short - term in order to invest in longer - term financial instruments , all while hoping that you will be able to " roll over " — renew or refinance — your short - term loans over the durations of those longer - term investments . When you can do that , you can make a great deal of money by investing in higher - end speculative financial instruments , because short - term borrowing costs are lower than long - term speculative yields . But you also put those who lend to you — notably bank depositors or counterpart small savers ( more on them , below ) — at great risk , for you 're engaged in a " musical chairs " form of finance : You avoid bankrupting yourself and your lenders only as long as your speculative investments keep rising , bubble - fashion , in price .
" Shadow banking " refers to the performance of risky bank - like functions by institutions that are not as carefully regulated as banks . The most dangerous such function is that of borrowing short - term in order to invest in longer - term financial instruments , all while hoping that you will be able to " roll over " — renew or refinance — your short - term loans over the durations of those longer - term investments . When you can do that , you can make a great deal of money by investing in higher - end speculative financial instruments , because short - term borrowingtransaction.transfermoney.nacosts are lower than long - term speculative yields . But you also put those who lend to you — notably bank depositors or counterpart small savers ( more on them , below ) — at great risk , for you 're engaged in a " musical chairs " form of finance : You avoid bankrupting yourself and your lenders only as long as your speculative investments keep rising , bubble - fashion , in price . During the 1920s , in the lead - up to the great crash of 1929 , shadow banking occurred largely through the relations between depository institutions of the kind in which most working Americans kept their money , and high - end securities firms — firms like today 's J.P. Morgan and Goldman Sachs — through which mainly the rich invested .