WHAT IS SHADOW BANKING? WILL IT CAUSE THE NEXT MELTDOWN?

The system of so-called "shadow banking" grew to a new high of $67 trillion globally last year, a top regulatory group said, calling for tighter control. A report by the Financial Stability Board (FSB) on Sunday appeared to confirm fears among policymakers that shadow banking is set to thrive, beyond the reach of a regulatory net tightening around traditional banks and banking activities. Shadow institutions typically do not have banking licenses and don't take deposits like a depository bank and therefore are not subject to the same regulations. Complex legal entities comprising the system include hedge funds, structured investment vehicles, special purposeentity conduits, money market funds, repurchase agreement (repo) markets and other non-bank financial institutions. As shadow banks do not take deposits, they are subject to less regulation than traditional banks. They can therefore increase the rewards they get from investments by leveraging up much more than their mainstream counterparts and this can lead to risks mounting in the financial system. Unregulated shadow institutions can be used to circumvent the strictly regulated mainstream banking system and therefore avoid rules designed to prevent financial collapse. The shadow banking system also conducts an enormous amount of trading activity in the Over The Counter derivatives market, which grew rapidly in the decade up to the 2008 financial crisis, reaching over US$650 trillion in contracts traded.
 READ ENTIRE ARTICLE

 

            IMPORTANT: MUST WATCH