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The shadow banking sector is unlikely to be the 'black swan' event that overturns the apple cart and triggers a financial crisis and recession.

This is according to economists who note that the shadow banking sector is unlikely to suffer significant stress in the current environment, particularly given the firm expectations of a June rate cut at the Fed.

As U.S. stock markets extend an impressive rally, investors are on the lookout for any lingering risks that metamorphose into a structural breakdown that destabilises the financial system and economy.

"In terms of risks to the outlook, U.S. commercial real estate and shadow banking are two of the 'hotter' topics in discussions with market participants," says Matthew Mish, a strategist at UBS.

A so-called "goldilocks" outcome is currently playing out in global markets, whereby stocks rise as the U.S. economy experiences falling inflation and ongoing expansion despite a rapid rise in interest rates.

Yet, fears of another crisis centred on bad credit loans have simmered, with the Fed recently reporting that loans to non-deposit taking financial companies exceeded $1trn at the end of January.

This sector uses the money "to leverage investments and increasingly lend it out to a range of risky borrowers that regulators have discouraged banks from lending to directly," explains Bank of New York Mellon (BNY Mellon).

BNY Mellon analysts say the growth in the shadow banking sector contrasts with lending to the ongoing tight credit standards, as per the most recent Fed Senior Loan Officer Survey.

Acting head of the Office of the Comptroller of the Currency, Michael Hsu, one of the top U.S. bank regulators, recently told the Financial Times he thought the lightly regulated lenders were pushing banks into lower-quality and higher-risk loans.

For all banks, shadow bank financing now makes up more than 6% of all loans, putting it just above auto loans at 5%, and just below credit cards, which crossed $1tn for the first time just last year, at 7%.

"Under more conventional macro policies, the expansion could be more at risk from financial imbalances than inflation. For instance, through a repricing of fiscal sustainability risks or instability in the shadow banking sector," says Bilal Hafeez, head of research at Macro Hive.

However, a new analysis from UBS finds that although the rise in the shadow banking sector is noticeable, it is too soon to worry.

"Shadow banking in the U.S. and Europe merits monitoring, but an improving outlook for corporate and bank credit in both regions should allay investor concerns," says Matthew Mish, Strategist at UBS.

The bank's research finds U.S. C&I/corporate credit to be "the largest by far" in terms of the size of debt outstanding originated by non-banks.

UBS holds a "more constructive corporate debt outlook" given robust U.S. credit conditions and easing stress in riskier credit sectors.

Strong EU "credit technicals" should meanwhile also placate some of the flashpoints for shadow banking risks in Europe, according to Mish.