End of last week one of the largest manufacturing companies in the USA General Electric...
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End of last week one of the largest manufacturing companies in the USA General Electric announced it would get out of the banking business and liquidate its General Electric Capital division. General Electric Capital is what economists call a shadow bank. It provides credit to firms, but it doesnt have a banking license. It doesnt attract deposits, but it borrows on the money market. The reason why General Electric leaves the banking business is that due to US regulation of the shadow banking sector in the US, which is imposed after the financial crisis in 2007/8, the rate of return has become simply too low. Explain why the rise of shadow banking contributed to the financial crisis in 2007/8.
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