This paper incorporates the shadow banking sector into a DSGE model and explores the relation between shadow banking activities, financial regulation, macroeconomic and financial stability. Our main contribution in theoretical modelling is that we examine the response of economic and financial stability to the decreased surviving rate and procyclicality of shadow banking. The results reveal that shadow banking amplifies uncertainty of macroeconomic and financial sectors when the economic system is suffering an exogenous shock. Besides, regulating the shadow banking not only mitigates volatility of macroeconomic and financial variables in general, but dramatically raises welfare level. Nevertheless, such regulation might also make nominal interest rate and inflation more volatile under the impact of some shocks. Therefore, regulators should attach much importance to the supply of formal credit as well as countercyclical supervision. In order to smooth the undue fluctuation of economic and financial cycles caused by shadow banking, alleviating reliance of social financing on informal sources is also required.