Shadow banking
그림자 금융
Financial institutions and markets that borrow and lend like banks but, not being deposit-taking banks, stand outside bank regulation, deposit insurance and the central bank's lending of last resort. They include investment banks, money market funds, hedge funds, securitisation vehicles and the market for short-term repurchase agreements (repo). In the 2008 financial crisis a "run" on this sector was at the core of the credit freeze.
In depth
An ordinary bank takes deposits and makes loans. Deposits are short-term money that can be withdrawn at any time, while loans run for years or decades, so a bank cannot survive if its depositors all come at once. After the Great Depression countries set up deposit insurance, required banks to hold capital and gave central banks the means to lend to them in a crisis, to prevent such "bank runs". In return banks accepted strict regulation.
Shadow banking is finance that does the same work outside this fence. Investment banks bought long-term securities with money borrowed overnight in the repo market; money market funds promised, much like deposits, to pay out at any time, but had no deposit insurance. Structured investment vehicles (SIVs) and asset-backed commercial paper (ABCP) conduits set up off banks' balance sheets sold paper of a few months' maturity to buy mortgage-backed securities. The term "shadow banking" was coined by Paul McCulley of the bond fund manager PIMCO at the Jackson Hole symposium in 2007 for "the whole alphabet soup of levered up non-bank investment conduits, vehicles, and structures".
On the eve of the crisis shadow banking rivalled the regular banks in size. According to Timothy Geithner, president of the Federal Reserve Bank of New York, in early 2007 ABCP conduits, SIVs and similar vehicles had assets of about $2.2 trillion, assets financed overnight in triparty repo came to $2.5 trillion, hedge funds held about $1.8 trillion, and the balance sheets of the five major investment banks totalled $4 trillion. At the same time the top five US bank holding companies had total assets of just over $6 trillion, and the entire banking system about $10 trillion.
When the value of subprime mortgage securities collapsed in the summer of 2007, those who had funded the shadow banks pulled their money at once. Geithner put the main blame for the freezing of credit markets on a "run" on the entities of the shadow banking system, and Paul Krugman called it the "core of what happened". Bear Stearns in March 2008 and Lehman Brothers in September collapsed after losing their repo funding, and when the Reserve Primary Fund, a money market fund holding Lehman debt, failed to protect its investors' principal, money fled the money market funds too. After the crisis the Financial Stability Board and the G20 tightened the regulation of shadow banking, but by the end of 2022 it had grown to about $63 trillion worldwide. In China a different kind of shadow banking, entangled with the commercial banks through trust loans and the like, became a problem of its own.