Macroeconomic Effects and Regulatory Responses to Shadow Banking: A Literature Review

Abstract

This review offers an exhaustive exploration of the shadow banking system, from its conceptual foundations to its operational intricacies. Originating as non-traditional banking entities, shadow banks have come to play a pivotal role in global finance, facilitating credit intermediation, liquidity provision, and risk distribution. While introducing innovation and additional liquidity, they also present challenges, notably evident during the 2007-2009 financial crisis. This paper delves into the functions and operations of shadow banks, the inherent vulnerabilities they introduce to the financial system, their impact on macroeconomic stability, and the evolving regulatory landscape. With a blend of theoretical insights and empirical analyses, the review sheds light on the complexities of shadow banking and the imperative for informed regulatory responses.