The non-bank financial sector in the euro area has more than doubled in size over the last decade reflecting the substantial growth in shadow banking activities. However, a large proportion of the non-bank financial sector remains unmapped as granular balance sheet information is not available for almost half of the sector. Motivated by these data gaps and employing firm-level data, this paper examines the location decisions of newly incorporated foreign affiliates in the non-bank financial sector across 27 European countries over the period 2004 to 2012. The probability of a country being chosen as the location for a new foreign affiliate is found to be negatively associated with higher corporate tax rates and geographic distance but increases with the size and financial development of the host country. The financial regulatory regime in the host country and gravity related controls such as the home and host country sharing a common legal system, language, border and currency are also found to impact the likelihood of non-bank financial FDI.JEL classification: F23, F65, G23, G32.

This paper provides a unique snapshot of the exposures of EU banks to shadow banking entities within the global financial system. Drawing on a rich and novel dataset, the paper documents the cross-sector and cross-border linkages and considers which are the most relevant for systemic risk monitoring. From a macroprudential perspective, the identification of potential feedback and contagion channels arising from the linkages of banks and shadow banking entities is particularly challenging when shadow banking entities are domiciled in different jurisdictions. The analysis shows that many of the EU banks' exposures are towards non-EU entities, particularly USdomiciled shadow banking entities. At the individual level, banks' exposures are diversified although this diversification leads to high overlap across different types of shadow banking entities.

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ESRBAssessing shadow bankingnon-bank financial intermediation in Europe No 10/ July 2016 4 Similarly, in a second step the FSB states: "authorities should narrow the focus for policy purposes to the subset of nonbank credit intermediation where there are (i) developments that increase systemic risk (in particular maturity/liquidity transformation, imperfect credit risk transfer and leverage), and (ii) indications of regulatory arbitrage that is undermining the benefits of financial regulation." (FSB, 2011b) ESRB Assessing shadow bankingnon-bank financial intermediation in Europe No 10/ July 2016 9 See the BCBS consultative document on the identification and measurement of step-in risk (BCBS, 2015), which raises issues of identification of unconsolidated entities to which a bank may provide financial support. The BCBS document proposes potential approaches to reflect step-in risk in prudential measures. See also, for example, Cetorelli ( 2014) and Claessens and Ratnovski (2014). ESRB Assessing shadow bankingnon-bank financial intermediation in Europe No 10/ July 2016 12 See, for example, FSB (2011b), p. 4.13These metrics overlap to some extent with those suggested by the FSB in its Workstream 3 on other shadow banking entities, as well as with those mentioned in the FSB"s global shadow banking monitoring reports. In line with this FSB approach, the ESRB also takes into account credit intermediation and the interconnectedness with the banking system. However, whereas the interconnectedness is included in a separate section in the FSB reports, the ESRB decided to classify it as an additional indicator category. ESRBAssessing shadow bankingnon-bank financial intermediation in Europe No 10/ July 2016 14 Academic concerns about the interactions between funding and market liquidity (see, for example, Brunnermeier and Pedersen, 2009) were emphasised more recently by the Bank of England (see, for example, Box 4 in the Bank of England"s December 2014 Financial Stability Report). 15 Pozsar (2014) calls for "Flow of Collateral, Flow of Risk, Flow of Eurodollar satellite accounts to supplement the Financial Accounts". 16 In order to assess risks in the investment fund and market-making sectors, the ESRB conducted a data collection exercise covering 274 EU asset management firms and 1,668 fixed-income investment funds in 2015.17Regulation (EU) 2015/2365 of the European Parliament and of the Council of 25 November 2015 on transparency of securities financing transactions and of reuse and amending Regulation (EU) No 648/2012. ESRB Assessing shadow bankingnon-bank financial intermediation in Europe No 10/ July 2016 ESRB Assessing shadow bankingnon-bank financial intermediation in Europe No 10/ July 2016 Entity-based mapping of shadow banking in Europe 9 ESRB Assessing shadow bankingnon-bank financial intermediation in Europe No