See how shadow banking works and what its risks are

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Have you ever heard of shadow banking? This term defines a group of companies that operate in the financial system in a parallel manner. As a result, they are not regulated by the sector's authorities.

But what are the objectives of this parallel structure that often crosses borders and operates in several countries simultaneously? More importantly, what risks does this type of practice pose, both for individuals and for the financial system? The answers to this question are throughout the article. Check it out!

After all, what is shadow banking and when did it emerge?
The brief definition we gave in the introduction already gives a good idea of ​​what shadow banking is. Another way to understand it is by translating the term that defines it: in Portuguese, we would have something like “shadow banking system”. It is also called the informal banking system.

Its emergence dates back to the beginning of the 21st century. Shadow honduras phone number list involves a series of unregulated intermediaries that include investment banks, hedge funds, derivatives operations, factoring operations and decentralized lending mechanisms, among others.

In practice, institutions that engage in shadow banking are primarily looking for places where they can escape the rules of traditional banking systems. Among many of the requirements of regulated financial institutions are capital reserves, liquidity and other measures necessary to prevent failures and bankruptcies.

This failure to comply with the rules allows many institutions in this parallel market to operate with a high degree of leverage. In short, leverage is a type of credit operation in which a person or company is able to operate in certain markets with a much greater financial capacity than they actually have.

As a result, risks skyrocket and, if a problem occurs, the losses can be irreversible. As a result, much of shadow banking is focused on intermediating transactions between creditors and borrowers, releasing loans that would not be granted if all regulations were followed to the letter.

It is no wonder that many experts point to shadow banking intermediaries as one of the triggers of the 2008 crisis. They operated with a high degree of leverage amid the frenetic granting of real estate credit. When the system collapsed due to the increase in defaults, many of these institutions plummeted, taking a large part of the world economy with them.