THE SHADOW BANKING MECHANISM: HIGHLIGHTING THE PERILS AND CHALLENGES ASSOCIATED WITH IT

Abstract

It was Paul McCulley who first used the phrase "shadow bank" in 2007. It occurs all over the world. It suggests that nonbank financial entities are undergoing maturity changes in the US (using short-term funds to fund loans that are long-term, for example). Shadow banking is defined by the Financial Stability Board as debt intermediary that takes place (wholly or partly) beyond the traditionally established banking system. Outside of the authorized banks, shadow banking operations include credit intermediaries, liquidity conversion, and transformation of maturity. Although shadow banks date back in the 1970s, in recent years developing nations have seen a sharp increase in the number of shadow banks. Shadow banking have grown similarly in India as well. It is crucial to comprehend the shadow banking industry properly since experts have warned that shadow banks are vulnerable to systemic threats and crises. In this paper we will focus on the better understanding of the shadow banking and the threats its poses. This paper also focuses on the recent RBI guidelines of the shadow Banking.