Shadow Banking System

Shadow banking is an umbrella term describing the bank-like services provided by financial institutions outside of the formal banking sector. Shadow banks, also called non-bank financial institutions (NBFIs), do not have banking licences but do offer a suite of products and services similar to those provided by licensed banks. They are not regulated by bank regulators but they are bound by other formal regulations. Direct lenders are NBFIs that lend to companies using funds not drawn from a deposit base – they are not permitted to accept deposits – but from institutional investors. Institutional investors (insurance companies, pension funds, asset managers, hedge funds, private equity funds, family offices, sovereign wealth funds etc) provide shadow banking services by lending to and owning stakes in companies by buying their bonds and equities. Finance companies engaging in consumer finance are another form of shadow bank. EU policymakers, through the Capital Markets Union, have been striving to increase the proportion of corporate funding provided by capital markets/non-banks as an alternative to the core banking sector.