Shadow Banking
Shadow banking refers to credit intermediation activities conducted outside the traditional regulated banking system.
Meaning in Practice
Shadow banking entities include money market funds, hedge funds, and structured investment vehicles. They provide lending and liquidity services similar to banks but are subject to lighter regulation. Their activities often rely on wholesale funding markets.
Why It Matters
Shadow banking expands credit availability but can increase systemic risk. Limited oversight may amplify leverage and liquidity mismatches. Monitoring this sector is essential for financial stability.
Market Impact
Stress in shadow banking can spill over into traditional banks and capital markets. Liquidity disruptions may lead to asset fire sales and volatility. Regulatory tightening can reshape funding structures.
Example
A structured investment vehicle finances long-term assets using short-term market funding without being classified as a traditional bank.