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When financial intitutions create credit (forward loan) like a bank but are not under the banking regualtory framework of the country, they are supposed to be involved in shadow banking. Hedge funds are one such example. It also includes unregulated activities of regulated entities. Credit default swaps (CDS) are the examples of it—regulated entities (like banks) provide loan protection in it to other lenders against default risks by the borrowers.
As such institutions do not accept traditional bank deposits they easily
escape the regulatory design of a country. Such acts are financially risky to the economy, as in it ‘capital requirements’ (of CRR, SLR, etc.) are bypassed by the institutions. This is why in cases of default there remains no standby capital/asset to counter it. After the ‘sub-prime’ crisis in USA (2007-08), shadow banking came under increasing scrutiny and regulation across the world.