The Effects Of Shadow Banking On The Financial Crisis

In this essay I am going to discuss the effects of shadow banking on the recent financial crisis of 2007-8. Shadow banking was one of the major causes of the financial crisis since it was the subprime mortgages which was the first trigger of the collapse in the banking system. Through this essay I am to achieve a detailed analysis of why the shadow banking was one of the causes in the financial crisis and why was it not prevented by any regulation enforced. The basis of shadow banking system is that it occurs when financial intermediaries conduct transformation of maturity, credit and liquidity without having access to the central bank liquidity guarantees or even public sector credit. Furthermore shadowing banking includes a complicate process to reach maturity transformation since the process is done over various steps in the system. Firstly in this essay I am going to start by discussing the difference in the shadow banking system and the traditional system. In the traditional system there are less steps compared to the shadowing banking system to reach the maturity transformation. In tradition banking the process to reach maturity transformation was done under one roof. Moreover shadow banking had led to a rise in the originate to distribute model of banking which means that the default risk on granted loans is separate and disconnected from the originators of the loan. This is in contrast to the traditional banking system of originate to hold model. In the shadowShow MoreRelatedEffects Of Shadow Banking On The Financial Crisis1912 Words   |  8 Pagesdiscuss the effects of shadow banking on the recent financial crisis of 2007-8. Shadow banking was one of the major causes of the financial crisis since it was the subprime mortgages which was the first trigger of the collapse in the banking system. 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