Despite all the progress that had been made in reining in banks, they still constituted “an area which is extremely bereft of regulation,” Merkel said on Wednesday.
'Shadow banks' conduct billions of euros' worth of transactions but aren't subject to the same oversight as other financial institutions.
“If we don't put them under the microscope, with the same consequences, the danger of another financial crisis is already pre-scripted,” Merkel added.
More than a dozen Nobel prize winners and hundreds of other economists are present for the meeting. This year's themes are set to include the growing inequality between rich and poor and how to measure risk in the financial system.
Nobel economics laureate Joseph Stiglitz criticised the Chancellor on the sidelines of the conference, saying that her policies in Europe have led to high unemployment and slow growth.
Merkel is seen as the driver of austerity policies in the Eurozone and has resisted Stiglitz's suggestions, including commonly-issued "Eurobonds” to allow members of the currency to borrow money at lower interest rates.
“We see the enormous price that Europe is paying,” the former World Bank chief economist told Bloomberg Television. “Hopefully the reality of this failed policy will strike.”
The conference opens in the shadow of poor economic results in Germany, France and Italy, the Eurozone's largest economies, in the second quarter of 2014.
Germany's economy shrank by 0.2 percent over the three months, more than economists had predicted, while France recently scrapped its 2014 deficit target after its economy failed to grow in the first six months of the year.