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Banks accept deposits and give out loans. Shadow banking refers to non-bank financial intermediation activities taking place outside the regulated banking system. The size of shadow banking has reached a record $67 trillion in 2011, according to a report by the Finance Stability Board, a regulatory task force for the world's group of 20 economies . America has the biggest shadow banking system, followed by the Eurozone and the United Kingdom. History. It is documented that the growth in shadow banking activity was due to the inability of the traditional banking system to meet the spike in demand for funding, due to tight regulation on lending. Larysa looks into the world of shadow finance to see the alternatives that Canadians may seek to avoid Ottawa's new mortgage stress test. A recent report by the Financial Stability Board (FSB) estimated that global shadow banking assets are worth at least $75 trillion. Through this essay I am to achieve a detailed analysis of why the shadow banking was one of the causes in the financial crisis and why was it not prevented by any regulation enforced. Shadow banking is a term that is used to describe all financial institutions that perform bank-like transactions, but are not regulated by one. There is much confusion about what shadow banking is and why it might create systemic risks. Shadow banking, on the other hand, refers to any type of lending provided by financial institutions that are not commercial banks and not regulated as banks. Some equate it with securitization, others with non-traditional bank activities, and yet others with non-bank lending. Backstops can come in the form of franchise value of a bank or insurance company, or in the form of a government guarantee. Shadow banking institutions generally serve as intermediaries between investors and borrowers, providing credit and capital for investors, institutional investors, and corporations, and profiting from fees and/or from the arbitrage in interest rates. Unlike commercial banks, the entities within a shadow banking system are largely unregulated and in most instances, these organizations do not have access to government funds or credit facilities provided by government operated central banks. Shadow banking, just like traditional banking, involves risk transformation – specifically, credit, liquidity, and maturity risks. To understand shadow banks, we must first understand banking. The … The risks can be transmitted directly and through the interconnectedness of partially-regulated entities with the banking system. What are Shadow Banks ? In the larger scheme of things, shadow banking has a valid place in the economy. 1 2 3. Without close … There is much confusion about what shadow banking is and why it might create systemic risks. Shadow banking foundations like speculative stock investments regularly go out on a limb that standard banks are either reluctant or not permitted to take. It has become an essential aspect of matching the necessities of rising financial loans for mainly speculative activities. January 2015; SSRN Electronic Journal; DOI: 10.2139/ssrn.2559504 Authors: Shadow banking operations garnered much of the blame for the 2008 Global Financial Crisis. The phrase “shadow banking” was originally coined by Paul McCulley, chief economist for investment management company PIMCO, in 2007. Shadow Banking and Global Credit. The term shadow banking emerged during the financial crisis of 2007-2009. Broadly speaking, there are four types of activities. Regardless, most think of shadow banking as activities that can create systemic risk. 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