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Shadow Banking System Essay

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1. Fill Regulatory Gaps Because of the crisis, major gaps in regulation were revealed. With reference to past events, depository institutions such as banks were more at risk from financial shocks and disruptive panics. The Federal Deposit Insurance Corporation guaranteed that depositors would be paid back in olrder to reduce the risk. As a result, banks faced the toughest regulation and oversight. A ‘’Shadow banking system’’ in recent decades developed and involved a variety of financial firms,securities and markets. Funding long-term loans and securities using short-term liabilities that are assumed to be highly liquid and safe were core features of banking which were replicated by the system.in the crisis,the rigourously regulated shadow banking system was prone to panics and all together proved to be a major source of credit-market disruption. Basing oversight on the function of the firm and it’s risk to the economy is one of Dodd-Frank Wall Street Reform and Consumper Protection Act of 2010’s aim to remove gaps in regulation. An …show more content…

Firms that wanted to increase lending made riskier loans and reduced their standards during the pre-crisis boom years. Investors across the financial landscapes werfe sold loans that were financed and packaged with borrowed funds. Investors were unsure who was exposed to the quesstioinable loans when the financial crisis occurred. Their biggest fear was that many institutions lacked sufficient shareholder funds to protect against losses. It was for this reason that investors began demanding their money back. Debt-ladden was created and the cycle deepend as a result of a plunge in asset prices. The new financial reform reduces this risk by requiring large, complex financial companies to operate with more appropriate levels of shareholder capital, liquidity and

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