Question

What is shadow banking? Is there a problem with shadow banking? Elaborate your answer.

Answer 1

A shadow banking system is the community of financial intermediaries that promote credit creation across the global financial system but are not subject to regulatory oversight by their members. The shadow banking system often applies to the practices of financial institutions that are not regulated. Examples of non-regulated intermediaries include hedge funds, unlisted derivatives, and other unlisted instruments, while examples of non-regulated entities ' activities include credit default swaps.

The first class of losses incurred by the common man is in the form of investment losses, equity investors have lost enormous amounts of money in their investments in shadow banking shares, the situation is not very different for bond investors who suffer losses in the form of reduced NAVs of their debt mutual fund holdings as more and more AMCs are forced to categorize their exposures The second set of hardships may affect a large section of the common population, 40% of all consumer loans accounted for in the recent past shadow banking system,

Loan volumes have fallen to 10 percent of the levels seen before the crisis for some of these lenders. Less loans from shadow lenders have already made especially vulnerable automobiles, consumer goods and real estate sectors. Industries are seeing growing income and volume growth in these industries and are forced to cut demand. Although the shadow banking crisis continues to be an issue in the financial sector, it leads to a tightening of loan standards and fresh loan curbs for both businesses and individuals, and the effect can be seen as a reduction in the production and consumption cycle, an erosion of the price of personal wealth and, eventually, a lower national GDP. If the crisis persists in the next phase, we anticipate massive downsizing and job losses that would impact a larger section of the economy and individuals directly.