Shadow Banking

Topics: Subprime mortgage crisis, Finance, Bank Pages: 4 (1041 words) Published: June 17, 2012
Shadow Banking System and its role in the global financial crisis

What is shadow banking system

Shadow Banking System (SBS) refers to a collection of financial entities, infrastructures and practices which support financial transactions but beyond the regulation and monitor from the government or official regulators. Some financial institutions, like investment banks, may conduct some their transactions in the shadow banking system, but they are not SBS institutions themselves. The term was first proposed in 2007 by Paul McCulley, CEO of Pacific Investment Management Co., and soon became popular with the spread of global financial crisis around the world.

History and evolution

Shadow banking system has actually existed for a long history alongside the development of traditional banking system. It became prosperous and brought attention to the public only a few decades ago with the help of two remarkable social developments: securitization and technology innovation. In the 1980s-90s, securitization trend became booming in America. All kinds of assets you can imagine can be securitized and were packaged on the market for trading. Mortgage, sub-mortgage and credit card collection were securitized and were used as collateral for borrowing and lending capital. After 21th century, with the fast development of technology, especially personal computer, various sophisticated financial derivatives, which had been so pretentious and stood high above the masses, seemed to become so popular that can be accessed by everyone overnight. The SBS grew explosively after the 21th century. By late 2007 the assets size of the SBS in the US exceeded $10 trillion, similar as the value of traditional banking system. SBS global transaction volume reached $600 trillion, 15 times of the world’s total GDP.

How Shadow Banking System works

Shadow banks work as an intermediate role to provide credit and liquidity for the market. When people deposit money in a bank, or receive...
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