The Yale Undergraduate Research Journal


This paper examines the development of the shadow banking sector in the US leading up to the global financial crisis of 2007-2008. Shadow banking, or nonbank financial intermediation, consists of credit intermediation that takes place outside of the traditional banking sector. This can include off-balance sheet operations at banks and finance holding companies as well as operations at other nonbank financial companies. The paper reviews how shadow banking emerged as a result of regulatory arbitrage and the search for higher returns before considering how it contributed to the buildup of systemic risk leading up to the crisis. It specifically inspects the role of money market funds (MMFs) in supporting shadow banking. Finally, it engages with the reforms that emerged in the US in the wake of the crisis, concluding that more regulation is not necessarily the solution and advocating for a more holistic strategy geared towards oversight and supervision.

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