Three years after the beginning of the financial crisis, the shadow banking system had about $16 trillion of obligations in the first quarter, compared with $13 trillion for banks, the report said. The gap has narrowed from 2008, when obligations were $20 trillion and $11 trillion, respectively.
Throughout the early part of the decade, shadow banks grew in importance as they acted as intermediaries between investors and borrowers. Familiar examples of shadow institutions include Bear Stearns and Lehman Brothers, which were swallowed by the financial crisis, as well as Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE).
While this system became a huge and vital source of money to fuel the housing market and the rest of the U.S. economy, the subprime mortgage crisis and ensuing credit crunch exposed a major flaw.