https://www.investopedia.com/terms/s/shadow-banking-system.asp#:~:text=The%20Breadth%20of%20the%20Shadow%20Banking%20System&text=These%20include%20investment%20banks%2C%20mortgage,of%20credit%20in%20the%20economy.
When rate ramp up quickly and higher, these shadow banks would not able to turn to low borrow sources to borrowing and could buckle. The FED is walking a tight rope. I wonder how JPowell sleep at night?
Understanding Shadow Banking Systems
The shadow banking system has escaped regulation primarily because unlike traditional banks and credit unions, these institutions do not accept traditional deposits. Shadow banking institutions arose as innovators in financial markets who were able to finance lending for real estate and other purposes but who did not face the normal regulatory oversight and rules regarding capital reserves and liquidity that are required of traditional lenders in order to help prevent bank failures, runs on banks, and financial crises.
As a result, many of the institutions and instruments have been able to pursue higher market, credit, and liquidity risks in their lending and do not have capital requirements commensurate with those risks. Many shadow banking institutions were heavily involved in lending related to the boom in subprime mortgage lending and loan securitization in the early 2000?s. Subsequent to the subprime meltdown in 2008, the activities of the shadow banking system came under increasing scrutiny due to their role in the over-extension of credit and systemic risk in the financial system and the resulting financial crisis.
The Breadth of the Shadow Banking System
Shadow banking is a blanket term to describe financial activities that take place among non-bank financial institutions outside the scope of federal regulators. These include investment banks, mortgage lenders, money market funds, insurance companies, hedge funds, private equity funds and payday lenders, all of which are a significant and growing source of credit in the economy.
Despite the higher level of scrutiny of shadow banking institutions in the wake of the financial crisis, the sector has grown significantly. In May 2017, the Switzerland-based Financial Stability Board released a report detailing the extent of global non-bank financing. Among the findings, the board found that non-bank financial assets had risen to $92 trillion in 2015 from $89 trillion in 2014. A more narrow measure in the report, used to indicate shadow banking activity that may give rise to financial stability risks, grew to $34 trillion in 2015, up 3.2% from the prior year and excluding data from China. Most of the activity centers around the creation of collateralized loans and repurchase agreements used for short-term lending between non-bank institutions and broker-dealers. Non-bank lenders, such as Quicken Loans, account for an increasing share of mortgages in the United States. One of the fastest-growing segments of the shadow banking industry is peer-to-peer (P2P) lending, with popular lenders such as LendingClub.com and Prosper.com. P2P lenders initiated more than $1.7 billion in loans in 2015.
Who Is Watching the Shadow Banks?
The shadow banking ind
