The Dangers of Shadow Banking

You have probably heard the term by now, “shadow banking”. However, many people don’t understand the risks it poses because they do not understand exactly what it is.

Shadow banking by all estimates is greater in size than the global banking system. By some estimates, it is greater in size than the global economy.

Comparison. You see lots of stories about how the Chinese shadow banking system poses a threat to the global economy. However, according to Bloomberg, the US shadow banking system is nearly twice the size of the Chinese shadow banking system, with China accounting for 16% of estimated shadow banking programs, while the US accounts for and estimated 31% (almost 1/3 of all shadow banking globally). In 2016, China began enacting policies to rein in their shadow banking problem. This is aside from the fact that most Chinese banks are nationalized. Nationalized banks cannot be shadow banks or pose the level of risk that privatized shadow banking systems do. In the US, any attempt at regulating shadow banking has met with legal, economic and political resistance.

What is it? Shadow banking is comprised of financial institutions and systems which are not held accountable to regulatory agencies the way officially recognized banks are. In the US, financial products and institutions are typically regulated by the Federal Deposit Insurance Corporation (FDIC) and Securities and Exchange Commission, with other regulatory agencies which oversee various smaller segments of the financial market. These agencies…