What role did the shadow banking system play in the 2007–2009 financial crisis?

A Shadow banking system is a set of non-bank financial mediators which provide comparable services to commercial banks but are external to financial regulations.

Mortgage companies and investment banks are examples of companies hit by the 2008 financial crisis.

Traditional banks have federally protected values, returns, and insurances when you store your money there. However, because there is less risk there is less return. So investors seeking profit took on securities that operate in a similar way to banks, but outside the scope of the financial regulations, banks abide by. This risk will increase returns, as long as you get out before it crashes.

A period of booming American housing led to a bust in the economy, and mortgage-backed securities (MBSs) and derivatives lost considerable value.

The Shadow banking system played a critical part in the financial crisis by carrying less risk or decease funding amount which enabled to protect the economy from losses.