Shadow Banking: Credit Intermediation Through Non-Depository Institutions and Markets

In the chapter on credit intermediation by banks we looked at financial institutions (financial companies) which accepted deposits and made loans and we classified these institutions as banks. We identify a financial institution as a ‘bank’ if it is a company which has a banking licence and is therefore permitted to accept deposits. The function of this type of company is credit intermediation, i.e. intermediation between lenders and borrowers through the use of a balance sheet in order to provide lenders with attractive savings vehicles and borrowers with loans. However, there are other institutions that also perform credit intermediation but which, in law, are not banks. They are not banks for the simple reason that they are not permitted to accept what in law is defined as a deposit. They therefore do not hold a banking licence and are not regulated as banks.