Shadow Banking As A System Competing With Classical Banking

Abstract

In our present time, one of the significant developments in the economy and in the world of finance, which is one of the most dynamic elements of the economy globally, is the financial liberalization practices that emerged in developed countries in the late 1970s, spreading to developing countries in the 1980s and as a part of it, the liberalization of capital movements. In addition to causing unstable growth, financial liberalization also causes changes in the sectoral structures of countries by affecting the sectors that are the components of growth with different characteristics. It was observed that competition in financial markets intensified with the phenomenon of globalization, and accordingly, financial institutions, which had to increase profitability levels in an increasingly competitive environment, turned to new methods. The Shadow Banking System, which emerged as a result of these methods, is a profit-oriented system with different legal regulations and methods from the classical banking system and is based on off-balance sheet transactions. The Shadow Banking System gathers short-term funds from money markets for the purpose of funding long-term assets. However, this system is called “Shadow” because its deposits are not covered by insurance, it cannot borrow from central banks in case of emergency, and it is not subject to classical banking regulations. It can be argued that the Shadow Banking System is more suitable for regulatory arbitrage as it is subject to fewer regulations compared to classical banks. For this reason, increasing regulations in the classical banking system increase the demand for Shadow Banking System. In the present study, the purpose is to provide information on the concept of the Shadow Banking, such as its institutional foundations, relevant literature data, and benefits and costs.