Fin 6778 — 6-topic bundle

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Shadow banking isn't a new concept, but its scale and complexity grew significantly in the decades leading up to the 2008 global financial crisis. It generally refers to credit intermediation involving entities and activities (in whole or in part) outside the regular banking system.

The key drivers for its emergence and growth include:

However, real-world finance frequently challenges these assumptions, leading to problems with efficiency and trust.

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Traditional finance, largely built on ideas like the Efficient Market Hypothesis (EMH) and Rational Economic Man (REM), assumes that all available information is instantly reflected in asset prices, and that investors always act logically to maximize their own wealth. While these concepts provide a useful baseline, they often don't hold up in the messy, unpredictable real world.

Banks face a complex web of risks that, if unmanaged, can lead to failure. Regulators, in turn, create rules and oversight to mitigate these risks and ensure the stability of the financial system.

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Traditional banking systems are built on a few core functions: deposit taking, lending, and payment processing. Banks are highly regulated entities, designed to protect depositors and maintain financial stability.

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