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The 2007-09 financial crisis prompted policymakers to shine a spotlight on the hitherto largely unregulated sector, which creates credit as do banks.
The European Banking Authority (EBA) was responding to criticism that its proposed guidelines to limit banking exposures to shadow banks are too broad to be workable.
It includes securitization vehicles and alternative funds, a sector industry officials said is now being regulated.
The guidelines are due to take effect around early 2016 when a bank's exposure to shadow banking should be no more than a quarter of its total capital buffers.
A financial lawyer who attended the hearing said this limit would be quickly breached at many banks given how many assets have moved from now heavily regulated banking to asset managers.
Money market funds, currently in the EBA definition, could be removed once a draft EU law regulating them is approved, EBA officials said.
The definition includes vehicles used by banks for securitized debt, a sector now a priority in EU plans for a capital markets union (CMU) to boost financing for companies as banks rein in lending.
Regulators don't want to see such large amounts of credit moving from core banking into shadow banking and the 25 percent limit was a relatively light step to cut risk, Hodbod added.