Bank Promotion Exams

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Shadow Banking

  • The shadow banking system is a network of financial institutions consisting of non-depository banks like investment banks, non-bank financial institutions and money market funds.

  • In other words, Shadow banking is a system of Non-Financial Institution, which borrow funds in short term and invest the money in long term assets.
  • Shadow banking entities generally serve as mediators between investors and borrowers, providing credit and capital for investors, institutional investors, and corporations, and profiting from fees and/or from the arbitrage in interest rates.
    Because shadow banking institutions don’t receive traditional deposits like a depository bank, they are escaping from most regulatory limits and laws enforced on the traditional banking system.

  • The shadow banking is said to be the major reason for 2008 US Sub-prime Crisis.