shadow banking
Financial Markets

What Is Shadow Banking?

In this article, I would like to talk about Shadow Banking.

Shadow Banking is critical in the spectrum of the international market that no many people know about it, and it plays a leading role in the financial markets, and especially in this current times. 

A Brief definition of Shadow Banking is almost precisely what it sounds like; A Shadow Banking Industry is the equivalent of saying, “Banking off-the-books.” Non-banking institutions (no business and individual through deposits) give loans to this banking industry, and these lenders don’t work through the same regulations as regular banking institutions. 

Commercial Banking

When most people usually think of “a bank,” they typically refer to a commercial bank. 

A commercial bank is a financial institution that receives deposits from individuals and businesses. The Government ensures it through different entities such as FDIC (Federal Deposit Insurance Corporation) in the US.

Since all deposits and capital received by commercial banks are covered and protected by governments, individuals and businesses don’t have the urgency to worry about their money.

What is The Shadow Banking?

Shadow Banking is a group of financial intermediaries (lenders, brokers, and other credit entities) whose primary objective is to provide global credit.

Shadow Banking Industry doesn’t take deposits from individuals and businesses, so their capital is not covered and protected by the Federal Government -FDIC-.

Shadow Banking System is a parallel banking system that performs banking activities, but it is not regulated by the same rules and regulations as Traditional Banking System.

Most Shadow Banking activities are not under the radar of regulators. 

Some examples of Shadow Banking entities are:

a) Investment Banks.

b) Hedge Funds.

c) Issuers.

d) Parts of Commercial Banks.

d) Money Market Funds.

e) Unlisted Derivatives. 

f) Insurance Companies.

g) Private Equity Funds.

h) Payday Lenders.

Another essential key aspect to understand is that Shadow Banking is also the system where major financial institutions usually are regulated and under the radar of governments. Still, their main activity is based on financial products or services that are less regulated or even not regulated at all, such as credit default swaps.

The main strength and power in shadow banking is the use of leverage. At the same time, this strength can become a huge risk when it is not measured and controlled correctly because the shadow banking system does not subject to the same kinds of risk, liquidity, and capital restrictions as commercial banks are in the traditional banking system. 

 

Shadow Banking System is a parallel banking system that performs banking activities, but it is not regulated by the same rules and regulations as Traditional Banking System.

Shadow Banking and Global Credit

As I mentioned earlier, shadow banking’s main objective is to provide global credit, especially in the United States. It has become an essential aspect of matching the necessities of rising financial loans for mainly speculative activities.

When it comes to defending or criticizing this banking system, some people agree that shadow banking increases economy efficiency by operating outside the radar of traditional regulations. On the other hand, those who criticize it defends the idea that their financial activities create significant systemic risks inside the whole financial system, included traditional banking.

A Shadow Banking Industry is the equivalent of saying, “Banking off-the-books.” Non-banking institutions (no business and individual through deposits) give loans to this banking industry, and these lenders don’t work through the same regulations as regular banking institutions. 

shadow banking

Has There Been A Collapse of the Shadow Banking?

One of the primary financial causes of the 2008 financial crisis was due to shadow banking unregulated activities. Since then, this banking system has grown dramatically, and it has become even more powerful when it comes to avoiding regulations and supervision from federal governments.

Some experts and entrepreneurs believe the Shadow Banking System collapsed at the end of 2019. Since then, Centrals Banks around the world have been printing off billions of dollars of currency to solve big structural problems inside this ultra rich environment.

When the current virus appeared, there is no coincidence for the whole global economic lockdown. There is undoubtedly something fishy about this virus and the economic lockdown.

Significance amount of businessmen, entrepreneurs, investors, politicians, or scientists believe that the complete shutdown of the economy is an “excuse” to distract more significant problems behind the scenes in the system. You heard it right: There are many political and financial interests behind these economic lockdowns. If there weren’t something colossal happening financially behind the scene, do you think there would be such unprecedented paralysis of the global economy? 

During Q1 2020, the financial markets have lived the biggest record crash in history, and since then, a lot of things related to finance and government policies have changed. Still, most are only worried about wearing masks, social distancing, and infected cases.

The world has lived the most significant financial crash in history and the beginning of the most considerable wealth transfer, and most people don’t even know what is going on, how, and why this ‘black swan’ has occurred. This 2020 has been  the beginning of something big that is about to come, and the Shadow Banking Industry has a lot to do with it.

shadow banking

The main strength and power in shadow banking is the use of leverage. At the same time, this strength can become a huge risk when it is not measured and controlled correctly because the shadow banking system does not subject to the same kinds of risk, liquidity, and capital restrictions as commercial banks are in the traditional banking system. 

 

I hope you have enjoyed this article. Check out the next one if you haven’t gotten the chance to read it yet: 8 Years Of Economic And Social Revolution! 

 

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