Shadow banking term applies to firms or the practices followed by the firm who performs the functions similar to financial institution but without complying with the regulations. Shadow banking became quite popular. Shadow banking was one of the culprits in the 2008 sub-prime crisis of the banks. Intermediaries who do not fall under the regulations form a part of the shadow banking.
Shadow banking entities do not take in deposits and hence most of the regulations do not apply to them. Post 2008, there was an increased scrutiny on the functioning of the shadow banking system. One of the recent examples of growing Shadow banking business is the peer to peer lending.
Shadow banking tries to meet the credit demand of the people but since it is not governed by the regulations and does not have proper risk management in place, they have risks which are continuously passed on to the main financial system.
Thus they pose a threat to the main stream financial system since it is very easy to form a bubble in that space. This was visible in the recent crisis and with no regulations controlling their activity, it becomes difficult to assess the risk which they are adding when the bubble will burst.