The shadow banking system is the collection of non-bank financial intermediaries that provide services similar to traditional commercial banks. It includes entities such as hedge funds, money market funds and structured investment vehicles (SIV). Investment banks may conduct much of their business in the shadow banking system (SBS), but most are not SBS institutions themselves.
The core activities of investment banks are subject to regulation and monitoring by central banks and other government institutions - but it has been common practice for investment banks to conduct many of their transactions in ways that don't show up on their conventional balance sheet accounting and so are not visible to regulators or unsophisticated investors. For example, prior to the financial crisis, investment banks financed mortgages through off-balance sheet securitizations and hedged risk through off-balance sheet credit default swaps.
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