money supply, banking & financial institutions section 2 MCQ Questions & Answers Detailed Explanation

Answer: (b)

Shadow banking operates outside the regular banking system and financial intermediation activities are undertaken with less transparency and regulation than conventional banking.

Shadow banks, like conventional banks, undertake various intermediation activities akin to banks, but they are fundamentally distinct from commercial banks in various respects. NBFCs are examples of shadow banks.

The following are differences between normal banks and shadow banks.

• First, unlike commercial banks, which by dint of being depository institutions can create money, shadow banks cannot create money.
• Second, unlike the banks, which are comprehensively and tightly regulated, the regulation of shadow banks is not that extensive and their business operations lack transparency.
• Third, while commercial banks, by and large, derive funds through the mobilization of public deposits, shadow banks raise funds, by and large, through market-based instruments such as commercial paper, debentures, or other structured credit instruments.
• Fourth, the liabilities of the shadow banks are not insured, while commercial banks’ deposits, in general, enjoy Government guarantees to a limited extent.
• Fifth, in times of distress, unlike banks, which have direct access to central bank liquidity, shadow banks do not have such recourse.