A damning report by the UK House of Lords has accused the British Treasury of being "asleep at the wheel" regarding the explosive growth of the shadow banking sector—a $16 trillion (KES 2,080 trillion) global industry that operates largely outside traditional regulations.

Shadow banking, which includes private equity funds, hedge funds, and private credit firms, has quadrupled in size since the 2008 financial crisis. Unlike traditional banks, these entities do not take deposits but lend massive amounts to businesses. The fear is that if this sector crashes, it lacks the safety nets (like central bank bailouts) that protect high street banks.

The "Limited Grasp"

The Lords’ Financial Services Regulation Committee expressed shock at the Treasury's "passivity," noting that officials seemed unprepared for the systemic risks posed by private markets.

• The Danger: Shadow banks are heavily interconnected with mainstream banks and pension funds. A default in the shadow sector could trigger a domino effect across the entire financial system.
• Lack of Data: Because the sector is private, regulators have very little visibility on who owes what to whom. It is a financial "black box."
• Global Exposure: The report warns that the UK, as a global financial hub, would be on the frontline of any contagion originating from the US-dominated shadow market.

Why It Matters

For global investors and emerging markets like Kenya, a crisis in Western shadow banking would dry up credit lines and spike interest rates overnight. The warning from London is clear: the next financial crisis might come from the lenders we aren't watching.