Shadow banking and its role in financial markets

Abstract

The paper analyses the shadow banking system, its main participants, activities and associated risks. Shadow banking represents predominantly non-bank financial institutions' activities in credit risk transfer and liquidity and maturity transformation of financial resources. Most of these activities and/or institutions are not subject of the official regulation and supervision in financial markets. Thus, they are often followed by significant risk transfer that may become systemic and affect the whole financial system. The systemic role of the shadow banking in US and Europe is, in addition, the consequence of its fast growth in latest years but also significant interconnectedness of traditional and shadow banks. The ongoing efforts of regulators in better understanding of the shadow banking system, its regulation and supervision, after the latest financial crisis, have as a goal mitigation of the systemic risk it may create and prevention of significant losses in financial systems, both national and global.

Keywords

• shadow banking
• financial markets
• traditional banks
• liquidity and maturity transformation
• credit risk transfer
• systemic risk
• regulation