Liberalization and regulation is another cause of shadow banking. There are various nations which have liberalized its financial sector. Though this sector was much more regulated in the past, there are a number of liberal implementations in this sector. This has been the primary reason for the growth of shadow banking. In the present times, the trust sector has become the second largest sub sector in the world. The assets in this sector are greater than the others including the insurance sector. As per the Credit Suisse (2013), it has been stated that the brokers and asset management related businesses are growing more and more at a huge pace. By offering a large number of lucrative offers, the shadow banking system is increasing more and more.
In addition to this, there are various other macroeconomic factors such as the fall of stock markets (Da, 2012). An example of the same is the fall of stock market in China in 2008. This fall was much higher in comparison to the stock returns. Because of the market fall, a declining trend had been observed. In the same time, there was a growth in the pressure in the world which led to the increase in the size of shadow banking. This was because it led to the creation of a low real return on bank deposits in comparison to the high rate of return as promised by the shadow banks.
Shadow banking may lead to the creation of asset bubble. Because of the spending done from the shadow banking, there is a creation of financial bubble. The number of regulations in the normal procedure of banking is very high.
Thus, the majority of financing is done from the shadow banking system. This leads to the inflation of the asset bubble which doesn’t get corrected.
Another consequence of shadow banking system is the increase in the fragility of financial systems. Because of the shadow banking system, there is an increase in the three major banking risks. If there will be any trouble over these shadow banks, it will lead to the freezing of the complete pipeline which will be related to the credit (Strahan, 2013). This will lead to a sudden impact on the growth of output, causing a rise in the massive loss of jobs in a short time span.