A shadow banking system may refer to the banking system in which the financial intermediaries are involved in providing the credits across the global financial system in such a manner that the members are not subjected to the regulatory insight. Thus, it may refer to the number of unregulated activities by different institutions. In the recent times, there has been a significant rise in the concept of shadow banking because of rival traditional depository banking. Some of the examples of shadow banking systems included the securitization done the vehicles, commercial papers which are backed on assets, conduits, money market funds, mortgage and investment banking. Though, shadow banking systems are usually associated with a number of risks as they do not take any deposit, they involve fewer number of regulations in comparison to traditional banks.
In order to be better than their competitors, they may even increase the rewards for the customers which possess the risk in the financial systems. Because of a lot of un-regulations, shadow bank can regulate the mainstream banking system and avoid all the rules which are there for the prevention of the financial crises. There are a number of other risks associated with shadow banking.Ineffective monetary policies: With the increase in the size of the shadow banking institutions, there will be a decrease in the effectiveness of different monetary policies, which will help in controlling the inflation rate.
This will also lead to the reduction in the official supply of money. Thus, there will ultimately decrease and will become nullified because of the increase in the liquidity of the shadow banks. It is important to control the inflation by doing the reduction in the growth of credit and by doing the prevention related to the overheating in the economy. Shadow banking is a banking system which has been spreading in each and every economy in the world. It is such kind of banking system in which the short-term funds are borrowed from the market institutions, which leads to the creation of a liquidity mismatch. In this report, the discussion has been focused on Shadow banking. Different literature journals have been studied to discuss the risk associated with shadow banking, the causes of the same and its consequences. Further, the shadow banking issues in Canada have been investigated. Further, on the basis of the research, the causes and consequences related to shadow banking and its impact on the economy have been discussed in detail.