Establishing a safety net for banks may prove ineffective if shadow banking activities are allowed to undermine it, and could prove costly to the regulator in the event of a crisis, according to a working paper published by the European Central Bank (ECB).

In Banks, shadow banking and fragility, Stephan Luck and Paul Schempp produce a "simple banking model" of maturity transformation to illustrate how sharp contractions in short-term funding in the shadow banking sector can spread to commercial