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Significant Features and Concept of Shadow Banking
Significant Features and Concept of Shadow Banking
Tags: Gig Economy Economy WTO WTO Public Stockholding MSP Economic Growth Masala Bond Environmental Performance Index Forecast of Economic Growth Functions of the Finance Commission
We must first comprehend banking in order to comprehend Shadow Banks. Loans and deposits are accepted at banks. To put it another way, banks accept short-term obligations and provide loans with longer terms. The money markets can also replicate this practice of lending long-term and borrowing short-term.
Therefore, a business would be effectively conducting banking if it established a money market fund, sold short-term securities, and used the proceeds to make long-term loans. A bank license would be the only thing lacking. There would also be no regulation because there is no bank license. There would be no need to borrow from interbank markets because there would be no reserve ratios or capital ratios to keep up with.
Except for accepting deposits from the general public, the Shadow Banks will be able to carry out every aspect of banking. The arrangement is flawless because the majority of Shadow Banks have no intention of taking deposits in the first place. Perhaps the most tightly regulated industry in the world is banking. Regulators and governments keep an eye on how money enters and exits the banking system.
Banks, on the other hand, are compelled to take on more risks and, if possible, earn a higher interest rate on their investments due to competition. The Shadow Banks are a parallel financial universe created by this. A lot of experts think that trying to regulate banking is just a waste of time and energy. This is due to the fact that the banks have free rein to circumvent any regulation thanks to the shadow banking system. It is said that the shadow banking system expands and contracts in size. But it never goes away. After the catastrophic 2008 collapse, shadow banking has escaped the scrutiny and repression.