The recent substantial increase in the size of the shadow banking sector in the euro area was fostered by three factors. First, in an environment of globally low interest rates, among other financial institutions, investment funds and hedge funds were instrumental in the general search for yield.
Second, the supply of credit has been weak due to impaired banks’ balance sheets, which led to the expansion of the unregulated credit market. Third, a more stringent banking regulation in anticipation of the implementation of new capital and liquidity rules under Basel III could have, in itself, induced a shift of lending to the unregulated sector.