How does the Shadow Banking System works?

The Shadow Banking System is an institutions network, these institutions work as intermediaries between investors and borrowers. The system provides credit and capital for the following: investors, institutional investors and corporations. The Shadow Banking System’s profits come from the fees and the arbitrage opportunities in interest rates (Arbitrage = riskless profits). One of the classic strategies that are used in this system is borrowing from short-term liquid markets such as commercial paper markets and then investing these funds in longer-term that are less liquid assets such as securitized mortgages.