Shadow Banking

Shadow banking is the process by which nonbanks provide market-based financing to traditional commercial banks. The term shadow banking was first coined by economist Paul McCulley (then at PIMCO) in September 2007 in a speech before the annual Federal Reserve Bank of Kansas City conference in Jackson Hole, Wyoming, in which he characterized the credit crisis as a liquidity run on unregulated shadow banks. McCulley believed that shadow banks were much more vulnerable to liquidity risk than were traditional banks, which fund their loan assets with customer liabilities, interbank borrowings, and the proceeds of debt and equity issuance. Shadow banks, by contrast, often rely on short-term funding provided by nonbank financial market participants and intermediaries. When there is a run on shadow banking sources of ...