The Economist explains - How shadow banking works

On January 5th, in a campaign speech in New York, American senator Bernie Sanders pledged to break up banks that were deemed “too big to fail” and vowed to put a leash on their shadowy cousins. Janet Yellen, Federal Reserve’s chair, has admitted that shadow banks pose “a huge challenge” to the world economy. In an editorial for the New York Times in December, Hillary Clinton called for tough measures to contain the global bogeyman. Politicians and economists who often have little in common, unanimously agree that shadow banking, left to its own devices, has the potential to trigger another financial collapse. What are shadow banks and why is there such a fuss about them them?

The Economist