Shadow Banking

Explanation :

• Shadow Banking refers to the practice of banking like activities performed by non-banking finance companies, which are not subject to strict regulation. However, these institutions function as intermediaries between the investors and the borrowers, providing credit and generating liquidity in the system.
• It includes money market funds, private equity funds, hedge funds, securitisation, securities lenders, and structured investment vehicles.
• The term “shadow bank” was coined by economist Paul McCulley in a 2007 speech at the annual financial symposium hosted by the Kansas City Federal Reserve Bank in Jackson Hole, Wyoming.
• Unlike traditional banks, shadow banks do not take deposits. Instead, they rely on short-termfunding provided either by asset-backed commercial paper or by the repo market, in which borrowers offer collateral as security against a cash loan and then sell the security to a lender and agree to repurchase it at an agreed time in the future for an agreed price.