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. Hedge Fund

    An aggressively managed portfolio of investments that uses leveraged, ...
  2. Subprime Meltdown

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

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

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

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

    A swap designed to transfer the credit exposure of fixed income ...
RELATED FAQS
  1. What is the difference between an Equity REIT and a Mortgage REIT?

    There are several types of real estate investments trusts (REITS) that investors can purchase, including equity REITS and ... Read Full Answer >>
  2. What kinds of derivatives are types of forward commitments?

    A derivative is a type of security in which the price of the security is dependent on underlying assets. A derivative could ... Read Full Answer >>
  3. What are some popular ETFs that track the industrial sector?

    As of April 2015, some of the most popular and best performing exchange-traded funds (ETFs) that track the industrial sector ... Read Full Answer >>
  4. What is an over-the-counter derivative?

    A derivative is a type of security in which the price of the security depends on the price of the underlying asset. Depending ... Read Full Answer >>
  5. How can an investor terminate a derivative contract?

    Most derivatives contracts have provisions allowing for early termination and netting out the initial investment. The early ... Read Full Answer >>
  6. How big is the derivatives market?

    The derivatives market is, in a word, gigantic, often estimated at more that $1.2 quadrillion. Some market analysts estimate ... Read Full Answer >>
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. Professionals

    Alternatives Need More Education, Not Enforcement

    While disclosures and investor education need improvement, alternatives provide a valuable way to increase yield and hedge against declines.
  9. Mutual Funds & ETFs

    Top Skills Hedge Funds Look For In Job Candidates

    Lucrative salary, high perks, and best quantitative brains at work. What are the top skills a candidate needs to get a job at a hedge fund?
  10. Mutual Funds & ETFs

    Why Hedge Fund Managers Make Good Advisory Clients

    Super-busy hedge fund managers should be viewed as an opportunity for sophisticated financial advisors who can step in and offer their services.

You May Also Like

Hot Definitions
  1. Fracking

    A slang term for hydraulic fracturing. Fracking refers to the procedure of creating fractures in rocks and rock formations ...
  2. Mixed Economic System

    An economic system that features characteristics of both capitalism and socialism.
  3. Net Worth

    The amount by which assets exceed liabilities. Net worth is a concept applicable to individuals and businesses as a key measure ...
  4. Stop-Loss Order

    An order placed with a broker to sell a security when it reaches a certain price. A stop-loss order is designed to limit ...
  5. Covered Call

    An options strategy whereby an investor holds a long position in an asset and writes (sells) call options on that same asset ...
  6. Butterfly Spread

    A neutral option strategy combining bull and bear spreads. Butterfly spreads use four option contracts with the same expiration ...
Trading Center