The term "shadow bank" was coined in 2007 to describe risky off-balance-sheet vehicles hatched by banks to sell loans repackaged as bonds. Today, the term is used more loosely to cover all financial intermediaries that perform the bank-like activity but are not regulated as one. These include mobile payment systems, pawnshops, peer-to-peer lending websites, hedge funds and bond-trading platforms set up by technology firms. Among the biggest are asset management companies. In 2013 investment funds make such loans raised a whopping $97 billion worldwide. The Financial Stability Board, an international watchdog estimates that globally, the informal lending sector serviced assets worth $80 trillion in 2014 up from $26 trillion more than a decade earlier. Shadow banks have flourished in part because the traditional ones, battered by losses incurred during the financial slump, are under pressure. Tighter capital requirements and fear of heavy penalties have kept them grounded. In China, where banks are discouraged from lending to certain industries and are mandated to offer frustratingly low-interest rates on deposits, non-banks fill the gap. About two-thirds of all lending in the country by shadow banks are in fact 'bank loans in disguise'. Critics worry that unlike banks, which lend against deposits from customers, nonbanks loan money using investor's cash and rotating lines of credit. This is especially risky when skittish investors who bet on short term gains withdraw their money at once. But non-bank financing need not always be a bad thing. It offers an additional source of credit to individuals and businesses in countries where formal banking is either expensive or absent. It also takes some burden off banks which have big 'maturity mismatches' (the difference between the amount of time a depositor's money is parked in the bank minus the time that it is loaned out). And belatedly, regulators, too, are waking up to the new financial order of shadow banking. Banks must now declare structured investment vehicles on their balance sheets. Authorities are imposing leverage limits on various forms of shadow banks in America and Europe. It is a small start to rein in an industry that accounts for a quarter of the global financial system.

Which of the following has/have impacted the growth of shadow banks?

A. Faulty audits of these institutions by the Financial Stability Board.

B. The state of traditional banks post the financial crisis.

C. Need for credit which traditional banks are unable to meet.

Question

The term "shadow bank" was coined in 2007 to describe risky off-balance-sheet vehicles hatched by banks to sell loans repackaged as bonds. Today, the term is used more loosely to cover all financial intermediaries that perform the bank-like activity but are not regulated as one. These include mobile payment systems, pawnshops, peer-to-peer lending websites, hedge funds and bond-trading platforms set up by technology firms. Among the biggest are asset management companies. In 2013 investment funds make such loans raised a whopping $97 billion worldwide. The Financial Stability Board, an international watchdog estimates that globally, the informal lending sector serviced assets worth $80 trillion in 2014 up from $26 trillion more than a decade earlier. Shadow banks have flourished in part because the traditional ones, battered by losses incurred during the financial slump, are under pressure. Tighter capital requirements and fear of heavy penalties have kept them grounded. In China, where banks are discouraged from lending to certain industries and are mandated to offer frustratingly low-interest rates on deposits, non-banks fill the gap. About two-thirds of all lending in the country by shadow banks are in fact 'bank loans in disguise'. Critics worry that unlike banks, which lend against deposits from customers, nonbanks loan money using investor's cash and rotating lines of credit. This is especially risky when skittish investors who bet on short term gains withdraw their money at once. But non-bank financing need not always be a bad thing. It offers an additional source of credit to individuals and businesses in countries where formal banking is either expensive or absent. It also takes some burden off banks which have big 'maturity mismatches' (the difference between the amount of time a depositor's money is parked in the bank minus the time that it is loaned out). And belatedly, regulators, too, are waking up to the new financial order of shadow banking. Banks must now declare structured investment vehicles on their balance sheets. Authorities are imposing leverage limits on various forms of shadow banks in America and Europe. It is a small start to rein in an industry that accounts for a quarter of the global financial system.

Which of the following has/have impacted the growth of shadow banks?

A. Faulty audits of these institutions by the Financial Stability Board.

B. The state of traditional banks post the financial crisis.

C. Need for credit which traditional banks are unable to meet.

Accepted Answer

**Solution:**

1. From the passage, it is clear that shadow banks have grown partly because traditional banks were "battered by losses incurred during the financial slump" and are "under pressure" due to tighter capital requirements and fear of penalties. This corresponds to option B.

2. The passage also states that in places like China, shadow banks fill the credit gap because traditional banks are discouraged from lending to certain industries and offer low-interest rates on deposits. This indicates that the need for credit unmet by traditional banks (option C) is a factor in shadow bank growth.

3. Regarding option A, the passage mentions the Financial Stability Board as an international watchdog estimating shadow banking assets, but there is no mention of faulty audits by this board impacting shadow bank growth.

4. Therefore, only options B and C have impacted the growth of shadow banks.

**Answer:** Only B and C

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