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FAQs on PPT: Shadow Banks - Indian Economy for UPSC CSE

1. What are shadow banks?
Ans. Shadow banks are financial intermediaries that operate outside the traditional banking system. They provide credit and other financial services similar to traditional banks but are not subject to the same regulatory framework.
2. How do shadow banks differ from traditional banks?
Ans. Shadow banks differ from traditional banks in several ways. While traditional banks accept deposits and are subject to strict regulations, shadow banks do not accept deposits and are generally subject to less regulatory oversight. Shadow banks also rely heavily on short-term funding and engage in activities such as securitization and derivatives trading.
3. What risks do shadow banks pose to the financial system?
Ans. Shadow banks can pose several risks to the financial system. Their reliance on short-term funding can make them vulnerable to liquidity shocks, which can have systemic implications. Additionally, their activities, such as securitization and derivatives trading, can amplify risks and contribute to financial instability.
4. How are shadow banks regulated?
Ans. Shadow banks are regulated through a combination of measures. In some jurisdictions, regulators have implemented reforms to enhance oversight and reduce systemic risks associated with shadow banks. These measures include stricter capital requirements, enhanced reporting and disclosure requirements, and closer monitoring of shadow banking activities.
5. What are some examples of shadow banking activities?
Ans. Some examples of shadow banking activities include repurchase agreements (repos), money market funds, asset-backed commercial paper (ABCP), and hedge funds. These activities involve lending, borrowing, and investing in various financial instruments outside the traditional banking system.
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