The Shadow Banking System: a Complement to Regular Financial Institutions? Evidence from International Data

Using a sample of 26 countries over the period 1990 to 2013, we empirically examine the correlation between the size of the shadow banking system and the size of traditional financial institutions, namely banks and institutional investors. First of all, we conduct a survey of the entire sample as well as the countries of the euro area and then a review country-by-country. The question is whether shadow finance and conventional finance should be seen as complements or substitutes. Our results tend to show that the shadow banking system complements rather than replaces the activities of traditional financial institutions, including banks. Bank sponsorship of shadow banking activities has clearly reinforced this link.