What is Shadow Banking?

Abstract

There is much confusion about what shadow banking is. Some equate it withsecuritization, others with non-traditional bank activities, and yet others with non-banklending. Regardless, most think of shadow banking as activities that can create systemicrisk. This paper proposes to describe shadow banking as "all financial activities, excepttraditional banking, which require a private or public backstop to operate". Backstopscan come in the form of franchise value of a bank or insurance company, or in the form ofa government guarantee. The need for a backstop is in our view a crucial feature ofshadow banking, which distinguishes it from the "usual" intermediated capital marketactivities, such as custodians, hedge funds, leasing companies, etc.