Total shadow banking assets in 26 jurisdictions rose by 10. 1% in 2014, exceeding the 4.7% increase in 2013(Exhibit 7). The calculated growth rate is net of exchange rate effects but does not account for valuation effects, which would likely dampen the growth figures given the overall appreciation of assets prices in 2013 and 2014.29 However, growth rates differed considerably across jurisdictions. All but two jurisdictions saw their shadow banking assets rise in 2014, and several showed a marked increase in growth rates compared to 2013. Exchange rate-adjusted growth rates of shadow banking assets in 2014 exceeded 30% in Argentina, China, and Hong Kong. However, for Argentina and Hong Kong, the strong growth in shadow banking is largely due to the low base effect given the relatively small size of shadow banking in these jurisdictions Annual growth of shadow banking 26 jurisdictions Exhibit 7 AR CN HK RU ID E CL TR KR CH CA BR JP Es IN DE AU FR SA ZA NL US MX T UK SG Total 2013 FX-ad Justed growth 2014 FX-adJustod growth 2014-FX-andnmfilation adJusted growth Note: Bars show year-over-year growth rate, controlling for exchange rate effects. Dots show year-over-year growth rates, controlling for 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 ources: National financial accounts data; other national sources, IMF: FSB calculations Exhibit 8 provides a breakdown of each jurisdictions' contribution to the total 26-group sample growth rate in 2014 of 10. 1%, reflecting the size and growth rate of individual jurisdictions 28 The aggregate growth rate for the 26 jurisdictions is calculated as a weighted average of individual jurisdictions'growth ates measured in local currency. The weights are based on the amount of reported financial assets of the shadow banking sector measured in us dollars ial assets presented in this report are not adjusted for valuation effects and therefore only approximately reflect the evolution of financial transactions from one year to another 13
13 Total shadow banking assets in 26 jurisdictions rose by 10.1% in 2014, exceeding the 4.7% increase in 2013 (Exhibit 7).28 The calculated growth rate is net of exchange rate effects but does not account for valuation effects, which would likely dampen the growth figures given the overall appreciation of assets prices in 2013 and 2014.29 However, growth rates differed considerably across jurisdictions. All but two jurisdictions saw their shadow banking assets rise in 2014, and several showed a marked increase in growth rates compared to 2013. Exchange rate-adjusted growth rates of shadow banking assets in 2014 exceeded 30% in Argentina, China, and Hong Kong. However, for Argentina and Hong Kong, the strong growth in shadow banking is largely due to the low base effect given the relatively small size of shadow banking in these jurisdictions. Annual growth of shadow banking 26 jurisdictions Exhibit 7 Percent Note: Bars show year-over-year growth rate, controlling for exchange rate effects. Dots show year-over-year growth rates, controlling for exchange rate and inflation effects. 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. Exhibit 8 provides a breakdown of each jurisdictions’ contribution to the total 26-group sample growth rate in 2014 of 10.1%, reflecting the size and growth rate of individual jurisdictions. 28 The aggregate growth rate for the 26 jurisdictions is calculated as a weighted average of individual jurisdictions’ growth rates measured in local currency. The weights are based on the amount of reported financial assets of the shadow banking sector measured in US dollars. 29 Growth rates of financial assets presented in this report are not adjusted for valuation effects and therefore only approximately reflect the evolution of financial transactions from one year to another
Jurisdiction contributions to shadow banking growth 26 jurisdictions Exhibit 8 JP DE CAFR FRIE US JP DECA Note: Contributions to year-over-year growth of shadow banking, adjusted for exchange rate effects. CA= Canada: CN= China: DE= Germany, FR= France; IE= Ireland: JP Japan: UK= United Kingdom; US=United States. ources: National financial accounts data; other national sources, fSB calculations 2.4 Breakdown by economic functions This section provides a breakdown of shadow banking according to the different shadow banking activities described by the five economic functions. Across the 26 jurisdictions, a total of $36 trillion of non-bank financial entities' assets were reported as being related to the management of collective investment vehicles with features that make them susceptible to runs(Economic Function 1) related to loan provision that is dependent on short-term funding(Economic Function related to the intermediation of market activities that is dependent on short-term funding or on secured funding of client assets( Economic Function 3) related to the facilitation of credit creation(Economic Function 4); related to securitisation-based credit intermediation and funding of financial entities related to one of the five economic functions but not attributable due to their residual nature(shadow banking not classified into economic functions ). 30 Of the five functions Economic Function 1 was by far the largest, representing $21.6 trillion or more than half of all shadow banking assets at the end of 2014(left panel of Exhibit 9) Jurisdictions generally classified collective investment vehicles such as fixed income funds, mixed-assets investment funds. credit hedge funds. leveraged real estate funds trusts. and money market funds into this economic function. Some regulators from participating jurisdictions did not consider particular collective investment vehicles to merit inclusion within Economic Function 1. Some authorities considered particular regulatory structures in This category includes mainly residual OFls jurisdictions that were not classified into a particular function, but were assessed to at least partly functions or for which it was not possible to 这 shadow banking activities as described by the five sufficient evidence to warrant their exclusion from the narrow measure of shadow banking
14 Jurisdiction contributions to shadow banking growth 26 jurisdictions Exhibit 8 Percentage points Note: Contributions to year-over-year growth of shadow banking, adjusted for exchange rate effects. CA = Canada; CN = China; DE = Germany; FR = France; IE = Ireland; JP = Japan; UK = United Kingdom; US = United States. Sources: National financial accounts data; other national sources, FSB calculations. 2.4 Breakdown by economic functions This section provides a breakdown of shadow banking according to the different shadow banking activities described by the five economic functions. Across the 26 jurisdictions, a total of $36 trillion of non-bank financial entities’ assets were reported as being: • related to the management of collective investment vehicles with features that make them susceptible to runs (Economic Function 1); • related to loan provision that is dependent on short-term funding (Economic Function 2); • related to the intermediation of market activities that is dependent on short-term funding or on secured funding of client assets (Economic Function 3); • related to the facilitation of credit creation (Economic Function 4); • related to securitisation-based credit intermediation and funding of financial entities (Economic Function 5); or • related to one of the five economic functions, but not attributable due to their residual nature (shadow banking not classified into economic functions). 30 Of the five functions Economic Function 1 was by far the largest, representing $21.6 trillion or more than half of all shadow banking assets at the end of 2014 (left panel of Exhibit 9). Jurisdictions generally classified collective investment vehicles such as fixed income funds, mixed-assets investment funds, credit hedge funds, leveraged real estate funds, trusts, and money market funds into this economic function. Some regulators from participating jurisdictions did not consider particular collective investment vehicles to merit inclusion within Economic Function 1. Some authorities considered particular regulatory structures in 30 This category includes mainly residual OFIs in some jurisdictions that were not classified into a particular economic function, but were assessed to at least partly contain shadow banking activities as described by the five economic functions or for which it was not possible to provide sufficient evidence to warrant their exclusion from the narrow measure of shadow banking. CN CN IE IE US US JP JP DE DE CA CA FR FR UK -4 -2 0 2 4 6 8 10 12 2013 2014
their jurisdictions to limit leverage and liquidity/maturity transformation. However, to ensure a level of consistency and conservatism in this monitoring report, these authorities agreed to classify vehicles that exhibited shadow banking risks in at least some jurisdictions into this economic function. The FSB will look to conduct additional analysis on entity types in Economic Function 1 next year to further enhance the classification process Economic Function 2 amounted to $2. 4 trillion, representing 7% of all shadow banking assets at end-2014. The entities most often included in this economic function by jurisdictions are finance companies, leasing companies, factoring companies, and various types of other consumer credit companies Economic Function 3 amounted to $3.9 trillion at end-2014, or 11% of all shadow banking assets. It was the second largest economic function. Broker-dealers and securities finance companies were the entities most frequently classified into this economic function Shadow banking by economic function 26 jurisdictions Exhibit 9 Relative size of economic function Annual growth of economic functions from 2011 to 20131 and in2014 At end-2014 Percent 11 EF3 EF2 EF4 EF5 SB not classEd Into EFs Avea9e2011-13口2014 Note: EFl= Economic Function 1; EF2= Economic Function 2: EF3= Economic Function 3: EF4= Economic Function 4: EF5= Economic Function 5: SB not classified into EFs =Residual OFI with some shadow banking risks but not classified into any of the five economic functions Controlling for exchange rate effects. Average annual growth rates not shown for " not classified"category Sources: National financial accounts data: other national sources: fsB calculations. Economic Function 4 was the smallest type of shadow banking activity reported by participating jurisdictions. It amounted to 0.3% of all classified shadow banking assets, or SO. 1 trillion at the end of 2014. However, it is worth noting that the size of this economic function and its importance relative to the other economic functions may be significantly understated by the fact that the comparison is conducted by focusing on balance sheet assets and not including off-balance sheet assets. The reason is that balance sheet assets of credit insurers, which are typically classified into this economic function, are often, due to the nature 31 Economic Function 3 in Japan is relativ which is mainly due to the large volume of repo holdings by broker dealers related to their marke in Japanese goy n entities in Japan that are ubject to Basel regulatory d liquidity framework and assessed by the methodology for potential designation are included
15 their jurisdictions to limit leverage and liquidity/maturity transformation. However, to ensure a level of consistency and conservatism in this monitoring report, these authorities agreed to classify vehicles that exhibited shadow banking risks in at least some jurisdictions into this economic function. The FSB will look to conduct additional analysis on entity types in Economic Function 1 next year to further enhance the classification process. Economic Function 2 amounted to $2.4 trillion, representing 7% of all shadow banking assets at end-2014. The entities most often included in this economic function by jurisdictions are finance companies, leasing companies, factoring companies, and various types of other consumer credit companies. Economic Function 3 amounted to $3.9 trillion at end-2014, or 11% of all shadow banking assets. It was the second largest economic function. Broker-dealers and securities finance companies were the entities most frequently classified into this economic function.31 Shadow banking by economic function 26 jurisdictions Exhibit 9 Relative size of economic functions Annual growth of economic functions from 2011 to 20131 and in 2014 At end-2014 Percent Note: EF1 = Economic Function 1; EF2 = Economic Function 2; EF3 = Economic Function 3; EF4 = Economic Function 4; EF5 = Economic Function 5; SB not classified into EFs = Residual OFI with some shadow banking risks but not classified into any of the five economic functions. 1 : Controlling for exchange rate effects. Average annual growth rates not shown for “not classified” category. Sources: National financial accounts data; other national sources; FSB calculations. Economic Function 4 was the smallest type of shadow banking activity reported by participating jurisdictions. It amounted to 0.3% of all classified shadow banking assets, or $0.1 trillion at the end of 2014. However, it is worth noting that the size of this economic function and its importance relative to the other economic functions may be significantly understated by the fact that the comparison is conducted by focusing on balance sheet assets and not including off-balance sheet assets. The reason is that balance sheet assets of credit insurers, which are typically classified into this economic function, are often, due to the nature 31 Economic Function 3 in Japan is relatively large which is mainly due to the large volume of repo holdings by brokerdealers related to their market-making activity in Japanese government bonds. In addition entities in Japan that are subject to Basel regulatory capital and liquidity framework and assessed by the G-SIB methodology for potential designation are included
of their business, modest, while they can facilitate substantial volumes of credit supplied by other bank or non-bank financial institutions Finally, Economic Function 5 represented $3.0 trillion, or 8% of all shadow banking assets at end-2014. Participating jurisdictions classified various securitisation vehicles, including asset backed commercial paper, and synthetic exchange traded funds, into Economic Function 5 Residual ofi assets that were assessed to at least partly contain some shadow banking risks, but which the relevant authorities were unable to clearly assign to a particular economic function due to their residual nature, or for which it was not possible to provide sufficient evidence to warrant their exclusion were treated as 'shadow banking not classified into economic functions. Across the 26 jurisdictions, this category amounted to $4.8 trillion of assets, or 13% of all shadow banking assets at end-2014 The right panel of Exhibit 9 compares the exchange rate-adjusted growth rate of the different shadow banking activities described by the five economic functions from 2010 to 2014 for 26 jurisdictions. Economic Function 1 experienced the fastest growth rate of 15.9% in 2014, followed by Economic Function 3(10.0%), 32 Economic Function 2(5.6%),Economic Function 4 (3.0%), and Economic Function 5(0.2%) Jurisdictions' share of economic functions varied considerably at end-2014 as did the size of the different shadow banking activities relative to total national financial sector assets Shadow banking assets related to the management of collective investment vehicles that can be susceptible to runs(Economic Function 1) exceeded the size of other economic functions at the end of 20 14 in most jurisdictions. The relative size of Economic Function 4( facilitation of credit creation) was either zero or very small in most jurisdictions in 2014. Securitisation- based credit intermediation and funding of financial entities(Economic Function 5)relative to the size of the financial sector was particularly large in Ireland at end-2014, where the size of financial vehicles corporations was reported as almost 10% of total national financial sector assel The category ' shadow banking not classified into economic functions,, capturing residual OFIs that were included in shadow banking but not assigned to a particular economic function, also varied significantly across the relevant jurisdictions. Given the relatively large size for some jurisdictions, relevant authorities should consider taking steps to better identify entities included in this category and to determine whether their activities are related to any of the five economic functions or clearly outside of economic functions. Some jurisdictions are already working on improving their Flow of Funds data Each of the five economic functions is related to non-bank credit intermediation that pos shadow banking risks(.g. maturity/liquidity transformation and leverage). These risks discussed in Section 3 below Japanese authorities note that the size and growth of Japans broker-dealers results from higher repo holdings related to their market-making activity in Japanese government bonds JGBs), while other shadow activities either declined or remained relatively small. Credit exposures pertain mainly to short-term loans and repos collateralized by JGBs 16
16 of their business, modest, while they can facilitate substantial volumes of credit supplied by other bank or non-bank financial institutions. Finally, Economic Function 5 represented $3.0 trillion, or 8% of all shadow banking assets at end-2014. Participating jurisdictions classified various securitisation vehicles, including assetbacked commercial paper, and synthetic exchange traded funds, into Economic Function 5. Residual OFI assets that were assessed to at least partly contain some shadow banking risks, but which the relevant authorities were unable to clearly assign to a particular economic function due to their residual nature, or for which it was not possible to provide sufficient evidence to warrant their exclusion were treated as ‘shadow banking not classified into economic functions’. Across the 26 jurisdictions, this category amounted to $4.8 trillion of assets, or 13% of all shadow banking assets at end-2014. The right panel of Exhibit 9 compares the exchange rate-adjusted growth rate of the different shadow banking activities described by the five economic functions from 2010 to 2014 for 26 jurisdictions. Economic Function 1 experienced the fastest growth rate of 15.9% in 2014, followed by Economic Function 3 (10.0%), 32 Economic Function 2 (5.6%), Economic Function 4 (3.0%), and Economic Function 5 (0.2%). Jurisdictions’ share of economic functions varied considerably at end-2014 as did the size of the different shadow banking activities relative to total national financial sector assets. Shadow banking assets related to the management of collective investment vehicles that can be susceptible to runs (Economic Function 1) exceeded the size of other economic functions at the end of 2014 in most jurisdictions. The relative size of Economic Function 4 (facilitation of credit creation) was either zero or very small in most jurisdictions in 2014. Securitisationbased credit intermediation and funding of financial entities (Economic Function 5) relative to the size of the financial sector was particularly large in Ireland at end-2014, where the size of financial vehicles corporations was reported as almost 10% of total national financial sector assets. The category ‘shadow banking not classified into economic functions’, capturing residual OFIs that were included in shadow banking but not assigned to a particular economic function, also varied significantly across the relevant jurisdictions. Given the relatively large size for some jurisdictions, relevant authorities should consider taking steps to better identify entities included in this category and to determine whether their activities are related to any of the five economic functions or clearly outside of economic functions. Some jurisdictions are already working on improving their Flow of Funds data. Each of the five economic functions is related to non-bank credit intermediation that poses shadow banking risks (e.g. maturity/liquidity transformation and leverage). These risks are discussed in Section 3 below. 32 Japanese authorities note that the size and growth of Japan’s broker-dealers results from higher repo holdings related to their market-making activity in Japanese government bonds (JGBs), while other shadow activities either declined or remained relatively small. Credit exposures pertain mainly to short-term loans and repos collateralized by JGBs
Narrowing down towards an activity-based measure of shadow banking Box 1 In its 201 1 report to the G20, the FSB introduced a two-step approach to guide monitoring and OW First, authorities should cast the net wide to broadly monitor all non-bank credit ntermediation: and Second, authorities should then narrow the focus for policy purposes to the subset of non-bank credit intermediation involving maturity/liquidity transformation, imperfect credit risk transfer. and/or leverage The economic function measure of shadow banking introduced in Sections 2 and 3 of this report takes the FSB's efforts to monitor the global shadow banking system a step closer to a narrow measure of shadow banking(the second item above). However, a broad estimate of non-bank financial intermediation(the first item above) is also important for monitoring the trends outside of the banking sector and for detecting where shadow banking risks may arise This monitoring is particularly helpful in detecting adaptations and cross-border regulatory arbitrage. This conservative estimate may be referred to as the MUNFl, which approximated in this report by all non-bank financial intermediation including OFIs, insurance companies and pension funds The relationship between the broad MUNFI measure of all non-bank financial intermediation and the economic functions-based, narrow measure of shadow banking is illustrated in Exhibit For 26 jurisdictions, the broad MUNFI measure amounted to $124. 1 trillion in 2014, being comprised of $68. 1 trillion OFIs, $27.0 trillion insurance companies, and $29.0 trillion pension funds. The narrowing down methodology then involves the following steps 1 Pension d insurance companies that are not part of shadow banking. All pension fund assets, amounting to $29.0 trillion are deducted in a first step. In addition $26.9 trillion of insurance company assets that are not classified into Economic Function 4(facilitation of credit creation) are also excluded from the shadow banking measure 3s 2. OFIs reported as not shadow banking. Assets of OF Is that jurisdictions identified not being involved in any of the shadow banking activities described by the five economic functions are also excluded from shadow banking. $23.6 trillion are subtracted in this narrowing down step. It comprises mainly entities that tend not to directly engage in credit intermediation or to exhibit shadow banking risks. Examples include equity investment funds, closed-end funds without leverage and/or significant FSB: Shadow Banking, Strengthening Oversight and Regulation, Recommendations of the Financial Stability Board, 27 October2011,seehttp://www.fsb.org/wp-content/uploads/r111027a.pdf 34 In previous reports, the starting point for narrowing down was MUNFI based on OFIs. However, the introduction of the shadow banking measure based on economic functions this year, which includes insurance companies involved in the facilitation of credit intermediation, required the widening of the scope of mUNFI to also include pension funds and insurance companies in addition to OFls 35 While these entity types have been reported outside of shadow banking, activities within these entities may be considered shadow banking. Further assessment of securities financing activities may in the future warrant the inclusion of additional assets of these entity types into shadow banking 17
17 Narrowing down towards an activity-based measure of shadow banking Box 1 In its 2011 report to the G20, the FSB introduced a two-step approach to guide monitoring and policy responses to shadow banking risks:33 • First, authorities should cast the net wide to broadly monitor all non-bank credit intermediation; and, • Second, authorities should then narrow the focus for policy purposes to the subset of non-bank credit intermediation involving maturity/liquidity transformation, imperfect credit risk transfer, and/or leverage. The economic function measure of shadow banking introduced in Sections 2 and 3 of this report takes the FSB’s efforts to monitor the global shadow banking system a step closer to a narrow measure of shadow banking (the second item above). However, a broad estimate of non-bank financial intermediation (the first item above) is also important for monitoring the trends outside of the banking sector and for detecting where shadow banking risks may arise. This monitoring is particularly helpful in detecting adaptations and cross-border regulatory arbitrage. This conservative estimate may be referred to as the MUNFI, which is approximated in this report by all non-bank financial intermediation including OFIs, insurance companies and pension funds.34 The relationship between the broad MUNFI measure of all non-bank financial intermediation and the economic functions-based, narrow measure of shadow banking is illustrated in Exhibit 10. For 26 jurisdictions, the broad MUNFI measure amounted to $124.1 trillion in 2014, being comprised of $68.1 trillion OFIs, $27.0 trillion insurance companies, and $29.0 trillion pension funds. The narrowing down methodology then involves the following steps: 1. Pension funds and insurance companies that are not part of shadow banking. All pension fund assets, amounting to $29.0 trillion are deducted in a first step. In addition, $26.9 trillion of insurance company assets that are not classified into Economic Function 4 (facilitation of credit creation) are also excluded from the shadow banking measure.35 2. OFIs reported as not shadow banking. Assets of OFIs that jurisdictions identified as not being involved in any of the shadow banking activities described by the five economic functions are also excluded from shadow banking. $23.6 trillion are subtracted in this narrowing down step. It comprises mainly entities that tend not to directly engage in credit intermediation or to exhibit shadow banking risks. Examples include equity investment funds, closed-end funds without leverage and/or significant 33 FSB: Shadow Banking, Strengthening Oversight and Regulation, Recommendations of the Financial Stability Board, 27 October 2011, see: http://www.fsb.org/wp-content/uploads/r_111027a.pdf. 34 In previous reports, the starting point for narrowing down was MUNFI based on OFIs. However, the introduction of the shadow banking measure based on economic functions this year, which includes insurance companies involved in the facilitation of credit intermediation, required the widening of the scope of MUNFI to also include pension funds and insurance companies in addition to OFIs. 35 While these entity types have been reported outside of shadow banking, activities within these entities may be considered shadow banking. Further assessment of securities financing activities may in the future warrant the inclusion of additional assets of these entity types into shadow banking