Regulators are encouraging shadow banking by restricting traditional banks, setting the stage for another financial crisis, says former banking executive Susanna Tisa.

"Like squeezing a water balloon, regulators have pressed hard on traditional banks in the wake of the financial crisis, only to force demand elsewhere," Tisa writes in an article for American Banker. "The other side of the balloon is swelling, with all manner of nonbank entities rushing in to offer services that fill the demand."

If regulators don't open their eyes to the broader picture, it's only a matter of time before that balloon bursts, predicts Tisa, chief business officer for Treliant Risk Advisors.

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Mainstream banks typically offer safer and more affordable products, yet they have difficulty lending to anyone other than the most pristine borrowers and offering services to those needing them most, such as young people, immigrants and entrepreneurs.

New bank examiners are too inexperienced to analyze new services; veteran examiners are unlikely to be rewarded for considering them.

In response, lightly regulated shadow banking sector has boomed.

More than 20 percent of U.S. households use the alternative banking services, such as payday loans, at least occasionally, she says. Online lending, merchant cash advances and other alternative financing to small and midsize businesses have jumped 64 percent during the last four years. Worldwide, shadow banking increased by $5 trillion in 2012 to $71 trillion.

"The consequences are not to be taken lightly," Tisa asserts.

"The risks have not been eradicated, they have only moved elsewhere."

Instead of remaining obsessed with the 2008 financial crisis, policymakers and regulators should strive to move lending back to regulated mainstream banks. They should create "safe harbor" provisions permitting banks to offer services to more consumers and businesses, not just the most creditworthy, and should replace "reactive regulation and 'gotcha' enforcement with guided innovation."

"Without a fresh approach, we will likely get all wet again when the water balloon finally bursts."

Others have also expressed concerns about shadow banking.

In a recent speech in Philadelphia, Federal Reserve Governor Jeremy Stein said shadow banks are more prone to runs than traditional banks are. They rely less on cash deposits, deposit insurance and access to government support.

"The shadow banking technology uses less capital and manufactures safety by, instead, giving repo investors collateral and the right to seize the collateral on a moment's notice."

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