We provide an overview of the rapidly evolving literature on shadow credit intermediation. The shadow banking system consists of a web of specialized financial institutions that conduct credit, maturity, and liquidity transformation without direct, explicit access to public backstops. The lack of such access to sources of government liquidity and credit backstops makes shadow banks inherently fragile. Much of shadow banking activities is intertwined with the operations of core regulated institutions such as bank holding companies and insurance companies, thus creating a source of systemic risk for the financial system at large. We review fundamental reasons for the existence of shadow banking, explain the functioning of shadow banking institutions and activities, discuss why shad-ow banks need to be regulated, and review the impact of recent reform efforts on shadow banking credit intermediation.

In this paper, we define shadow credit intermediation to be the intermediation of credit without the direct or explicit support of the U.S. taxpayer. Over the past sixty years, the fraction of credit funded using commercial banks’ maturity transformation has declined significantly, as market-based credit intermediation has increased in importance. The decline of credit intermediation financed through traditional banks has been offset only in part by the rise of shadow banks. We explore three motivations for the growing importance of shadow banking. First, we highlight financial innovation in the composition of the aggregate money supply. Second, we discuss the incentives of financial institutions to avoid taxes, accounting rules, or capital requirements. Third, we review the presence of agency problems in financial markets, which create perverse incentives.