Introducing shadow banks into the economy lowers the money supply measured as the sum of cash and deposits, while the amount of payment liquidity does not decrease as long as the liabilities of shadow banks remain fully liquid. At the same time, the total amount of credit available to firms increases with the size of shadow banks which lend to firms without the restriction of reserve requirement. The credit-to-payment ratio determines the equilibrium investment level. The expansion of credit liquidity brought by shadow banks might cause over-investment, and this cannot be rectified by raising reserve requirement, which would actually drive more fund flows to shadow banks. Frictions in the shadow banking system reduce both payment liquidity and credit liquidity, and the impact on investment and social welfare is uncertain.