There is much confusion about what shadow banking is. Some equate it with securitization, others with non-traditional bank activities and yet others with non-bank lending. Regardless, most think of shadow banking as activities that can create systemic risk. This paper proposes to describe shadow banking as “all financial activities, except traditional banking, which require a private or public backstop to operate”. Backstops can come in the form of franchise value of a bank or insurance company, or in the form of a government guarantee. The need for a backstop is in our view a crucial feature of shadow banking, which distinguishes it from the “usual” intermediated capital market activities, such as custodians, hedge funds, leasing companies, etc.

It has been very hard to “define” shadow banking. FSB (2012) describes shadow banking as “credit intermediation involving entities and activities (fully or partially) outside the regular banking system.” This is a useful benchmark and has been much used in writings about shadow banking, but the definition has two weaknesses. First, it may cover entities that are not commonly thought of as shadow banking, such as leasing and finance companies, credit-oriented hedge funds, corporate tax vehicles, etc., yet that do also intermediate credit. Second, it describes shadow banking activities as operating primarily outside banks. But in practice, many shadow banking activities, e.g., liquidity puts to securitization SIVs, collateral operations of dealer banks, repos, etc., operate within banks, especially systemic ones (Pozsar and Singh 2011; Cetorelli and Peristiani 2012). Both reasons make the description less insightful and less useful from an operational point of view.