Another professor, Bill Black, describes the vulnerability further in his video interview here. Here is a link to an MP3 file with Chris Whalen, a risk analyst with expertise in the banking sector. Shadow banks compound the danger from systemically important or "too big to fail" financial intermediaries because they are separated from the conventional financial system only by accounting cleverness. They are still a danger on the road to financial stability being restored.
The following is excerpted from Thoma's article:
"One approach to solving this problem is to provide deposit insurance in the shadow banking system that mimics the insurance available to traditional banks. But regulators are reluctant to expand the explicit government commitments to the financial system to this degree. A more likely approach is to restrict the allowable collateral to ultra safe assets such as Treasuries, and there is good news along these lines. The Federal Reserve Bank of New York is working on a proposal to make shadow banking safer by tightening up collateral requirements."
"However, it is not yet clear what types of collateral that shadow banks will be allowed to hold against deposits, and the potential bad news is that the inevitable howls and protests from the financial industry about how the economy will be harmed if their activities are restricted may fall on sympathetic ears. When combined with the large amount of political influence the shadow banks have, the result may be an outcome that is not as restrictive as needed to keep the system safe."