Shadow Banking System

The shadow banking system refers to non-bank financial institutions that provide services similar to traditional banks but operate outside of regular banking regulations. These entities include hedge funds, private equity firms, and money market funds. While they contribute to the liquidity and credit of the financial system, shadow banks are not subject to the same oversight, which can increase systemic risk, particularly during financial crises.

Example

During the 2008 financial crisis, shadow banking activities, such as the securitization of risky mortgages, contributed to the collapse of major financial institutions.