Welcome to the world of shadow banking: a term coined in 2007 by economist Paul McCulley to describe financial institutions that act like banks but don’t follow the same rules. These entities borrow short-term money to invest in long-term assets, much like regular banks do, but, unlike traditional banks, they operate outside the usual regulations and safety nets like deposit insurance or emergency support from central banks.
Shadow banking played a key role in the 2008 financial crisis, and, while the name sounds mysterious, its impact on the economy is very real. Politicians and economists are now warning that letting shadow banking grow unchecked could lead to serious trouble. Indeed, in 2024, Bank of England governor Andrew Bailey cautioned that the non-bank sector is “very large and growing,” with risks that are difficult to trace, making it a potential trigger for the next financial collapse.
Intrigued? Click through this gallery to uncover how shadow banking could impact us all.