Broadly defined as credit intermediationinvolving entities and activities outside the regularbanking system, shadow banking raises important policyconcerns. Given significant challenges with dataavailability, the size, nature and significance of shadowbanking in emerging market and developing economies (EMDEs)are even less discussed and understood. Shadow banking inEMDEs generally does not involve long, complex, opaquechains of intermediation, as is often the case in advancedeconomies. Nonetheless, it can pose systemic risks, bothdirectly, as its importance in the total financial systemgrows (with the concomitant credit, market, and liquidityrisks that its participants undertake), and indirectlythrough its interconnectedness with the regulated bankingsystem. At the same time, shadow banks also play animportant role in channeling alternative funding sources toEMDEs, especially as deleveraging pressures from Europeanbanks continue. This suggests that policy makers need tomanage trade-offs carefully to ensure that shadow banksprovide alternative but safe sources of funding to theprivate sector without generating additional systemic risks.Based on a snapshot of selected EMDEs in East Asia and inCentral and Eastern Europe, and subject to caveats dictatedby limited data availability, the shadow banking system isrelatively small in most EMDEs, but has grown markedly inrecent years, reaching a not insignificant share of thefinancial system in some countries, while remaining largely unregulated.
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