Shadow Banking: Background and Policy Issues [December 31, 2013]   [open pdf - 595KB]

"Shadow banking refers to financial firms and activities that perform similar functions to those of depository banks. Although the term is used to describe dissimilar firms and activities, a general policy concern is that a component of shadow banking could be a source of financial instability, even though that component might not be subject to regulations designed to prevent a crisis, or be eligible for emergency facilities designed to mitigate financial turmoil once it has begun. This concern is magnified by the experience of 2007-2009, during which financial problems among nonbank lenders, and disruption to securitization (in which both banks and nonbanks participated), contributed to the magnitude of the financial crisis. This report provides a framework for understanding shadow banking, discusses several fundamental problems of financial intermediation, and describes the experiences of several specific sectors of shadow banking during the financial crisis and related policy concerns. Shadow banking is contrasted with 'luminated banking', a term which the report uses to describe chartered banks that gather funds from depositors in order to offer loans that the chartered bank holds itself. Luminated banking, like all forms of financial intermediation, is subject to well-known risks, including credit risk, interest rate risk, maturity mismatch, and the potential for runs. Each sector of shadow banking is generally subject to the same problem of financial intermediation to which the sector is analogous."

Report Number:
CRS Report for Congress, R43345
Public Domain
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