Understanding the Shadow Banking System and Its Mechanisms

Shadow banking, often misunderstood due to its name, plays a crucial role in the global financial landscape by providing credit and financial services outside the traditional banking system. Comprising entities like hedge funds, money market funds, and investment banks, the shadow banking sector has amassed over $239 trillion in assets as of 2022, accounting for nearly 50% of total financial sector assets. While shadow banks facilitate essential financial functions such as securitization and offering alternative credit, they also pose risks due to their limited regulatory oversight, lack of transparency, and potential systemic risks that could destabilize the broader financial system. Following the 2008 financial crisis, efforts to monitor these institutions have intensified, highlighting the ongoing challenge regulators face in balancing innovation with financial stability.

Understanding the Shadow Banking System and Its Mechanisms

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