What is Shadow Banking

Shadow banking has gained prominence in recent years, and especially after the world financial and economic crisis because, on the one hand, it favours the funding of firms that have difficulty accessing the tradicional banking system, and, on the other hand, it offers to investors alternatives to the traditional bank deposits. However, shadow banking involves risks because it is subject to a lower level of regulation than the traditional system and it is clearly pro-cyclical, contributing to worsening the economic climate in times of recession. The chapter shows in detail how the shadow banking works and what the advantages and disadvantages of this alternative system are. In addition, reference is made to the debate about the possibility of reinforcing the regulation of this sector, although so far, the supervisory authorities prefer maintaining a vigilant attitude while not imposing strict requirements, which would lead to limit the role played by shadow banking.