Meet the New Shadow Bank (It’s a Lot Like the Old Shadow Bank) by Tracy Alloway

Good definitions of shadow banking — the ominously-titled corner of the financial system — are hard to come by.

One of the more broader definitions used by the Financial Stability Board includes any vehicle that provides credit and leverage and which falls outside the realm of traditional regulated banking. That would mean anything from hedge funds and private equity to non-bank mortgage lenders. A more narrow definition suggest that shadow banks are entities engaged in particular types of financial activities or transformation. By this definition, the repo market, where banks and big investors essentially pawn their assets in exchange for short-term cash, was the biggest component of shadow banking. It was also ground zero for the 2008 financial crisis.

As big investors in the repo market fretted about the risk of lending to Lehman Brothers, even on a short-term secured basis, the firm found itself unable to fund itself and was soon on the brink of collapse. It was the equivalent of a good old-fashioned bank run, but one that took place in the hidden corners of the shadow banking system instead of on the streets of New York. Funding long-term assets with short-term loans, it turned out, could be tricky; the repo market was prone to sudden and violent withdrawals.

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