The Shadow Of Shadow Banking

1311 Words Apr 22nd, 2015 6 Pages
“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 public. These typically include pension funds, investment banks, hedge funds, money market funds, finance, leasing and factoring companies, asset management companies and unregulated non-banking financial services. Since they are non-deposit taking institutions, they were not subjected to the same strict guidelines as that as the banks. Shadow banking systems generally raise funds from suppliers (e.g. households, corporate, financial institutions) through deposit like liabilities, which are short-term in nature. These funds are then used to create assets such as mortgages, auto loans and other longer term assets which are essentially less liquid.” (A.R Subramanian) Basically, shadow banking allowed many Americans an easier approach to cheap…

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