Chapter EMA, Problem 2DS

To determine

To state: The meaning of the term shadow bank and the difference between shadow bank and traditional bank using examples.

Explanation of Solution

Shadow banking term is used to describe bank-like activities (which are majorly lending) that proceed outside the traditional banking sector. It is also referred to as market-based finance or non-bank financial intermediation in the international market.

Shadow bank lending has the same function as to that traditional bank lending. Usually, such institutions are not permitted to take demand deposits from the public that was done traditionally and easily available funds, such as the funds that are kept in savings or checking accounts. This restraint keeps them out of the range of conventional oversight from state and federal financial regulators.

The difference between shadow banking and traditional banking is:

A traditional bank would accept deposits to lend loans to the ones in search of money, but on the other hand, shadow banks do not accept deposits; they do not have the same ways to construct their loan funds. Instead, shadow banks make use of the securities that are provided to them in exchange for a loan. Examples explaining the difference between these two banks are: Investment banks, like Morgan Stanley or Goldman Sachs, Money market funds, Mortgage lenders, Insurance/re-insurance companies

Economics Concept Introduction

Introduction:

Shadow banking: This term is used to describe bank-like activities (which are majorly lending) that proceed outside the traditional banking sector. It is also referred to as market-based finance or non-bank financial intermediation in the international market.

Shadow bank lending has the same function as to that traditional bank lending.