Read the passage to answer the given questions
Shadow banking (SB) has been an essential and largely disputed issue in finance literature for
over a decade. Its macroeconomic implications and institutional-level importance have made it
a fascinating area of study. After the Global Financial Crisis of 2007–2008 (GFC), scholars,
legislators had SB in their sights. Many scholars have argued that the GFC initially sprouted from
the SB sector, and that SB was the main culprit in the crisis. The SB sector’s vulnerability was in
its financing of risky, long-term, and illiquid assets with short-term borrowings, resulting in a
breakdown in the credit market that forced SBs to sell long-term holdings at fire-sale prices.
However, some studies argue that SBs were not entirely responsible for the sub-prime mortgage
crisis during the GFC. Moreover, SBs may be a key to mitigating damages if a liquidity crisis
caused by traditional banks arises in the future. As the future of SB and the new financial
innovations within the SB sector hangs in the balance, some suggest taming the wild horse. On
the other hand, some say that if SB remains unregulated or is regulated differently than the
traditional banking sector, it will bring about the next global financial crisis.
The term “shadow bank” was coined by economist Paul McCulley. In McCulley’s talk, shadow
banking had a distinctly US focus and referred mainly to nonbank financial institutions that
engaged in what economists call maturity transformation. Commercial banks engage in maturity
transformation when they use deposits, which are normally short term, to fund loans that are
longer term. Shadow banks do something similar. They raise short-term funds in the money
markets and use those funds to buy assets with longer-term maturities. But because they are not
subject to traditional bank regulation, they cannot—as banks can—borrow in an emergency
from the Federal Reserve (the US central bank) and do not have traditional depositors whose
funds are covered by insurance; they are in the “shadows.”