The Growth Of Shadow Banking

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 It should be noted that the growth of the shadow banking system is not per se a problem since intermediating credit through non-bank channels can have some advantages. For example, the shadow banking system can provide market participants and companies with an alternative source of funding and liquidity. Also, some non-bank entities have specialized knowledge and expertise that can enable them to provide credit in a more optimal and cost cost-efficient manner than traditional banks. However, following the financial crisis there has been increased concern about the shadow banking sector as a source of systemic risk. This stems from the fact that non-bank entities may extend funds to riskier borrowers and have poorer risk monitoring systems in place. In addition, there is the interconnectedness of shadow banks with the regulated banking sector and the possibility that problems in shadow banks will spill over to traditional banks and vice-versa. There is also concern that greater regulation of the banking sector is merely fueling the growth of the unregulated shadow banking sector. Finally, there is concern that shadow banks can increase the amount of leverage and risks in the system as they are not required to have the same level of capital adequacy as traditional banks.

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