The “shadow banking” system could easily trigger the next financial crisis. “Shadow” banks are not lending institutions like traditional banks. They are largely unregulated, for example. They have also taken over from traditional banks as the primary source of business and consumer credit.
But the shadow banking industry’s’ rapid expansion could cause serious problems if credit conditions worsen and those loans need to be repaid. Leading up to the last financial crisis, many shadow banks offered subprime loans to borrowers with poor credit profiles. They’re now repeating that pattern of behavior with another type of questionable loan.
Here’s how the shadow banking system has created another massive credit bubble that could trigger the next crisis. And why regulators are asleep at the switch.