Shadow Banking System

Peter Pan couldn’t pin down his shadow. Same deal with banks.

The shadow banking system is basically the black market of banking: all the stuff that conveniently misses out on banking regulations. It’s not just under-the-table deals happening though. It’s larger entities and vehicles hiding in plain sight. By repackaging and moving money around, people can use the shadow banking system to get around regulations.

Hedge funds, structured vehicle investments, special purpose entities, and even mutual funds are regulation-safehouses for money. The more regulations that are introduced, the more ways bankers move things around to find ways around the regulations. There are mechanisms used to get around entities, like repurchase agreements and asset-backed securities.

Remember the 2008 financial crisis? There were poorly rated mortgages repackaged with shiny bows, labeled as highly rated mortgages. Like a bag of raisins repackaged to look like a bag of M&Ms, and sold for a higher price. Not cool.

Since the shadow banking system got the entire world into an economic pickle, the shadow banking system has gotten more side-eye and attention than it's used to. Still, it’s going strong. Some estimates say it comprises a quarter to a third of global banking.