involves non-bank credit intermediation that may pose shadow banking risks (e.g maturity/liquidity transformation and leverage The resulting measure of shadow banking, by establishing the principal activity of different shadow bank entities, takes the FSB's efforts to monitor the global shadow banking system step further towards identifying the subset of non-bank credit intermediation involved shadow banking risks that may raise financial stability concerns and where potential policy responses may be needed. 19 The addition of the economic function(activity )-based approach to monitoring shadow banking accomplishes two goals. First, it allows policy makers to better focus on the activities of shadow banking entities and on the potential risks they might pose. Second, it allows for a more accurate refinement of the shadow banking measure through the additional exclusion of non-bank financial entities that are not involved in significant maturity/liquidity transformation or leverage, and are not typically part of a credit intermediation chain. The implementation of this approach, however, is an ambitious endeavour which will take time to fully realise, with improvements and consistency also being achieved as authorities learn from collective information-sharing The measure of shadow banking based on economic functions differs from that reported in previous reports in several ways. Measures of shadow banking presented in previous reports were based on the exclusion from Ofis of assets related to self-securitisation assets of ofis prudentially consolidated into a banking group, and entities not directly involved in credit intermediation. This year's narrowing down methodology is more comprehensive and based on the economic functions outlined in the FSBs Policy Framework(see Box 1). Therefore this year's narrow shadow banking results are not comparable to results provided in previous plications 2.1 Economic functions approach The five economic functions are set out in the FSBs Policy Framework, published in August 2013. The framework is designed to allow authorities to detect and assess the sources of financial stability risks from shadow banking in the non-bank financial space and to apply appropriate policy measures to mitigate these risks One element of the FSB's Policy Framework is the assessment of non-bank financial entities based on economic functions. It takes into account home authorities'assessment of potential sources of shadow banking risks in non-bank financial entities in their jurisdiction from a financial stability perspective, by either classifying these entities with reference to five economic functions or excluding the entity based on the assessment that it does not pose shadow bank-like risks. Exhibit 1 sets out these five economic functions. Section 3 summarises the ways in which each economic function gives rise to shadow banking risks. 20 19 Through the FSB's shadow banking information-sharing exercise, authorities from a number of juris have noted that some entity-types classified as shadow banking are highly regulated through a range of policy tools available to address and mitigate shadow banking risks. See the FSBs Policy Framework for an assessment of the FSBs policy toolkittomitigateshadowbankingrisks(availableathttp://www.fsborg/wp-content/uploads/r13082 the availability, use and efficacy of such tools may range significantly across jurisdictions. Therefore, to ensure conservatism and consistency of reporting, these entity types were included in shadow banking 20 See the FSBs Policy Framework for further details on the five economic functions 77 involves non-bank credit intermediation that may pose shadow banking risks (e.g. maturity/liquidity transformation and leverage). The resulting measure of shadow banking, by establishing the principal activity of different shadow bank entities, takes the FSB’s efforts to monitor the global shadow banking system a step further towards identifying the subset of non-bank credit intermediation involved in shadow banking risks that may raise financial stability concerns and where potential policy responses may be needed. 19 The addition of the economic function (activity)-based approach to monitoring shadow banking accomplishes two goals. First, it allows policy makers to better focus on the activities of shadow banking entities and on the potential risks they might pose. Second, it allows for a more accurate refinement of the shadow banking measure through the additional exclusion of non-bank financial entities that are not involved in significant maturity/liquidity transformation or leverage, and are not typically part of a credit intermediation chain. The implementation of this approach, however, is an ambitious endeavour which will take time to fully realise, with improvements and consistency also being achieved as authorities learn from collective information-sharing. The measure of shadow banking based on economic functions differs from that reported in previous reports in several ways. Measures of shadow banking presented in previous reports were based on the exclusion from OFIs of assets related to self-securitisation, assets of OFIs prudentially consolidated into a banking group, and entities not directly involved in credit intermediation. This year’s narrowing down methodology is more comprehensive and based on the economic functions outlined in the FSB’s Policy Framework (see Box 1). Therefore, this year’s narrow shadow banking results are not comparable to results provided in previous publications. 2.1 Economic functions approach The five economic functions are set out in the FSB’s Policy Framework, published in August 2013. The framework is designed to allow authorities to detect and assess the sources of financial stability risks from shadow banking in the non-bank financial space and to apply appropriate policy measures to mitigate these risks. One element of the FSB’s Policy Framework is the assessment of non-bank financial entities based on economic functions. It takes into account home authorities’ assessment of potential sources of shadow banking risks in non-bank financial entities in their jurisdiction from a financial stability perspective, by either classifying these entities with reference to five economic functions or excluding the entity based on the assessment that it does not pose shadow bank-like risks. Exhibit 1 sets out these five economic functions. Section 3 summarises the ways in which each economic function gives rise to shadow banking risks.20 19 Through the FSB’s shadow banking information-sharing exercise, authorities from a number of jurisdictions have noted that some entity-types classified as shadow banking are highly regulated through a range of policy tools available to address and mitigate shadow banking risks. See the FSB’s Policy Framework for an assessment of the FSB’s policy toolkit to mitigate shadow banking risks (available at: http://www.fsb.org/wp-content/uploads/r_130829c.pdf). However, the availability, use and efficacy of such tools may range significantly across jurisdictions. Therefore, to ensure conservatism and consistency of reporting, these entity types were included in shadow banking. 20 See the FSB’s Policy Framework for further details on the five economic functions