In a CNN article, the author noted that the size of the market for "exotic financial instruments" or 'shadow banks' has grown since the 2008 financial crisis. He claims that:
"Some bankers argue that new post-crisis regulations, which have increased capital and liquidity requirements for traditional institutions, have only boosted demand for shadow banking and with it the risks of a future crash."
Public choice theory would suggest that these regulations were attempts by the 'shadow banking' companies to induce greater demand for their products. Consumers must pick between conventional banking assets and risky assets, meaning they are substitutes. The risky asset sellers probably had a hand in ensuring that the substitutes for their products were as expensive as possible by burdening their companies with expensive regulatory compliance. As an added bonus these compliance measures probably keep out new entry making it easier for the companies to collude and increase prices, thus increasing the demand for 'shadow banks' by increasing the price of their substitute.
The article then goes on to say that this shadow banking system will soon get further regulation. It will be interesting to see whether this regulation is captured by the industry it seeks to regulate or whether the conventional banks will use this as an opportunity to fight back and educe consumers to return to their products. Or maybe the regulation will do its intended purpose and protect the American consumers from 'structural instability.' Maybe.
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