Shadow banking is commonly attributed to the economist McCulley (2007) who used the term shadow banking during his address at the annual financial conference conducted by the Kansas City Federal Reserve bank in Jackson Hole, Wyoming.He defined shadow banking as entities involved in non-traditional banking system, activities that are outside the regular banking system. As stated by Pozsar et al in 2010 …show more content…
Shadow banking institutions act as a middle man between an investor and borrowers who provide credit and capital for the investors and corporation for the investment which in turn get the profit from the fees and /or from the arbitrage interest rates. As the shadow banking system is non- traditional banking system, they don’t pick up deposits like commercial banks. They have less regulatory limits and laws and that’s why they are not subject to regulatory control of unregulated activities. A good example of this would be credit default …show more content…
The first reason is to inquire the yield on the banks. Over the last 30 years the substitute deposit for fee-based wholesale funding of banking industry have increased as the competition in banking sector have increased. In 2012 Pozsar et al stated that the changed in the process have converted banks to generate low return on-equity (ROE) service that offers loans and hold it till maturity to increase ROE services that originate loans to storehouse and afterwards securitize and assort them. However, the second reason is to avoid banking restrictions and in specific, capital requirements. Banks leverage was increased with the usage of structured finance vehicles and financial holding companies, which in turn raised up their expected returns but also their vulnerability to aggregate risk. Moreover the poor monitoring incitement and misrelate incentive made the evaluation agencies to authenticate the quality of the securities being used as