Abstract

The growing influence of shadow banking in global financial markets presents significant challenges, primarily due to its regulatory opacity and the associated risks it poses to the economy. Shadow banking refers to financial activities conducted by non-bank financial institutions that are not subject to the same regulatory oversight as traditional banks. These activities, while contributing to economic growth, also create vulnerabilities in the financial system, particularly through the practice of regulatory arbitrage. Regulatory arbitrage allows financial institutions to exploit regulatory loopholes, circumventing traditional banking regulations and increasing their exposure to systemic risks. This paper delves into the complex legal landscape of shadow banking, focusing on the dynamics of regulatory arbitrage and its potential implications for financial stability. It critically examines the evolving regulatory frameworks across various jurisdictions and offers policy recommendations to mitigate the risks posed by shadow banking. By proposing strategies for better oversight, transparency, and international cooperation, this paper seeks to outline pathways for addressing the legal and economic challenges of shadow banking while ensuring the resilience of the global financial system.

Keywords