Definition of shadow banking

The system of non-deposit taking financial intermediaries including investment banks, hedge funds, monoline insurance firms and other securities operators.

These non traditional entities grew up complementing the traditional banking system during the property boom between 2001 and 2008, particularly in the US. All operated in different parts of the securitisation business where mortgage loans were packaged as securities, moved off bank balance sheets and distributed, via various investment vehicles, to an array of investors.

The securitisation activity fuelled the residential mortgage lending boom that in turn boosted property prices up to mid-2007 until the onset of the sub-prime crisis and the subsequent banking crisis. [1]

 

shadow banking in the news

In July 2013 it was reported that China's shadow banking system had become both a concern and an opportunity for investors. The FT reported that the booming sector had recently been  estimated by a Chinese banking regulator to amount to Rmb8.2tn ($1.3tn). But many analysts were saying the figure was much higher, with Deutsche Bank estimating that shadow banking accounts for 40 per cent of gross domestic product – or Rmb21tn. Large amounts of money had entered the system via the sale of wealth management products and was being used to invest in real estate and local government infrastructure projects but offered investors no guarantees. Given the lack of disclosure, transparency and meaningful collateral, hedge funds have begun shorting the shares of banks offering these wealth management products.

 

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