This article reminds us of the 2008 financial crisis that was precipitated by the unregulated shadow banking system. It claims that the unregulated shadow banking system is a black hole at the center of the global financial system.
A bank can be defined as an entity that borrows money short-term and invests the money on less liquid assets that pay a higher return. The depositor banks "borrow" short term by taking deposits and they are regulated by government. Much of our focus after the financial system crisis is on reforming the regulation of depository banks. Shadow banking works in similar way but they raises money by borrowing short term from money market funds, and other sources, instead of from depositors. They use collateral to back up their short term borrowing. Lehman Brothers collapsed when the collateral that it used for its short term borrowing became less acceptable as collateral. It was no longer able to turn over its short term loans as they became due and it was brought down by a liquidity crunch.
Shadow banking grew rapidly from 2002 when it had $27 trillion in assets to $60 trillion at the peak of the crisis. It is estimated that shadow banks hold 50% of all financial assets. Their credit creation is much larger than that which is captured in statistics and the use of leverage not easy to measure since the carry trade, for example, is conducted via off balance sheet derivatives and only the net positions are reported. The top 5 banks in the US act as prime brokers for 97% of the derivative trades that are conducted. A major problem in the shadow banking system represents systemic risk to the regulated banking system.
Borrowing money is quite a common sight today. Many lending companies are offering payday loans and people can use it in any way that they could. I have used it once and was impressed with it.
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