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♪ [music] ♪

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- [Narrator] What is a shadow bank?

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Well, what you and I
would commonly call just "a bank,"

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is actually more technically
a commercial bank,

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and that means a bank
that takes deposits

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from individuals and businesses,

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and it's insured by the government
through the FDIC.

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Because of the government guarantee,

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depositors don't feel the need
to run to the bank

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at the first sign of trouble
and pull out their money.

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A shadow bank, on the other hand,
does not take deposits,

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and so does not fall
under the FDIC.

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Shadow banks are generally
any entities

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that perform bank-like activities

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but are not regulated
like traditional banks.

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Examples include investment banks,

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along with other complex
financial intermediaries,

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such as hedge funds,
issues of asset-backed securities,

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money market funds,

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and even some parts
of traditional commercial banks

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which are not covered
by the deposit insurance guarantee.

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Take investment banks,
one type of shadow bank.

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Investment banks are
a different kind of bank,

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without a comparable
governmental guarantee

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for deposits or liabilities.

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The money they use
comes from investors,

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not from depositors,

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so the investors are always asking,

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"If I lend my money
to an investment bank,

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are my funds safe?

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Will I get my money back?"

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And these investors
are more watchful

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and sometimes even prone to panic

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if something seems to be wrong
with the investment bank.

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And we saw a lot of this
during the Great Recession.

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♪ [music] ♪

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Check out our practice questions
to test your skills on shadow banks.

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If you're curious to learn more
about the role shadow banks played

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in the Great Recession, click here.

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♪ [music] ♪

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Still here?

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Check out Marginal Revolution
University's other popular videos.

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♪ [music] ♪