Classification by Economic Functions Exhibit 1 Economic Function Definition Typical entity types Management of collective investment EF1 vehicles with features that make them Fixed income funds mixed funds, credit susceptible to runs hedge funds, real estate funds Finance companies, leasing companies, EF2 Loan provision that is dependent on short term funding factoring companies, consumer credit Intermediation of market activities that is EF3 dependent on short-term funding or on Broker-dealers secured funding of client assets Facilitation of credit creation Credit insurance companies, financial guarantors, monolines Securitisation-based credit intermediation Securitisation vehicles and funding of financial entities Non-bank financial entity types typically classified into the five economic functions include certain entities that are susceptible to runs(EF1), lending dependent on short-term funding (EF2), market intermediation dependent on short-term funding or secured funding of client assets(EF3), facilitating credit creation(EF4), and securitisation-based intermediation(EF5) The measure of shadow banking based on economic functions presented in this report covers 26 jurisdictions. As part of the shadow banking information-sharing exercise, as described in the FSBs Policy Framework, these jurisdictions considered the business models, activities and associated shadow banking risks of non-bank financial entities and classified these entity types into the five economic functions. Classification was generally based on the guidance provided in the Policy Framework and through the information-sharing among FSB members with respect to shadow banking activities and risks. In this regard, the classification allows for supervisory judgment regarding which non-bank financial entities'activities give rise to shadow banking risks. While such judgment was permitted, the classification choice benefited from discussions with other participating authorities at workshops organised by the fsb to better understand and improve the consistency of each other's approach to identifying entities by economic functions. Given the element of supervisory judgment and also developments in business models and risk profiles, it may be the case that entity classifications change over time based on shifts in entity types'activities or risks, and supervisors' judgment of the materiality of such risks. Since this is the first year that the classification of non-bank financial entities by economic functions has been implemented by all FSB jurisdictions, the choice of whether particular entity types are classified as shadow banking can differ across jurisdictions. Further refinement of the classification process will take place going forward 21 The FSb Policy Framework acknowledges that shadow banking may take different form jurisdictions due to ifferent legal and regulatory settings as well as the constant innovation and dynamic nat non-bank financial sector. It also enables authorities to capture new structures or innovations that create shade ks, by looking through to the underlying economic function and risks of these new innovative structures he entity types listed should be taken as typical examples 8
8 Classification by Economic Functions Exhibit 1 Economic Function Definition Typical entity types21 EF1 Management of collective investment vehicles with features that make them susceptible to runs Fixed income funds, mixed funds, credit hedge funds, real estate funds EF2 Loan provision that is dependent on shortterm funding Finance companies, leasing companies, factoring companies, consumer credit companies EF3 Intermediation of market activities that is dependent on short-term funding or on secured funding of client assets Broker-dealers EF4 Facilitation of credit creation Credit insurance companies, financial guarantors, monolines EF5 Securitisation-based credit intermediation and funding of financial entities Securitisation vehicles Non-bank financial entity types typically classified into the five economic functions include certain entities that are susceptible to runs (EF1), lending dependent on short-term funding (EF2), market intermediation dependent on short-term funding or secured funding of client assets (EF3), facilitating credit creation (EF4), and securitisation-based intermediation (EF5). The measure of shadow banking based on economic functions presented in this report covers 26 jurisdictions. As part of the shadow banking information-sharing exercise, as described in the FSB’s Policy Framework, these jurisdictions considered the business models, activities, and associated shadow banking risks of non-bank financial entities and classified these entity types into the five economic functions. Classification was generally based on the guidance provided in the Policy Framework and through the information-sharing among FSB members with respect to shadow banking activities and risks. In this regard, the classification allows for supervisory judgment regarding which non-bank financial entities’ activities give rise to shadow banking risks. While such judgment was permitted, the classification choice benefited from discussions with other participating authorities at workshops organised by the FSB to better understand and improve the consistency of each other’s approach to identifying entities by economic functions. Given the element of supervisory judgment and also developments in business models and risk profiles, it may be the case that entity classifications change over time based on shifts in entity types’ activities or risks, and supervisors’ judgment of the materiality of such risks. Since this is the first year that the classification of non-bank financial entities by economic functions has been implemented by all FSB jurisdictions, the choice of whether particular entity types are classified as shadow banking can differ across jurisdictions. Further refinement of the classification process will take place going forward. 21 The FSB Policy Framework acknowledges that shadow banking may take different forms across jurisdictions due to different legal and regulatory settings as well as the constant innovation and dynamic nature of the non-bank financial sector. It also enables authorities to capture new structures or innovations that create shadow banking risks, by looking through to the underlying economic function and risks of these new innovative structures. Thus, the entity types listed should be taken as typical examples
See Annex 1 for a summary of material exclusions from the narrow measure of shade banking, and where differences occurred across jurisdictions 2.2 Global perspective Global assets of financial entities classified as shadow banking under the economic functions approach in 26 jurisdictions continued their upward trend, increasing $1. 1 trillion in 2014 and reaching $36 trillion(Exhibit 2).22 Based on this measure aggregate global shadow banking assets in these jurisdictions have increased on average by $1. 3 trillion each year since 2011.23 This number differs from that reported in previous reports as the narrow measure of shadow banking in several ways and therefore cannot be compared Assets of financial intermediaries 26 jurisdictions Exhibit 2 Size in 2014 Growth in 2014 Average annual growth (S trillion) (year-over-year, percent) (2011-2014, percent) OFs Shadow Banking 36 10.1 6.3 Note: Growth rates adjusted for exchange rate effects. Sources: National financial accounts: other national sources fSB calculations By way of comparison, a broader category of non-bank financial intermediation based on OFIS, whose calculation methodology remains broadly unchanged compared to previous years'reports, increased $1. 4 trillion in 2014, reaching $68 trillion for 26 jurisdictions. Using the slightly different sample of 20 jurisdictions and the euro area as a whole, the new total amounted to $80 trillion in 2014, up by $1. 6 trillion The growth in shadow banking assets globally in 2014 occurred against the backdrop of a slight decline in global banking system assets. After increasing significantly in 2011 and 2012, global banking system assets in 26 jurisdictions remained roughly stable in 2013 and decreased slightly in 2014, reaching $135 trillion 2 Measures of growth throughout this report are based on time series data included in jurisdictions'2015 submission, going 2014 back to 2002. This report, however, focuses mainly on estimates of growth and trends from 2011 forward, because jurisdiction-year data gaps were relatively few between 2011 and 2013, with no such gaps for 2014 Note that, in some cases, in particular prior to 2010, increases of aggregated time series may also reflect improvements in the availability of data over time on a jurisdiction level
9 See Annex 1 for a summary of material exclusions from the narrow measure of shadow banking, and where differences occurred across jurisdictions. 2.2 Global perspective Global assets of financial entities classified as shadow banking under the economic functions approach in 26 jurisdictions continued their upward trend, increasing $1.1 trillion in 2014 and reaching $36 trillion (Exhibit 2).22 Based on this measure, aggregate global shadow banking assets in these jurisdictions have increased on average by $1.3 trillion each year since 2011. 23 This number differs from that reported in previous reports as the narrow measure of shadow banking in several ways and therefore cannot be compared. By way of comparison, a broader category of non-bank financial intermediation based on OFIs, whose calculation methodology remains broadly unchanged compared to previous years’ reports, increased $1.4 trillion in 2014, reaching $68 trillion for 26 jurisdictions. Using the slightly different sample of 20 jurisdictions and the euro area as a whole, the new total amounted to $80 trillion in 2014, up by $1.6 trillion. The growth in shadow banking assets globally in 2014 occurred against the backdrop of a slight decline in global banking system assets. After increasing significantly in 2011 and 2012, global banking system assets in 26 jurisdictions remained roughly stable in 2013 and decreased slightly in 2014, reaching $135 trillion. 22 Measures of growth throughout this report are based on time series data included in jurisdictions’ 2015 submission, going 2014 back to 2002. This report, however, focuses mainly on estimates of growth and trends from 2011 forward, because jurisdiction-year data gaps were relatively few between 2011 and 2013, with no such gaps for 2014. 23 Note that, in some cases, in particular prior to 2010, increases of aggregated time series may also reflect improvements in the availability of data over time on a jurisdiction level. Assets of financial intermediaries 26 jurisdictions Exhibit 2 Size in 2014 ($ trillion) Growth in 2014 (year-over-year, percent) Average annual growth (2011-2014, percent) Banks 135 6.4 5.6 OFIs 68 9.0 6.3 Shadow Banking 36 10.1 6.3 Note: Growth rates adjusted for exchange rate effects. Sources: National financial accounts; other national sources; FSB calculations
Assets of financial intermediaries Exhibit 3 Financial assets Share of total financial asset USD trillion Percent Notes: Banks broader category of 'deposit-taking institutions; OFls Other Financial Intermediaries: Shadow Banking measure of shadow banking based on economic functions. These are not mutually exclusive categories, as shadow banking is largely contained Sources: National financial accounts data: other national sources, FsB calculations. As a share of the total financial system, shadow banking based on the economic functions measure remained relatively constant in recent years at about 12%(right panel of Exhibit 3 However. the shadow banking to gdp ratio has risen from 55% in 2012 to 59% in 2014. as the steady growth of shadow banking in recent years has outpaced GDP (left panel of Exhibit Shadow banking and gDp 26 jurisdictions Exhibit 4 hadow banking size relative to GDp Percent USD trillion GDP versus shadow banking growth rates, 2011-20141 2010 2011201220132014 Rhs. As a percentage of GDP I- In tilllons of US dolars Advanced economies 2011-2014, adjusted for exchange rate effects, except for Singapore where growth rates from dow banking assets growing faster than nominal GDP in local currency Canada, Germany, Euro area, France, Hong Kong, Ireland, Italy, Japan, Korea, Netherlands, Singapore, Spain, Switzerland, United Kingdom, United States. 3: Emerging economies= Argentina, Brazil, Chile, China, India, Indonesia, Mexico, Russia, Turkey, Saudi Arabia, South Africa Sources: National financial accounts data other national sources. fsb calculations 10
10 Assets of financial intermediaries 26 jurisdictions Exhibit 3 Financial assets Share of total financial assets USD trillion Percent Notes: Banks = broader category of ‘deposit-taking institutions’; OFIs = Other Financial Intermediaries; Shadow Banking = measure of shadow banking based on economic functions. These are not mutually exclusive categories, as shadow banking is largely contained in OFIs. Sources: National financial accounts data; other national sources; FSB calculations. As a share of the total financial system, shadow banking based on the economic functions measure remained relatively constant in recent years at about 12% (right panel of Exhibit 3). However, the shadow banking to GDP ratio has risen from 55% in 2012 to 59% in 2014, as the steady growth of shadow banking in recent years has outpaced GDP (left panel of Exhibit 4). Shadow banking and GDP 26 jurisdictions Exhibit 4 Shadow banking size relative to GDP GDP versus shadow banking growth rates, 2011-20141 Percent USD trillion Notes: 1 : Average annual growth rate during 2011-2014, adjusted for exchange rate effects, except for Singapore where growth rates from 2012-2014. >45% line indicates shadow banking assets growing faster than nominal GDP in local currency. 2 : Advanced economies = Australia, Canada, Germany, Euro area, France, Hong Kong, Ireland, Italy, Japan, Korea, Netherlands, Singapore, Spain, Switzerland, United Kingdom, United States. 3 : Emerging economies = Argentina, Brazil, Chile, China, India, Indonesia, Mexico, Russia, Turkey, Saudi Arabia, South Africa. Sources: National financial accounts data; other national sources; FSB calculations
The growth of shadow banking has been associated with economic growth in recent years Adjusted for exchange rate effects, jurisdictions with a greater increase in shadow bankin assets between 2010 and 2014 tended to have greater increases in gDP over the same time period. As indicated by the dots above the 45-line in the right panel of Exhibit 4, shado banking assets grew faster than GDP since 2010 in most of the 26 jurisdictions. Strong growth in shadow banking may occur from a low base and contribute to financial deepening, in particular in EMEs with relatively less developed financial systems. However, careful monitoring is still warranted to detect any increases in systemic risk factors(e.g. maturity and liquidity transformation, and leverage) that could arise from the rapid expansion of credit relative to gDP provided by the non-bank sector 2.3 Cross-jurisdiction analysis This section describes the considerable heterogeneity that exists across individual jurisdictions. It focuses on the new measure of shadow banking based on economic functions, whereas in past reports it focused on the broader measure based on OFIs The United States continued to have the largest shadow banking sector, with $14.2 trillion in 2014, representing more than a third of global shadow banking assets reported by the 26 jurisdictions (right panel of Exhibit 5). The United Kingdom had the second largest shadow banking sector, amounting to $4. 1 trillion, while the next 29% of shadow banking was concentrated in four jurisdictions in Asia and Europe. Combined, participating euro area countries represented 23% of total global shadow banking assets in 2014 Share of shadow banking assets Exhibit 5 At end-2010 At end-2014 MEs ex 2% NL 4% 41% 40% 7% DE 13%% UK lE Note: CA=Canada: CN= China: DE Germany: EMEs ex CN= Argentina, Brazil, Chile, India, Indonesia, Mexico, Russia, Turkey, Saudi Arabia, South Africa, FR= France: IE Ireland; JP= Japan; KR= Korea; NL= Netherland; UK= United Kingdom: US= United States. Sources: National financial accounts data: other national sources: fsB calculations. 24 In previous reports, the cross-sectional analysis focused on the broader measure based on OFIs, incorporating that were then later removed as part of a narrowing down process to arrive at a more accurate narrower measu shadow banking sector. See Box I for this years narrowing steps, linking the broad measure of non-bank re of the intermediation based on OF ls to the narrow measure of shadow banking based on economic functions 25 Participating euro area countries are France, Germany, Ireland, Italy, Netherlands and Spain
11 The growth of shadow banking has been associated with economic growth in recent years. Adjusted for exchange rate effects, jurisdictions with a greater increase in shadow banking assets between 2010 and 2014 tended to have greater increases in GDP over the same time period. As indicated by the dots above the 45°-line in the right panel of Exhibit 4, shadow banking assets grew faster than GDP since 2010 in most of the 26 jurisdictions. Strong growth in shadow banking may occur from a low base and contribute to financial deepening, in particular in EMEs with relatively less developed financial systems. However, careful monitoring is still warranted to detect any increases in systemic risk factors (e.g. maturity and liquidity transformation, and leverage) that could arise from the rapid expansion of credit relative to GDP provided by the non-bank sector. 2.3 Cross-jurisdiction analysis This section describes the considerable heterogeneity that exists across individual jurisdictions. It focuses on the new measure of shadow banking based on economic functions, whereas in past reports it focused on the broader measure based on OFIs. 24 The United States continued to have the largest shadow banking sector, with $14.2 trillion in 2014, representing more than a third of global shadow banking assets reported by the 26 jurisdictions (right panel of Exhibit 5). The United Kingdom had the second largest shadow banking sector, amounting to $4.1 trillion, while the next 29% of shadow banking was concentrated in four jurisdictions in Asia and Europe. Combined, participating euro area countries25 represented 23% of total global shadow banking assets in 2014. Share of shadow banking assets 26 jurisdictions Exhibit 5 At end-2010 At end-2014 Note: CA = Canada; CN = China; DE = Germany; EMEs ex CN = Argentina, Brazil, Chile, India, Indonesia, Mexico, Russia, Turkey, Saudi Arabia, South Africa; FR = France; IE = Ireland; JP = Japan; KR = Korea; NL = Netherland; UK = United Kingdom; US = United States. Sources: National financial accounts data; other national sources; FSB calculations. 24 In previous reports, the cross-sectional analysis focused on the broader measure based on OFIs, incorporating elements that were then later removed as part of a narrowing down process to arrive at a more accurate narrower measure of the shadow banking sector. See Box 1 for this year’s narrowing steps, linking the broad measure of non-bank financial intermediation based on OFIs to the narrow measure of shadow banking based on economic functions. 25 Participating euro area countries are France, Germany, Ireland, Italy, Netherlands and Spain. EMEs ex CN 4% CN 2% NL 2% KR 1% CA 2% FR 6% JP 10% DE 7% IE 7% UK 13% US 41% EMEs ex CN 4% CN 8% NL 2% KR 2% CA 3% FR 4% JP 7% DE IE 7% 8% UK 11% US 40%
The relative size of national jurisdictions shadow banking sectors has shifted somewhat since 2010. The relative decline of shadow banking assets since 2010, most notably in Japan, France, United Kingdom, and the United States was counterbalanced by an increase in the share in a number of other jurisdictions. Most notably the share of EMEs doubled from 6% of global shadow banking assets in 2010 to 12% in 2014, driven mostly by China The size of jurisdictions' shadow banking sectors relative to their economies varies widely and appears to be related to the degree of financial intermediation and financial deepening of jurisdictions. In terms of GDP, shadow banking in Ireland, the United Kingdom Switzerland, and the United States stood at the high-end of the spectrum, with 1, 190%, 147%, 90%, and 82% of GDP, respectively. On the other end, the size of shadow banking assets was below 10% of GDP in Turkey, Argentina, Saudi Arabia, Russia, and Indonesia(Exhibit 6) The size of the banking sector exceeds that of shadow banking significantly in most exceeds substantially the size of the banking sector, e the size of the shadow banking sector Shadow banking, OFIs and banks as a percent of GDP 26 jurisdictions at end-2014 Exhibit 6 1551 lE UK CH US NL DE FR JP CA KR BR AU ZA CN CL ES HK IN IT MX SG TR AR SA RU ID Total OF■ Shadow banking Note: Banks broader category of deposit-taking institutions; OFls= Other Financial Intermediaries Banking economic function-based measure of shadow banking. AR= Argentina: AU = Australia; BR= Brazil; CA CN= China: CL= Chile: DE Germany, ES= Spain: FR=France: HK= Hong Kong: IE Ireland donesia; IN= India IT= Italy: JP Japan: KR= Korea; Mx= Mexico: NL= Netherlands: RU = Russia; SA= Saudi Arabia; gapore: tR Turkey UK United Kingdom: US= United States: ZA= South Africa. ces: National financial accounts data; other national sources, IMF: FSB calculations 26 Financial deepening may be considered as ()the increase in the size of the financial system and in its role and pervasiveness in the economy and (ii) the broadening of the set of intermediaries beyond a core banking sector to encompass a range of actors among nonbank financial intermediaries This is due to the international nature of the shadow banking sector in Ireland, which has limited linkages to the domestic economy. See Annex 2 for a more detailed analysis of the Irish shadow banking system
12 The relative size of national jurisdictions’ shadow banking sectors has shifted somewhat since 2010. The relative decline of shadow banking assets since 2010, most notably in Japan, France, United Kingdom, and the United States was counterbalanced by an increase in the share in a number of other jurisdictions. Most notably, the share of EMEs doubled from 6% of global shadow banking assets in 2010 to 12% in 2014, driven mostly by China. The size of jurisdictions’ shadow banking sectors relative to their economies varies widely and appears to be related to the degree of financial intermediation and financial deepening of jurisdictions.26 In terms of GDP, shadow banking in Ireland, the United Kingdom, Switzerland, and the United States stood at the high-end of the spectrum, with 1,190%, 147%, 90%, and 82% of GDP, respectively. On the other end, the size of shadow banking assets was below 10% of GDP in Turkey, Argentina, Saudi Arabia, Russia, and Indonesia (Exhibit 6). The size of the banking sector exceeds that of shadow banking significantly in most jurisdictions. The notable exception is Ireland, where the size of the shadow banking sector exceeds substantially the size of the banking sector. 27 Shadow banking, OFIs and banks as a percent of GDP 26 jurisdictions at end-2014 Exhibit 6 Percent Note: Banks = broader category of ‘deposit-taking institutions’; OFIs = Other Financial Intermediaries; Shadow Banking = economic function-based measure of shadow banking. AR = Argentina; AU = Australia; BR = Brazil; CA = Canada; CH = Switzerland; CN = China; CL = Chile; DE = Germany; ES = Spain; FR = France; HK = Hong Kong; IE = Ireland; ID = Indonesia; IN = India; IT = Italy; JP = Japan; KR = Korea; MX = Mexico; NL = Netherlands; RU = Russia; SA = Saudi Arabia; SG = Singapore; TR = Turkey; UK = United Kingdom; US = United States; ZA = South Africa. Sources: National financial accounts data; other national sources; IMF; FSB calculations. 26 Financial deepening may be considered as (i) the increase in the size of the financial system and in its role and pervasiveness in the economy and (ii) the broadening of the set of intermediaries beyond a core banking sector to encompass a range of actors among nonbank financial intermediaries. 27 This is due to the international nature of the shadow banking sector in Ireland, which has limited linkages to the domestic economy. See Annex 2 for a more detailed analysis of the Irish shadow banking system