Chapter 1 - What Is Shadow Banking? This treatise draws on a number of current researchers on the

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Chapter 1 - What Is Shadow Banking?

This treatise draws on a number of current researchers on the shadow banking sector, i acknowledge their influences on my thinking and thank them, Melanie Fien, Zoltan Pozsar, Adrian Ashcraft

The term “shadow banking” is one that is used by banking regulators, the media and academics especially when coming up with explanations for the financial crisis of 2007-2008. It has become a rallying point for international reform efforts aimed at the unregulated nonbank financial activities which have potential to destabilize the global financial system1.However on closer examination it is apparent that not only does shadow banking subsist predominantly within the regulated banking system2, it also in another
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The Financial Crisis Inquiry Commission defined it as “bank-like financial activities that are conducted outside the traditional commercial banking system”7

Despite the fact that the name “shadow banking” is reminiscent of a sinister, unexplored sector and a “pejorative connotation”8 It is the commonly used term for credit intermediation activities that are market funded (as opposed to bank-funded). As a result of this there is a sector-wide agreement on the key characteristics of shadow banking and the key ones are credit intermediation,maturity transformation, the lack of guarantee for raised funds and the absence of explicit public sector backstops in the event of liquidity problems.9 There is disagreement on some characteristics such as Leverage and Off-balance sheet treatment. There is disagreement on leverage as a result of the fact that, while some shadow banking activities are dependent on leverage for an increase in returns, Hedge funds, banks and private equity funds also do employ leverage as a tool in business. Therefore this is not a unique characteristic. Similarly disputed is
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