Federal Reserve Bank of New York Staff Reports
Shadow Banking

Abstract
The rapid growth of the market-based financial system since the mid-1980s changed the nature
of financial intermediation in the United States profoundly. Within the market-based financial
system, “shadow banks” are particularly important institutions. Shadow banks are financial
intermediaries that conduct maturity, credit, and liquidity transformation without access to
central bank liquidity or public sector credit guarantees. Examples of shadow banks include
finance companies, asset-backed commercial paper (ABCP) conduits, limited-purpose finance
companies, structured investment vehicles, credit hedge funds, money market mutual funds,
securities lenders, and government-sponsored enterprises.
Shadow banks are interconnected along a vertically integrated, long intermediation chain,
which intermediates credit through a wide range of securitization and secured funding
techniques such as ABCP, asset-backed securities, collateralized debt obligations, and repo.
This intermediation chain binds shadow banks into a network, which is the shadow banking
system. The shadow banking system rivals the traditional banking system in the intermediation
of credit to households and businesses. Over the past decade, the shadow banking system
provided sources of inexpensive funding for credit by converting opaque, risky, long-term
assets into money-like and seemingly riskless short-term liabilities. Maturity and credit
transformation in the shadow banking system thus contributed significantly to asset bubbles in
residential and commercial real estate markets prior to the financial crisis.
We document that the shadow banking system became severely strained during the financial
crisis because, like traditional banks, shadow banks conduct credit, maturity, and liquidity
transformation, but unlike traditional financial intermediaries, they lack access to public
sources of liquidity, such as the Federal Reserve’s discount window, or public sources of
insurance, such as federal deposit insurance. The liquidity facilities of the Federal Reserve and
other government agencies’ guarantee schemes were a direct response to the liquidity and
capital shortfalls of shadow banks and, effectively, provided either a backstop to credit
intermediation by the shadow banking system or to traditional banks for the exposure to
shadow banks. Our paper documents the institutional features of shadow banks, discusses their
economic roles, and analyzes their relation to the traditional banking system.

Key words: shadow banking, financial intermediation