Entities That Make Up The System
Shadow institutions typically do not have banking licenses and don't take deposits like a depository bank and therefore are not subject to the same regulations. Complex legal entities comprising the system include hedge funds, structured investment vehicles (SIV), special purpose entity conduits (SPE), money market funds, repurchase agreement (repo) markets and other non-bank financial institutions. Many shadow banking entities are sponsored by banks or are affiliated with banks through their subsidiaries or parent bank holding companies. The inclusion of money market funds in the definition of shadow banking has been questioned in view of their relatively simple structure and the highly regulated and unleveraged nature of these entities, which are considered safer, more liquid, and more transparent than banks.
Shadow banking institutions are typically intermediaries between investors and borrowers. For example, an institutional investor like a pension fund may be willing to lend money, while a corporation may be searching for funds to borrow. The shadow banking institution will channel funds from the investor(s) to the corporation, profiting either from fees or from the difference in interest rates between what it pays the investor(s) and what it receives from the borrower.
The shadow banking system makes up 25 to 30 percent of the total financial system, according to the Financial Stability Board (FSB), a regulatory task force for the world's group of top 20 economies (G20).
This sector was worth an estimated $60 trillion in 2010, compared to prior FSB estimates of $27 trillion in 2002. While the sector's assets declined during the global financial crisis, they have since returned to their pre-crisis peak except in the United States where they have declined substantially.
There are concerns that more business may move into the shadow banking system as regulators seek to bolster the financial system by making bank rules stricter.
Read more about this topic: Shadow Banking System
Famous quotes containing the words entities that, entities and/or system:
“Experimental work provides the strongest evidence for scientific realism. This is not because we test hypotheses about entities. It is because entities that in principle cannot be ‘observed’ are manipulated to produce a new phenomena
[sic] and to investigate other aspects of nature.”
—Ian Hacking (b. 1936)
“The white man regards the universe as a gigantic machine hurtling through time and space to its final destruction: individuals in it are but tiny organisms with private lives that lead to private deaths: personal power, success and fame are the absolute measures of values, the things to live for. This outlook on life divides the universe into a host of individual little entities which cannot help being in constant conflict thereby hastening the approach of the hour of their final destruction.”
—Policy statement, 1944, of the Youth League of the African National Congress. pt. 2, ch. 4, Fatima Meer, Higher than Hope (1988)
“Some rough political choices lie ahead. Should affirmative action be retained? Should preference be given to people on the basis of income rather than race? Should the system be—and can it be—scrapped altogether?”
—David K. Shipler (b. 1942)