Shadow Banking System

AAA

DEFINITION of 'Shadow Banking System'

The financial intermediaries involved in facilitating the creation of credit across the global financial system, but whose members are not subject to regulatory oversight. The shadow banking system also refers to unregulated activities by regulated institutions.

INVESTOPEDIA EXPLAINS 'Shadow Banking System'

Examples of intermediaries not subject to regulation include hedge funds, unlisted derivatives and other unlisted instruments. Examples of unregulated activities by regulated institutions include credit default swaps.


The shadow banking system has escaped regulation primarily because it did not accept traditional bank deposits. As a result, many of the institutions and instruments were able to employ higher market, credit and liquidity risks, and did not have capital requirements commensurate with those risks. Subsequent to the subprime meltdown in 2008, the activities of the shadow banking system came under increasing scrutiny and regulations.

RELATED TERMS
  1. Subprime Meltdown

    The sharp increase in high-risk mortgages that went into default ...
  2. Volcker Rule

    The Volcker rule separates investment banking, private equity ...
  3. Bank Reserve

    Bank reserves are the currency deposits which are not lent out ...
  4. Tax Accounting

    Accounting methods that focus on taxes rather than the appearance ...
  5. Credit Default Swap - CDS

    A swap designed to transfer the credit exposure of fixed income ...
  6. Hedge Fund

    An aggressively managed portfolio of investments that uses advanced ...
Related Articles
  1. Insurance

    Dissecting The Bear Stearns Hedge Fund Collapse

    Learn how a deadly mix of greed and leverage cost investors millions.
  2. Personal Finance

    The Rise And Fall Of The Shadow Banking System

    We look at the evolution, failure and fallout from the shadow banking system.
  3. Options & Futures

    Are Derivatives A Disaster Waiting To Happen?

    They've contributed to some major market scandals, but these instruments aren't all bad.
  4. Options & Futures

    Massive Hedge Fund Failures

    Flying high one day but not the next - see the stories behind some spectacular meltdowns.
  5. Credit & Loans

    An In-Depth Look At The Credit Crisis

    The credit crisis reshaped the financial landscape and changed Wall Street forever. Find out how it happened.
  6. Insurance

    Basel II Accord To Guard Against Financial Shocks

    Problems with the original accord became evident during the subprime crisis in 2007.
  7. Insurance

    Fannie Mae, Freddie Mac And The Credit Crisis Of 2008

    Is the U.S. Congress' failure to rein in these mortgage giants to blame for the financial fallout?
  8. Investing Basics

    The Most Popular Bitcoin Mining Software

    Success at mining bitcoins depends on the combination of time, knowledge, computer hardware and the complementary software.
  9. When trading in financial markets, higher returns are generally associated with higher risk. Hedge your risk with interest rate swaps.
    Investing Basics

    How Are Interest Rate Swaps Valued?

    When trading in financial markets, higher returns are generally associated with higher risk. Hedge your risk with interest rate swaps.
  10. Mutual Funds & ETFs

    How do hedge funds determine what assets to own?

    Learn about the various types of investments that hedge fund managers use, and explore basic hedge fund management trading strategies.

You May Also Like

Hot Definitions
  1. Deferred Revenue

    Advance payments or unearned revenue, recorded on the recipient's balance sheet as a liability, until the services have been ...
  2. Multinational Corporation - MNC

    A corporation that has its facilities and other assets in at least one country other than its home country. Such companies ...
  3. SWOT Analysis

    A tool that identifies the strengths, weaknesses, opportunities and threats of an organization. Specifically, SWOT is a basic, ...
  4. Simple Interest

    A quick method of calculating the interest charge on a loan. Simple interest is determined by multiplying the interest rate ...
  5. Special Administrative Region - SAR

    Unique geographical areas with a high degree of autonomy set up by the People's Republic of China. The Special Administrative ...
  6. Annual Percentage Rate - APR

    The annual rate that is charged for borrowing (or made by investing), expressed as a single percentage number that represents ...
Trading Center