Regulators should keep a close watch over the shadow banking system to protect its useful functions without any undue risks to the financial system, the International Monetary Fund said on Wednesday. Shadow banks are a loosely defined group of financial industry operators that provide credit without officially being banks, such as hedge funds, money market funds, finance companies and securitization vehicles. Much of the short-term funding provided to now defunct investment bank Lehman Brothers originated in the unregulated shadow banking industry, making it a central contributor to the 2007-09 financial crisis. Shadow banks also had benefits, however, the IMF said in its Global Financial Stability Report, providing funding as banks keep tight reins on lending. In underbanked emerging markets, shadow banks could broaden access to credit. Six years after the financial system blew up, shadow banking posed at least a third of the total systemic risk - measured as extreme losses
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