The risk of ALM mismatch leading to liquidity problems is quite high. In India, we had a situation during the height of global crisis in 2008 when some NBFCs ran into severe liquidity problems as they were using short term liabilities such as CPs (commercial paper) and NCDs (Non-Convertible Debentures) to fund their long term lending or investment.
I will be discussing this issue in detail a little later. •  Leverage risk – As shadow banks do not usually have prudential limits on borrowings, they can become highly leveraged. High leverage exacerbates the stress in the financial system and the real economy during the downturn adversely affecting financial stability. •  Regulatory arbitrage – Credit intermediation is, traditionally, a banking activity.