PDSnet Glossary

Term

Categories

Introductory Technical Fundamental Economics Opinion Sectors International Regulatory Other Markets

Versions

Name	synonyms = 1, variations = 2, abbreviations = 3

Publish: (0 = no, 1 = yes)

Definition

The taking of deposits and on-lending of money outside of normal banking regulations. Banks effectively create money in the economy because they take in deposits and then lend out as much as 90% of those deposits to borrowers. The relationship between the amount of deposits which they take and the amount of loans which they are allowed to give is known as the reserve ratio is strictly controlled. Banks fall under and are controlled by the Banks Act (94 of 1990) which regulates every aspect of banking and especially their reserve ratio. So banks have to keep liquid cash reserves of around 10% of their loan book. For example, if they take a deposit of R1000, they can only lend out R900 and the remaining R100 must be kept in reserve. In 2024 shadow banking became associated with China where the Zhongzhi, one of the largest shadow banks, filed for bankruptcy in January 2024. This put the entire Chinese shadow banking industry, estimated to be worth around $3 trillion, at risk. Most shadow banks offer better terms than conventional banks and the industry in China had mostly been used in the property sector. The following video gives a good understanding of the concept and the risks which it entails:
<a href="https://www.youtube.com/watch?v=9qz8-yjzk5Q">https://www.youtube.com/watch?v=9qz8-yjzk5Q</a>

Edit Glossary Term