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Question:


What is a shadow bank?
-GeorgiaGerald


Answer:


A shadow bank is a firm that lends money, just as a conventional bank does, but operates outside of a country’s regulatory supervision. Shadow banks are largely phenomena in emerging economies, especially China, where putatively legit institutions often do the bidding of government agencies, lending to businesses that they favor rather than to the ones that merit it most on commercial grounds. That forces those other capital-starved enterprises to seek the services of a shadow bank. The irony is that the activities of official lenders that operate out in the open are the ones whose practices we might consider shadier. The problem with shadow banks, as far as economic and monetary policy or the health of financial systems and markets is concerned, is that it’s hard to know how much money is tied up in these entities and therefore how much risk there is from one of them going belly up. The odds of a failure are hard to gauge, as is the fallout. And with economies more closely linked than ever before, a shadow bank blowing up in China could affect share prices, interest rates and economic growth all the way over here.

-Conrad de Aenlle



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