The year 2013 has proven to be a time of great transformation and controversy in the development of "shadow banking" supervision and regulation. In the past few months alone, the Financial Stability Board (FSB), United States, and European Union have taken significant steps that will result in increased oversight of this segment of the financial sector.
Although there is no single accepted definition of "shadow banking," there is a general consensus that the shadow banking system consists of markets and institutions that engage in credit intermediation both in conjunction with, and parallel to, regulated banks. Like conventional banks, shadow banking entities generate credit through maturity transformation (use of short-term funding to finance longer-term assets) and liquidity transformation (use of liquid instruments to fund more illiquid assets). While there is widespread international agreement that this $67 trillion global "shadow banking system" can pose a risk to financial stability, approaches to controlling this risk have differed across jurisdictions.
