Output of the U.S. Financial Sector: Measuring the services of banks andinsurance companies

Brian C. MoyerDeputy ChiefNational Income and Wealth Division

10th OECD-NBS Workshop on National Accounts

Paris, FranceNovember 6-10, 2006

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Output of the financial sector

Financial sector includes: commercial banks credit unions savings and loans regulated investment companies insurance companies

Output can be either priced or “implicit”

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I. Implicit output of commercial banks

Current measure introduced in the 2003 NIPA comprehensive revision

Based on the 1993 System of National Accounts— Financial intermediation services indirectly measured (FISIM)

FISIM of commercial banks recognized for both depositors and borrowers

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Implicit output of commercial banks

Implicit output of depositors’ and borrowers’ services calculated by type of liability and asset, respectively

Implicit output of depositors’ services  

YiD = (r – average rate paid) * average liability balance

Implicit output of borrowers’ services Yi

B = (average rate received – r) * average asset balance

Total implicit output of commercial banksYi = Yi

D + YiB

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Calculation of average rates

Based on “book value” calculations average rate paid =

(interest expense / average liability balance)

average rate received = (interest income / average asset balance)

Data available from commercial banks’ balance sheet and income statements

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Calculation of the reference rate (r)

Pure cost of borrowing funds; does not include risk premiums or intermediation services

Ratio of interest income on U.S. Government Treasury and Agency securities (excluding mortgage- backed securities) to their value on balance sheets of commercial banks

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0.4

1.4

2.4

3.4

4.4

5.4

6.4

7.4

8.4

9.4

10.4

1998Q1 1999Q1 2000Q1 2001Q1 2002Q1 2003Q1 2004Q1 2005Q1

Average rates and the reference rate

perc

ent

average rate received

reference rate

average rate paid

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Average rates and the reference rate

Spread between the reference rate and the average rate paid represents: for depositors, foregone interest income for banks, equilibrium cost of supplying services to

depositors

Spread between the average rate received and the reference rate represents: extra cost paid by borrowers for financial services

received extra revenue earned by banks as compensation for

financial services supplied

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Sector allocations of implicit output

Consumption of implicit output allocated to persons, government, rest of world, and businesses (corporations, sole proprietors, and partnerships)

Allocations estimated by asset and liability Assets allocated based on sector distribution of

loan/lease balances Liabilities allocated based on sector ownership of

deposit balances Data available from the U.S. flow of funds accounts

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Constant-price implicit output

Steps in the calculationReference year total output (both priced and

implicit)

extrapolated with: volume index of banking output

equals: constant-price total output

less: constant-price output of priced services

equals: constant-price implicit output

Sector shares of constant-price implicit output same as current-price sector shares

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II. Output of insurance companies

Output of property and casualty (P&C) insurance companies includes: transfer of risk financial intermediation administrative services, such as handling claims

Current measure introduced in the 2003 NIPA comprehensive revision

Similar treatment recommended by the Advisory Expert Group for the upcoming revision to the 1993 System of National Accounts

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BEA’s previous measure of output

Output = net premiums – dividends paid to policy holders – actual losses

However, disasters often cause large swings in measured output of insurance companies

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Consumption of household insurance

-10

-5

0

5

10

15

20

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Bill

ion

s o

f d

olla

rs,

SA

AR

Hurricane Andrew

Sept 11

consumption = premiums – actual losses

actual losses

premiums

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BEA’s current measure of output

Output = direct premiums earned+ premium supplements– dividends paid to policy holders – normal (expected) losses incurred

More consistent with the behavior of insurance companies

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Consumption of household insurance

-10

-5

0

5

10

15

20

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Bill

ion

s o

f d

olla

rs,

SA

AR

premiums normal losses

consumption = premiums – normal losses

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Output of P&C insurance companies

Direct premiums earned include transactions related to reinsurance

Premium supplements Expected income earned by insurance companies

from investing policyholder reserves Used to supplement revenue from premiums to pay

claims or purchase reinsurance services

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Output of P&C insurance companies

Normal losses Represent claims that insurance companies expect to

pay in a period Insurance companies determine premiums for a future

period based on the claims they expect to pay; that is—

Normal lossest = direct premiums earnedt *

{0.3 * (direct losses incurredt-1 / direct premiums earnedt-

1) +

0.7 * E[(direct losses incurredt-1 / direct premiums earnedt-1)]}

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Adjusting for disasters

Effect of disasters on normal losses is “smoothed”; a portion of the disaster is added to normal losses for a 20-year period following the disaster

“Net insurance settlements” is the difference between actual and expected losses; it is recorded as a current transfer payment to policyholders from insurance companies

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Constant-price insurance output

Currently based on a “single-deflation” technique using consumer price indexes and producer price indexes

Research underway to consider constant-price estimates based on “double-deflation” techniques