Top Highlights

• The right approach is to find the optimum balance of societal benefits and risks, not to aim for an arbitrary size or role
• Further, much of shadow banking results from a web of regulatory, bureaucratic, and policy constraints and pressures on the formal banking sector, as well as some internal weaknesses at the banks. Therefore, reform recommendations arising from a consideration of shadow banking need to extend into the formal banking sector
• Banks, for example, are generally required to have significantly more capital and liquidity than shadow banks may choose to carry.
• hadow banks are also less regulated. This combination forces policymakers into difficult balancing acts to try to maximize the benefits while minimizing the risks.
• There is also an interbank version, where one bank will act on behalf of another

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