Shadow Banks

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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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