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Shadow banking system 'could produce next crash' : Buba official

Germany's central bank is keeping a keen eye on the country's shadow banking system and the threats posed by U.S-style money market funds, Bundesbank executive board member Andreas Dombret told CNBC.

Shadow banks – organizations that provide funds and perform a similar function to banks but are not subject to the same level of regulation as the established sector - are hugely popular in the U.S. where they are seen as a safe place to park cash during bouts of volatility. The funds are low-risk vehicles that invest in short-term securities, but Dombret told CNBC that their European equivalent could be in need of tighter controls.

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"The private equity sector is by far not leveraging up as much as the sector did in the past and they are putting equity into transaction, so this in itself is not the most dangerous part," he said.

(Read More: Bundesbank's Dombret warns on bubble from low rates)

"But there are other parts of the so called shadow banking sector including U.S.-style money market funds which perform a role which is normally performed by banks which needs not only monitoring but potentially also regulation."

The European Union and the U.S. Treasury have both proposed measures to reduce the risk of the $4.7 trillion global money market fund industry, including setting capital buffers.

Dombret said he had a mixed view on the shadow banking system, adding that that they didn't produce the global financial crash of 2008 but "may well do so in the future" and close monitoring and regulation would be needed if these institutions pose a systemic risk to the system.

"Institutions are performing bank functions outside the regulated industry and there is the question of whether or not those functions of the shadow banking sector, systemic risks may very well be building in banks," he said.

(Read More: 'New Paranormal' andwhy black swans are circling)

Dombret also had some praise for the sector, explaining that the attitude of these "non-banks" was positive and said market participants are very helpful and very professional.

Global regulation of banking institutions has been a hot topic across the world since the fallout from 2008's crash. Regulation in the U.S and Europe has focused on solving the issue of "too big to fail" banking, whereas Chinese officials have made moves to try to cool a recent credit binge.

The European Central Bank (ECB) has embarked upon an asset quality review of the euro zone's banks, looking at stress testing each institution with a view of forming a banking union at a later date.

(Read More: German banks will pass stress tests, says regulator)

Elke Koenig, president of Germany's regulator BaFin, told CNBC that it was essential for the stress tests not to single out a particular country for any risk that it may hold. Shipping is seen as being an acute problem for German banks, with its heavy exposure to the sector, but Koenig said that the tests should be the same for every sovereign, or else there's a risk of there being multiple stress tests for each country.

"My argument is not to consider special scenarios for each country...shipping should be the same for everyone," she said. Koenig added that results of the tests should be available from early to mid-October, and would be in time for the ECB taking over responsibility of the banks.

By CNBC.com's Matt Clinch. Follow him on Twitter @mattclinch81.

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