Shadow banks are organizations that lend money to people just like traditional banks do. The difference between traditional banks and shadow banks comes when you talk about who actually puts their money into these banks.
In a traditional bank, that money comes in from depositors. In a shadow banking system, that money comes from investors, not depositors, not people like you and I, but investors who want to invest in that company.
For more explanation on how shadow banking impacts the economy, listen to my interview on the subject from Marketplace July 14, 2010.
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