But those unregulated or less regulated entities should in principle be subject to more-effective market discipline than banks because, without a safety net supporting them, their creditors have stronger incentives to monitor and limit their risk-taking.
In fact, while many focus on the dangers of risk transfer to highly leveraged entities that might be vulnerable to a sharp widening of credit spreads, a significant portion of the risks that are being transferred outside the banking system are being transferred to institutional investors that are far less leveraged than banks.