Shadow Banking - All Explained | SBI PO Prelims & Mains Preparation - Bank Exams PDF Download

Introduction to Shadow Banking

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.

Point 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.