The first one is straightforward: shadow banking activity can be used to circumvent and undermine banking regulations. This may become increasingly important given the new Basel III standards for bank capital and liquidity coming into force. The second concern reflects a number of vulnerabilities inherent in MBF, perhaps the most important of which is exposure to panics.
One of the main lessons from the financial crisis was that the rules governing the banking system were rather inadequate. We saw excessive risk-taking, insufficient loss absorbing capacity and banks that were “too big to fail” – to name just some of the problems that led to the crisis.