But that is not the only area which needs a lot more work. If we want to safeguard financial stability in future, regulators will need to set their sights beyond the banking system – to the shadow banking system. But I have my reservations about the term “shadow banking system”. The word “shadow” usually conjures up images of unsavoury, shady activities.
This divergence seems to be related to inefficiencies in the reallocation of resources from the least to the most productive firms within each sector, rather than inefficient allocation between sectors. Factors that drive such capital misallocation5 appear to be partly related to market rigidities, poor policy reactions and banks’ reluctance to address their non-performing loans.