to absorb shocks. in the meantime, interest rates across markets rose in response to gradual tightening of monetary policy ; turnover in the foreign exchange market recorded substantial increases ; and market capitalisation and price indices in the equity market continued to improve. figure 4 : ratio of capital funds to total assets of lcbs 8. 0 per cent 7. 0 6. 0 5. 0 4. 0 3. 0 2. 0 1. 0 0. 0 sep06 per cent figure 5 : non performing advances to total advances of lcbs 2005 sep - 06 it would also be noted in the year 2006, several important measures were taken to strengthen and improve the efficiency of the financial sector, improve risk management, enhance access to finance, strengthen the payment and settlement system as well as supervision and regulation. banks were required to include market risk in the computation of capital adequacy to ensure that they are adequately capitalised to meet any adverse fluctuations in market prices and are not vulnerable to any unanticipated shocks. prudential norms for classification and valuation of bank investment portfolios were further strengthened. to improve the safety and efficiency in the payments and settlements systems, the central bank also drafted a payment system policy in consultation with the national payment council to declare a public policy regarding the regulatory framework. as is well known, the central bank manages the employees ’ provident fund ( epf ). it does so by receiving member contributions, maintaining member accounts, investing funds and paying benefits to members. the total assets of the epf grew by 13 per cent to rs. 439 billion during the 12 months ending june 2006. total contributions and refunds during this period amounted to rs. 16 billion and rs. 13 billion, respectively. the total investment portfolio consisted mainly of government securities at 98 per cent, while the total income for the first half of 2006 amounted to rs. 25 billion. the central bank also manages the public debt to ensure that the government's financing needs and its payment obligations are met at the lowest possible cost over the medium to long term, consistent with a prudent degree of risk. during 2006, the central bank took several measures to strengthen the management of public debt by : • increasing the capital requirements, introducing a risk based supervision system and supervision activities to strengthen the primary dealer system and financial sector stability • introducing on - line data reporting to enhance the transparency in trading government securities • facilitating capacity building of market players • permitting subscription upto 5 per cent of treasury bonds by

problem at depository institutions. however, in recent years a significant amount of maturity transformation took place outside the traditional banking system – in the so - called shadow banking system – through the use of commercial paper, repurchase agreements, and other instruments. our ability to monitor the size and extent of maturity transformation has been hampered by the lack of high - quality and consistent data on these activities. better data on the sources and uses of maturity transformation outside of supervised banking organizations would greatly aid macro - prudential supervision and systemic risk regulation. another feature of the recent crisis was the extensive use of leverage, often in conjunction with maturity transformation. the consequences of this combination were dramatic. when doubts arose about the quality of the assets on shadow banking system balance sheets, a classic adverse feedback loop ensued in which lenders were increasingly unwilling to roll over the short - term debt that was used as funding. liquidity - constrained institutions were forced to sell assets at increasingly distressed prices, which accelerated margin calls for leveraged actors and amplified mark - to - market losses for all holders of the assets, including regulated firms. here, too, government regulators and supervisors had insufficient data to determine the degree and location of leverage in the financial system. more generally, the crisis revealed that regulators, supervisors, and market participants could not fully measure the extent to which financial institutions and markets were linked. a critical lesson from this crisis is that supervisors and investors need to be able to more quickly evaluate the potential effects, for example, of the possible failure of a specific institution on other large firms through counterparty credit channels ; financial markets ; payment, clearing, and settlement arrangements ; and reliance on common sources of short - term funding. a better system of data collection and aggregation would have manifold benefits, particularly if the data are shared appropriately among financial regulators and with a systemic risk council if one is created. it would enable regulators and a council to assess and compare risks across firms, markets, and products. it would improve risk management by firms themselves by requiring standardized and efficient collection of relevant financial information. it also would enhance the ability of the government to wind down systemically important firms in a prompt and orderly fashion by providing policymakers a clearer view of the potential impacts of different resolution options on the broader financial system. additional benefits would result from making data public to the degree consistent with protecting firm - specific proprietary and supervisory information. investors and analysts would have a more complete picture of individual firms ’ strengths and vulnerabilities, thereby contributing to