What is shadow banking? What impact does shadow banking have on the economy?

Shadow banking refers to the credit intermediary system (including all kinds of related institutions and business activities) which is outside the banking supervision system and may lead to systemic risks and regulatory arbitrage. The factors that cause systemic risks in shadow banking mainly include maturity mismatch, liquidity conversion, credit conversion and high leverage. In China, shadow banking mainly includes trust companies, guarantee companies, pawn shops, underground banks, money market funds, various private equity funds, microfinance companies, financial institutions and other off-balance-sheet businesses, and private financing. Overall, it presents the characteristics of many institutions, small scale, low leverage but rapid development.

Impact: The direct impact of shadow banking includes:

1, the interest rate is relatively market-oriented.

The interest rate of the Bank of China is determined by the central bank, which can be adjusted slightly, but it cannot fluctuate as a whole.

The shadow bank is not bound by the interest rate stipulated by the central bank, and the loan interest rate is relatively free. Generally, enterprises that seek loans from shadow banks are enterprises that can't get loans from the normal banking system, and the risk is slightly higher, so the interest rate will be slightly higher.

As a result of shadow banking, there have been (a large number of) loans with slightly higher interest rates in China, and interest rates have become more market-oriented.

2. The risk of financial system has increased.

Traditional banks have a sound internal management system, strict risk review and external supervision by CBRC, and are generally safe.

The development history of the shadow banking system is relatively short, some things are half-understood, the institutional system may not be perfect, the external supervision is weak, and it is relatively "barbaric growth". For the risks of shadow banking, please refer to @scott's answer. The specific risks of shadow banking are uncertain, but they are definitely greater than those of traditional banks. If there are large-scale problems in shadow banking, it may spread to other areas of the financial system.