SNA 1993 Updating - Issue 6a

Financial Services, FISIM

Giovanni SavioStatistics Coordination Unit, UN-ESCWA

Workshop on National AccountsCairo, 19-21 December 2006

Objectives of presentation

An important updating issue of 1993 SNA relates to Financial Services, issue 6a

The Advisory Expert Group (AEG) has made recommendations on:

– The definition of financial services; and– How financial services indirectly measured (FISIM) should

be calculated

Brief background on the issue and discussion of practical implications of the recommendations by AEG

Main reasons for 1993 SNAupdating

Financial corporations (FC) provide intermediation services without charging explicitly (§ 6.122 - 6.124)

FC defray their expenses and have operating surplus by charging interest rates on funds they lend that are higher than the rates paid on the funds borrowed. These intermediation services are indirectly measured, and they are called FISIM

Definition of value of FISIM in 1993 SNA (§ 6.125)

“Total property income receivable by financial intermediaries minus their total interest payable, excluding the value of any property income receivable from the investment of their own funds, as such income does not arise from financial intermediation”

Main reasons for 1993 SNAupdating

However, the rapid developments in financial markets have changed the way FC are managed and operated, as well as their activities

Nowadays, FC provide services other than intermediation, typically financial risk management and liquidity transformation, as opposed to “risk-taking” and “repackaging” of 1993 SNA

Furthermore, financial services are also provided by units making loans exclusively from own funds or securities rather than deposits

AEG recommendations

The AEG recommends to calculate FISIM independently on loans and deposits using a reference rate and considering two elements:

– services from intermediation, as presently understood; and– services from lending from sources other than intermediated

deposits

The aim of the intermediation process is unchanged from 1993 SNA, namely (§ 4.78):

“To channels funds from lenders to borrowers by intermediating between them”

However, it is not the only source of services associated with lending by financial institutions

AEG recommendations

Developments in financial markets create a mismatch between deposits and loans:

a) deposits are not only used to provide loans; and b) own funds and other financial liabilities, such as debt

securities, can be used in the provision of loans other than deposits

The hypothesis that financial institutions provide indirect services only when intermediating between depositors and borrowers and that pure interest receivable from borrowers are fully transferred to depositors are no longer applicable

AEG recommendations

1993 SNA

DDLLDL

DLDL

YrYrff

RRff

When intermediation takes place from deposits to borrowers only, FISIM (on loans (fL) and deposits (fD)) can be derived according to 1993 SNA principle, as interest receivable (RL) less interest payable (RD), namely the difference between the stock of loans and deposits (YL and YD) multiplied by their interest rates (rL and rD)

AEG recommendations

1993 SNA rev. 1

DDLLLDDL

DDLLDL

YrYrYYrrff

YrrrYrrrff

)(

)()(

The AEG defines FISIM as the stock of loans multiplied by the difference between the interest rate on loans and a reference interest rate (rr) plus the stock of deposits multiplied by the difference between a reference interest rate and the interest rate on deposits

1993 SNA

Consequences

FISIM derived from the two formulas are equal when the stock of loans is equal to the stock of deposits, as is for basic intermediation where all deposits are used by banks to provide loans and loans are only provided by deposits

Advantages of the formula:

1. services provided to depositors and borrowers are independently estimated irrespective of what the deposits are used for and funds for providing loans come from; and

2. facilitates the distribution of indirect service charges to its users in a consistent way by allowing calculations at a detailed level

Consequences

Then the final formula suggested by AEG is

which becomes, when units are lending exclusively from own funds

DDLL YrrrYrrr )()(

LL Yrrr )(

Compilation issues

The AEG does not prescribe which rate to use as reference interest rate, but recommends that it should not have service element inside and should reflect the risk and maturity structure of financial assets and liabilities to which indirect service charges apply

A single reference rate should be used but, when relevant, a country can use multiple rates

Different reference rates should be used for transactions in other currencies

Compilation issues

A simple way to obtain a reference rate reflecting the maturity structure of financial assets/liabilities is to calculate the average of the sum of the ratios of interest payable and receivable to the stock of deposits and loans as follows (the formula can be used for loans/deposits in foreign currency)

)//(5.0 LLDD YRYRrr

Measurement in volume terms

The measurement of the volume change in the output of financial intermediation should take into account the total output, including the direct charges

In the absence of direct deflators for the output of FISIM, one of the following approaches may be used:

a. rate of change of the volume indicator can be derived using the rate of change of average stocks of loans and deposits deflated by a general price index (e.g. the GDP deflator) adjusted for quality change in the output of financial services

b. the output indicator method which involves breaking down the different characteristics linked to financial services (numbers and values of loans and deposits, savings, money transfers, etc). For each characteristic, an appropriate volume indicator is derived, and volume indicators are then weighted together

References

1. “The production of financial corporations and price/volume measurement of financial services and non-life insurance services”, UNSD website

2. “Full set of provisional recommendations”, UNSD website

3. Smith, H. (2006), “Financial intermediation services indirectly measured (FISIM)”, SNA News and Notes, n. 22, October, pp. 4-6