per the report, for a number of emes, non - bank financial intermediation remains relatively small as compared to the level of gdp. in india, russia, argentina, turkey, indonesia, and saudi arabia the amount of non - bank financial activity remained below 20 per cent of gdp at the end of 2012. however, the sector was growing rapidly in some of these jurisdictions. how are shadow banks dissimilar to banks? 7. shadow banks, like conventional banks undertake various intermediation activities akin to banks, but they are fundamentally distinct from commercial banks in various respects. first, unlike commercial banks, which by dint of being depository institutions can create money, shadow banks cannot create money. second, unlike the banks, which are comprehensively and tightly regulated, the regulation of shadow banks is not that extensive and their business operations lack transparency. third, while commercial banks, by and large, derive funds through mobilization of public deposits, shadow banks raise funds, by and large, through market - based instruments such as commercial paper, debentures, or other structured credit instruments. fourth, the liabilities of the shadow banks are not insured, while commercial banks ’ deposits, in general, enjoy government guarantee to a limited extent. fifth, in the times of distress, unlike banks, which have direct access to central bank liquidity, shadow banks do not have such recourse. 8. while there may be stark differences in the way the shadow banks operate as compared to banks, sometimes there is only a thin line separating the two. for instance a regulated bank may float a special purpose vehicle ( spv ) to hold some specific assets, with a view at removing them from its balance sheet. regulation of shadow bank activities 9. while the role of the shadow banking generated apparent economic efficiencies through financial innovations, the crisis demonstrated that shadow banking created new this is the magnitude of non - bank financial intermediation, which is a conservative proxy of the global shadow banking system based on data from 25 countries - 5 euro area economies and 20 non euro area jurisdictions. for 2011, fsb had reported the size of shadow banking to be around us $ 66 trillion. bis central bankers ’ speeches channels of contagion and systemic risk transmission between traditional banks and the capital markets. therefore, globally a need was felt to bring such unregulated entities under the regulatory architecture. united states of america passed the dodd - frank act in 2010 that strengthened the arms of federal

reserve to regulate all institutions of systemic importance. in order to put a control on the burgeoning shadow banking activities, the european union has also put in place some measures, which inter alia include prudential rules concerning securitisation, regulation of credit rating agencies, etc. further, at the request of g - 20 countries, at international level, fsb has been working towards strengthening the oversight and regulation of the shadow banking system so that the risks emanating from them may be mitigated. various other countries, including india are working towards improving the regulatory framework so as to curb the shadow banking activities, which pose a risk to financial stability. challenges posed by shadow banks 10. though the focus of regulation on shadow banking activities emerged in the wake of their alleged role in the recent global crisis, shadow banking system is not a new development. even in the late 1950s and early 1960s, concerns emanating from the growth of non - bank financial intermediaries had been highlighted [ thorn ( 1957 ) ; hogan ( 1960 ) ]. thorn ( 1957 ) had advocated same degree of control over credit expansion by the nbfis as that of the banks. hogan ( 1960 ) found that from late 1930s to 1950s, while the role of banking system in australia was declining, that of the financial intermediaries was rising and he called for controlling the liquidity of the non - banking sector. 11. the biggest challenge for the regulators is to gauge the magnitude of shadow banking as this landscape is continually evolving by arbitraging the gaps in the regulatory framework that otherwise seek to control them. furthermore, unlike the banking sector, which have a very good statistical coverage, consistent database on shadow banking is not available given the heterogeneous nature of shadow banking entities, instruments and activities. 12. some of the challenges posed by the shadow banks to the global economy and economies, in general, are as follows : a. financial stability and systemic risk concerns 13. across various economies, regulatory arbitrage was used to create shadow banking entities. in many instances, banks themselves composed part of the shadow banking chain by floating a specialized subsidiary to carry out shadow banking activities. banks also invested in financial products issued by other shadow banking entities. since shadow bank entities have no access to central bank funding or safety nets like deposit insurance, they remain vulnerable to shocks. given the huge size of shadow bank activities and their interlinkages with other entities of the financial sector, any shock in the