Document Type



Since the financial crisis of 2008, “shadow banking” or financial transactions by “non-banks,” has skyrocketed. Non-banks are not depositary institutions and as such, they roam free, largely outside the purview of the bank regulators. They occupy all parts of the credit markets, from mortgage loan origination to payday lenders. Untethered, they operate without government guarantees, such as deposit insurance and have no access to emergency government lending facilities, such as the Federal Reserve's discount window.

There are both positives and negatives in the rise of non-banks. On the positive side is market liquidity and greater diversity of funding sources for consumer borrowing, which is often claimed to be a more efficient allocation of risk to investors. Also, by using alternative risk metrics in loan origination, non-bank lenders are increasingly making financing available to a particular demographic--the financially marginal. On the negative side, the heavy reliance on government guarantees and purchase of its loans may pose worrying systemic risks.