There is much confusion about what shadow banking is. Some equate it with securitisation, others with non-traditional bank activities, and yet others with non-bank lending. Regardless, most think of shadow banking as activities that can create systemic risk. This column proposes to describe
shadow banking as ‘all financial activities, except traditional banking, which require a private or public backstop to operate’.
Backstops can come in the form of franchise value of a bank or insurance company, or a government guarantee. The need for a backstop is a crucial feature of shadow banking, which distinguishes it from the “usual” intermediated capital market activities, such as custodians, hedge funds, leasing companies, etc. Continue reading “Shadow Banking”