Shaping a regulatory response Ideally, a regulatory response to the shadow banking system would be grounded in a full understanding of the dynamics that drove its rapid growth, the social utility of its intermediation activities, and the risks they create.
Still, capital strengthening must continue. While this may automatically reduce the return on capital, at the same time it favours its stability. By increasing banks’ ability to withstand adverse shocks it boosts investor confidence and lowers the cost of external funding. Exposure to the public sector has increased significantly since the beginning of 2012.