A large part of financial innovation in recent years can be attributed to one simple goal: the unrelenting effort by banks to circumvent the rules. But as banking and market reform gathers pace on both sides of the Atlantic, policymakers’ good intentions are starting to point to some dangerous outcomes.

This is because regulatory arbitrage and the so-called shadow banking system are closely linked. Where there was an opportunity for banks to make money at little to no cost, they took it, leveraged it and when times were good made decent money out of it.