Shadow banking

Date posted: January 7, 2013

To many of us the financial world is confusing and is understandable as the weather on Mars. A term commonly used to describe part of the financial industry is shadow banking. Does this term describe people who lurk around street corners offering to earn you an unbelievably high interest rate on your investments? N.C. State University economist Mike Walden responds.

“No, it’s not that bad. We’re talking here about legitimate companies and legitimate investment opportunities, but we’re talking about them in a part of the financial services industry that is, what we call in the business, lightly regulated. A good example here would be money market mutual funds offered by stock brokerage houses and offered by other kinds of mutual funds. A lot of people look to these as safe, because they do tend to invest in safe investments. You can often write checks from them and almost use them as a checking account.

“The issue here is that they’re not covered by federal deposit insurance, even though people may think that they are. And that particular type of investment did get in trouble during the financial crash. And actually the Federal Reserve had to come in and rescue that by offering insurance at least temporarily.

“So, this is a lingering issue. Do we want those kinds of instruments, the so-called shadow financial banking industry? Do we want it to be regulated? If so, that’s likely going to mean some fees, some lower rates of return, or do we want it to continue to be the same and again if something happens negatively maybe government won’t come in and rescue?

“We’re talking here … about $67 trillion of investments. So, this is a big, big issue that’s yet to be solved.”

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