Described as a parallel universe consisting of hedge funds, money market funds, finance companies and securities lenders, “shadow banking” continues to grow in the United States and beyond. What distinguishes shadow banking from regular investment banking is that it is unregulated.

John Grgurich of The Motley Fool defines shadow banking as “the act of borrowing, lending, or otherwise shifting of money around by financial institutions that aren't subject to regulation, like hedge funds. It can also refer to traditional banks operating in largely unregulated arenas such as credit-default swaps.”

This shady aspect of the financial industry now controls $23 trillion in U.S. assets, giving the United States the distinction of having the largest shadow banking system in the world.

Right behind the American system are those in the euro area ($22 trillion) and the United Kingdom ($9 trillion).

The U.S. share of the global shadow banking system—which totals $67 trillion—has declined in recent years, dropping from 44% in 2005 to 35% in 2011. This was due largely to increases in the shares of the UK and the euro area.

Overall, international shadow banking has grown about 4% a year since the financial crisis of 2007-2008.

The Financial Stability Board, a creation of the Group of 20 nations, has called for stronger oversight and regulation of shadow banking, but thus far the field has escaped serious action.

-Noel Brinkerhoff, David Wallechinsky

To Learn More:

Global Shadow Banking Monitoring Report 2012 (Financial Stability Board) (pdf)

Shadow Banking Hangover Still To Come (by James Saft, Reuters)

How Shadow Banks Rule the World (by Martin Hesse and Anne Seith, Spiegel)

Shadow Banking: The $67 Trillion Threat to the U.S. Economy (by John Grgurich, Motley Fool)