Shadow Banking System Law and Legal Definition

Shadow banking system refers to non-depository banks and other financial entities like investment banks, hedge funds, and money market funds involved in facilitating the creation of credit across the global financial system, but whose members are not subject to regulatory oversight. They borrow money in the short term and take that money to invest in long-term assets. The shadow banking system also refers to unregulated activities by regulated institutions. In the U.S., the shadow banking system grew in size dramatically after the year 2000 and played an increasingly critical role in lending businesses the money necessary to operate. Shadow banking institutions are typically intermediaries between investors and borrowers.