Some of the services Shadow Banks offer comprises the repackaging and transference of risk. This includes securitizing loans, generating credit defaulting switches, and trading of these on the derivatives market. Plus, shadow banking provides liquidness where commercial and investment banks can’t. The advantages of using Shadow Banking, they can offer credit and funding in addition to that provided by the mainstream banking system in a more cost efficiently than traditional banks. Shadow Banking also provide funding to traditional banks.
Shadow banking are like hedge funds, taking on risks that mainstream banks are either unwilling or not allowed to take. The risks are shadow banks are subject to less regulation, they can circumvent the strictly regulated mainstream banking that are designed to prevent financial crises. They can buildup risk that the unregulated system can easily spread to the traditional banking system. Shadow banking does not have insurance so any runs can cause a global financial crisis.
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They are lightly regulated and contain large gaps in the regulations which involve money market mutual funds (MMMFs), securitization, and repos. They have been able to move from banks to market lenders, hedge funds and other unregulated entities. They were also a major role in the financial crisis that recently occurred in the housing market. Quicken Loans and Rocket Mortgage are now among the chief mortgage originators in the country and they are Shadow Bankers. Because of the financial crisis that hit in the housing industries.
There are now regulators looking at the growth of Shadow Banking more seriously especially in China. Shadow bank is in many parts of the world but its exploding in China. Because of Chinas rapid growth of non-bank financial actives and the lack of transparency in the industry. Many believe they are heading down the same road American Banking system did with the housing crash.
In conclusion, I would not recommend using shadow banking. The risk is just too high. They are not regulated or insured properly. They are not held to the same standards as a regular bank. They can lend to company’s but the consumers are the ones that has to pay the bill.
There is no guarantee that a lawsuit would even help if the shadow bank collapse. If you decide to use a Shadow Bank please understand there are no grantees that your money is safe.