What is a shadow banking system?

The

shadow banking system consists of organizations that offer the same type of credit facilities and financial services as banks. Unlike commercial banks, entities within the shadow banking system are largely unregulated and in most cases these organizations do not have access to government funds or credit facilities provided by government central banks. Many businesses and private investors turn to the shadow banking system when conventional banks impose tight subscription instructions.

The money market funds are one type of financial company that operates in the shadow banking system. Like other mutual funds, the funds of the cash market contain a portfolio of various investment vehicles and these assets are controlled by the fund manager. These funds usually invest in short -term debt securities, many of which publish public or private corporations. These entities pay the Fund's interest and interest payments are handed over to shareholders inTon form of dividend payments. Many large companies primarily borrow money by selling debt securities to mutual funds rather than obtaining conventional loans from banks.

Initial businesses and individuals with a bad loan often cannot borrow money from commercial banks. These debtors often turn to the shadow system because investors on this market are willing to take higher risk levels than banks. Many investment companies specialize in the issue of loans to high -risk debtors and then combine thousands of loans to create investment funds. Speculators and other investors then buy bonds that are secured by these investment funds. Investors alleviate risks by demanding higher interest rates than banks, while debtors on the shadow market willingly apply to these rates due to lack of more affordable options.

in some countries, sponsored by governmentThey play an active role in the shadow banking system. These entities usually try to stimulate the housing market by transforming mortgages insured by the government into tradable securities. Investors can often create a higher level of return on investment in these debt securities rather than inserting funds into traditional banking products.

Securities regulators in many countries are responsible for ensuring that mutual funds and other entities in the shadow banking system publish critical information to investors such as types of tools that are held in a particular fund. Despite these publishing regulators, the regulators are not responsible for the protection of the Chief Director used by investors to buy securities. On the contrary, banking regulators in many countries must ensure that banks always have sufficient funds on hand to cover outstanding obligations. Therefore, debtors and investors in the shadow system are exposed to higher interestRisk than suitable bank clients.