The Shadow Of Shadow Banking

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“If it looks like a duck, quacks like a duck, and acts like a duck, then it must be a duck - or so the saying goes. But what about an institution that looks like a bank and acts like a bank? Often it is not a bank – it is a shadow bank” – (Laura E. Kodres)

Shadow banking is a bit of a modern day marvel, so to speak, taking on several complex forms. “The term Shadow Banking generally refers to the non-banking financial institutions that perform some banking functions but are not regulated or are less regulated than banks. In other words, they are either unregulated or under-regulated financial entities. The shadow banking system or the shadow financial system consists of financial institutions, which do not accept deposits from
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While shadow banks conduct credit and maturity transformations that are relatively similar to traditional banks, they tend to do so without any direct public source of liquidity and risk insurance by means of the Federal Reserve’s discount window and the FDIC. This details why shadow banks were and are so fragile. Banks also perform a lot of the same functions. With the only noticeable difference being, shadow banks use what are called non-deposit liabilities while banks use what we call deposit liabilities. Leading up to the financial crisis debacle in 2008, many commercial banks were extremely active, as were government-sponsored entities like Freddie Mac and Fannie Mae, in shadow banking activities. The financial institutions that participated still had activities that were "off the books," meaning, in spite of these new instituted regulations, they were still participating in shadow banking activities. Shadow banking is not illegal and does not involve illegal practices of any type. However, it does involve dodging certain legal requirements so the financial organization involved does not break any laws; but does not necessarily abide by them either. For example, there are laws that require banks to hold a certain amount of capital with regards to the amount of money they may lend. By taking a loan and selling it to another company, or a company whom is not a bank and therefore is not subject to the same legal limitations as banks, then buying it back packaged up as
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