Shadow banks

“Shadow Banks” permit credit intermediation outside of the conventional banking system. Typical examples include

  • Insurance companies
  • Pension funds

While shadow banks are not part of the central bank regulatory system (and therefore eligible for  liquidity provision) they are still regulated depending on their specific functions.

As the chart below shows shadow banking really took off prior to the global financial crisis. Since then commercial banks have continued on trend whilst shadow banks have leveled out

shadow.png

The growth in shadow banking is likely driven by:

  • Regulatory arbitrage (as a result of harsher regulatory requirements on conventional banks)
  • Search for yield (money being funneled into riskier investment funds)