A Layman’s Introduction To Shadow Banking

With the upcoming elections, many financial institutions have been preparing themselves for the inevitable monetary repercussions. Of particular interest is the recent news on shadow banking. The name should not deter the layman from knowing more about it. This is a financial topic that is relatively easy to understand. Detailed below are some concepts to be recognized.

Image Source: bloomberg.com

It was coined in 2007: Shadow banks were termed by Paul McCully of PIMCO, a bond fund company, to define any financial vehicle operated by banks that sells loans as bonds. It has evolved today to cover any type of financial intermediaries that offer bank-like transactions but may or may not be regulated by official boards. This includes any form of pawnshop, peer-to-peer lending, hedge forms, or even bond-trading platforms formed by technology firms.

It’s a booming business: Unlike traditional financial institutions, these non-regulated groups have been growing. This is also attributed also to the low interest rates provided for by these companies. In 2014, it was estimated that the informal lending sector amassed assets worth more than US $80 trillion – a number that is expected to double in the next few years.

Image Source: cnbc.com

There is a move to regulate it: Shadow banking is now hitting the headlines because regulators are now becoming aware of this new financial order. Conventional banking systems are taking the hit; a condition further exacerbated by global regulations to keep strict lending protocols. Local authorities are now determining the need for leverage limits on different types of shadow banks in America and Europe.

The business of shadow banking is a hot issue among the presidential candidates and many Americans are curious as to what their candidate will do regarding this situation.

Steve Sorensen writes embezzlement-related articles and other business topics. He is a financial blogger and shares his ideas on this YouTube channel.


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