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- [Narrator] What is a shadow bank?
Well, what you and I would commonly call just "a bank,"
is actually more technically a commercial bank,
and that means a bank that takes deposits
from individuals and businesses,
and it's insured by the government through the FDIC.
Because of the government guarantee,
depositors don't feel the need to run to the bank
at the first sign of trouble and pull out their money.
A shadow bank, on the other hand, does not take deposits,
and so does not fall under the FDIC.
Shadow banks are generally any entities
that perform bank-like activities
but are not regulated like traditional banks.
Examples include investment banks,
along with other complex financial intermediaries,
such as hedge funds, issues of asset-backed securities,
money market funds,
and even some parts of traditional commercial banks
which are not covered by the deposit insurance guarantee.
Take investment banks, one type of shadow bank.
Investment banks are a different kind of bank,
without a comparable governmental guarantee
for deposits or liabilities.
The money they use comes from investors,
not from depositors,
so the investors are always asking,
"If I lend my money to an investment bank,
are my funds safe?
Will I get my money back?"
And these investors are more watchful
and sometimes even prone to panic
if something seems to be wrong with the investment bank.
And we saw a lot of this during the Great Recession.
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Check out our practice questions to test your skills on shadow banks.
If you're curious to learn more about the role shadow banks played
in the Great Recession, click here.
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