Shadow Banking
$65 trillion in assets, zero banking regulators. Shadow lenders earn 3.8% on the same mortgage where banks earn 2% — by dodging every compliance cost. The bigger financial system is the one nobody oversees.
By 2007, the shadow banking system held $60 trillion in assets. Traditional banks held $40 trillion. The larger financial system was the one nobody regulated. Shadow banks are not banks at all. They are hedge funds, money market funds, insurance companies, and special-purpose vehicles that lend money without taking deposits. Because they take no deposits, they answer to no banking regulator, no reserve requirements, no capital ratios, no deposit insurance costs eating into margins. A traditional bank earns 2% on a mortgage after regulatory compliance. A shadow lender earns 3.8% on the same mortgage by avoiding every compliance cost the bank's shoulders. The borrower sees identical terms. The lender keeps nearly double the spread.
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