Sachin Karpe explains the shadow banking system is a network of financial institutions comprised of non-depository banks e.g., investment banks, structured investment vehicles (SIVs), conduits, hedge funds, non-bank financial institutions and money market funds. Shadow banking institutions generally serve as intermediaries between investors and borrowers, providing credit and capital for investors, institutional investors, and corporations, and profiting from fees and/or from the arbitrage in interest rates says Sachin Karpe. The shadow banking system may still be exposing the larger financial markets to excessive systemic risk. While all investments expose the investor to some level of risk, the unknown consequences of having such a large shadow banking system may lead some investors to prefer more conservative investment strategies in the years ahead. Shadow financial institutions still aren't subject to the same regulations as traditional, depository banks. This means they remain highly leveraged, with a high ratio of debt relative to their liquid assets on hand to pay immediate claims. Higher leverage equates higher returns, but it also carries outsized risk.
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