Shadow banking

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The system of credit creation and intermediation that involves entities and activities fully or partially outside the conventional banking system.

Some non-bank entities and transactions have the capacity to operate on a large scale in ways that create bank-like risks to financial stability (for example, longer-term credit extension based on short-term funding and leverage).

Such risk creation may take place at an entity level but it can also form part of a complex chain of transactions, in which leverage and maturity transformation occur in stages, and in ways that create multiple forms of feedback into the regulated banking system.

For this reason regulators are taking increasing interest in the activities of the shadow banking system, also known as non-bank financial intermediation (NBFI).

See also