Shadow
Banking System Definition & Example – Banking Awareness Notes
Dear Aspirants,
Welcome to Mentor for Bank Exams. Here we are
presenting you a short note on Shadow Banking System Definition &
Example. The history, meaning, points to remember and examples are given below:
History
The term SHADDOW BANKING
first came into an existence in 2007.
Economist Paul McCulley
used it first time at FEDERAL RESERVE BANK OF KANSAS CITY’S ECONOMIC SUMMIT.
Meaning
The term shadow banking
is used while a non-banking financial intermediates make provision for the
commercial banks.
Shadow banking is a
comprehensive term to do financial activities among the non-banking financial
institutions.
In simple language shadow
banking is a financial intermediaries involved to facilitate credit in the
financial system.
Points to Remember
- It don’t take deposits like
commercial banking
- It is also called as the
unregularly activities done by regular institutions.
- It works in lesser transparency,
rules and regulations as compared to commercial banking.
- Shadow banks make money by
market instruments like debentures, commercial paper.
- Shadow bank’s liability is not
insured.
- It deals with the high level of
risk.
- Shadow banking make most of
their money by being a mediate between the borrowers and lenders.
- They earn revenue the fees
charges for service and interest rates spreads.
- No need to follow regulations
like initial capital requirements.
- It has come under the increased
scrutiny since 2008.
- This system is prominent
worldwide.
- It is a complex system of
investments like Asset backed securities, derivatives, Credit default
swaps and repurchase agreements.
Example
Investment funds,
mortgage lenders, hedge funds are all deal with shadow banking.
