This paper investigates how expanding the corporate bond market and
the shadow banking sector affect the susceptibility of the financial system
to crisis. We show that the corporate bond market can increase banking
fragility although it also diminishes the impact of banking crises. Shadow
banking allows higher financial system leverage and thus increases bank risk
taking and fragility even further. Because it relies on bank capital for its
operations, the shadow banking sector provides no funding diversi cation and
cannot offset the real economy impact of a banking crisis.