European Central Bank, Directorate General Statistics, Banking statistics as an input for euro area monetary policy conduct: the institutional framework and coping with financial innovation Antonio Colangelo European Central Bank, Directorate General Statistics, Monetary & Financial Statistics Division antonio.colangelo@ecb.europa.eu

Contents 0. ESCB statistics Aim and scope of Monetary Financial Institutions (MFIs) balance sheet statistics The statistical framework of monetary analysis Coping with financial innovation: Securitisation Central counterparties

Contents 0. ESCB statistics

0. ESCB statistics (1) ESCB functions: Define and implement monetary policy Conduct foreign exchange operations/hold and manage official foreign reserves Promote smooth operation of payments systems Contribute to smooth conduct of policies relating to banking supervision and stability of the financial system the latter is now complemented by the ECB analytical and statistical support to the European Systemic Risk Board

0. ESCB statistics (2) Each country has its statistics GDP population inflation money external balance, … A monetary (and economic) union is a single economic entity common currency and monetary policy free movement of persons, goods and services, capital flows increasingly integrated (financial) markets A monetary (and economic) union needs high quality statistics to assess the economic developments in the whole area base its forecasts assess the transmission of monetary policy decisions on the economy analyse and assess its financial stability support the conduct of other policies (e.g. financial integration)

0. ESCB statistics (3) Is it not possible to simply add up national data? Even if and when national data are timely, at the same frequency and accurate enough… concepts and definitions may still diverge (following international standards which may also need to be interpreted) some classifications differ, e.g. intra-transactions need to be classified as “domestic” from the viewpoint of the monetary union and, thus, allocated to SNA/ESA sectors – once asymmetry-free institutions of the monetary union (e.g. the ECB) are residents of the union, but not of any country (even where they are located)

Contents 0. ESCB statistics Aim and scope of Monetary Financial Institutions (MFIs) balance sheet statistics

1. Aim and scope of MFI balance sheet statistics (I) ECB President Trichet at Press Conference 10 June 2010: “… the annual growth rate of M3 was unchanged at -0.1% in April 2010. The annual growth rate of loans to the private sector increased somewhat further and turned positive, but remained weak at 0.1%. These data continue to support the assessment that the underlying pace of monetary expansion is moderate and that inflationary pressures over the medium term are contained. The weak annual growth rate of bank loans to the private sector conceals that monthly flows have now been positive for a number of months. At the same time, these aggregate developments continue to reflect a strengthening in the annual growth of loans to households, while the growth of loans to non-financial corporations has remained negative. A lagged response of loans to non-financial corporations to economic activity is a normal feature of the business cycle.”

1. Aim and scope of MFI balance sheet statistics (2) Primary objective of price stability Governing Council takes monetary policy decisions based on a unified overall assessment of the risks to price stability Economic analysis Monetary analysis Analysis of economic dynamics and shocks Analysis of money and credit based on MFI statistics Cross-checking Macro-economic projections Full set of information

1. Aim and scope of MFI balance sheet statistics (3) What is money? Any definition of money is based on three crucial aspects: Identification of monetary instruments Financial assets that for their characteristics are – to a certain degree - substitutes of currency The nature and characteristics of financial assets and means of payment change over time and differ across economics areas, hence the different definition of monetary instruments used across central banks. Financial instruments also differ by their degree of “liquidity”, i.e. their degree of substitutability to banknotes in circulation, hence the definition (and monitoring) of several monetary aggregates by central banks.

1. Aim and scope of MFI balance sheet statistics (4) Definition of the money-issuing sector Financial institutions that issue financial assets that are included in the set of monetary instruments.  Monetary Financial Institutions Definition of the money-holding sector Resident entities that hold these monetary instruments and whose money disposal is of interest for the transmission mechanism from interest rates to prices

1. Aim and scope of MFI balance sheet statistics (5) M3 growth

1. Aim and scope of MFI balance sheet statistics (6) M3 vs. credit developments

Contents 0. ESCB statistics Aim and scope of Monetary Financial Institutions balance sheet statistics The statistical framework of monetary analysis

2. The statistical framework of monetary analysis (1) Monetary Financial Institutions (MFIs) = financial institutions which together form the money-issuing sector of the euro area = central banks + resident credit institutions as defined in EU law + other resident financial institutions whose business is - to receive deposits and/or close substitutes for deposits from entities other than MFIs and, - for their own account (at least in economic terms), to grant credits and/or make investments in securities (the latter group consists predominantly of money market funds)

Number of MFIs as at end-December 2010 2. The statistical framework of monetary analysis (2) Number of MFIs as at end-December 2010   NCBs Credit institutions Money Market Funds Other MFIs Total Euro area 17+1 6334 1474 3 7828 Non participating EU Member States 10 1875 154 53 2093 EU Total 28 8209 1628 56 9921

2. The statistical framework of monetary analysis (3) Statistical requirements for MFIs Type of data: end-period stocks and flow adjustments Frequency: Monthly for main balance sheet series, Quarterly for more detailed breakdowns Timeliness: data reported by NCBs to ECB on 15th working day after end of reference month, and 28th working day after end of reference quarter (NCBs decide on timeliness for national reporting)

2. The statistical framework of monetary analysis (4) Breakdowns collected for balance sheet items Residency of counterpart (domestic / other euro area / RoW) Counterpart sector (MFIs / Government / other financial institutions / insurance corporations and pension funds/ non-financial corporations / households) Instrument category (under liabilities / assets) Maturity bands (original maturity, i.e. at issue, or period of notice) Currency (euro / other)

2. The statistical framework of monetary analysis (5) Why to collect these breakdowns? Euro area monetary aggregates and counterparts Euro area MFI’s lending to euro area money holding sector Residency of counterpart. Our focus is on the euro area Counterpart sectors. To separately identify: (i) Money issuing sector = MFIs (ii) Money holding sector = Government excl. Central Gov., other financial institutions, insurance corporations and pension funds, non-financial corporations, households Instruments category. To identify M3 components and counterparts Maturity bands. To identify short term (≤ 2 years) and long term (>2 years) instruments

2. The statistical framework of monetary analysis (6) Separately identify money issuing and money holding sectors, for the purpose of deriving monetary aggregates

2. The statistical framework of monetary analysis (7) Decomposition of the annual growth rate of overnight deposits by sector (annual flows, EUR bn)

Decomposition of the annual growth rate of M3 by sector 2. The statistical framework of monetary analysis (8) Decomposition of the annual growth rate of M3 by sector (percentage point contribution)

2. The statistical framework of monetary analysis (9)

Decomposition of the annual growth rate of M3 by instrument 2. The statistical framework of monetary analysis (10) Decomposition of the annual growth rate of M3 by instrument (annual flows, EUR bn)

2. The statistical framework of monetary analysis (11) MFI loans to households In addition to the breakdown by counterpart sector and original maturity (and currency) Breakdown by purpose of the loan: Consumer credit Loans for house purchase Other lending  of which: loans to sole proprietors and unincorporated partnerships Some new requirements are included in the BSI Regulation ECB/2008/32

2. The statistical framework of monetary analysis (12) Decomposition of the annual growth rate of loans to non-financial sectors (annual flows, EUR bn)

Monetary aggregates and counterparts 2. The statistical framework of monetary analysis (13) Compilation of euro area aggregates at the ECB Central bank balance sheets of 16 euro area Member States ECB’s own balance sheet National aggregated balance sheets of other MFIs for each of the 16 euro area Member States Aggregated balance sheet of the Eurosystem Aggregated balance sheet of euro area other MFIs On a gross basis On a gross basis Aggregated balance sheet of euro area MFIs Central government deposit liabilities with a monetary character (e.g. post office accounts) Netting of inter - MFI positions Consolidated balance sheet of euro area MFI sector Adjustment for non-euro area holdings of short-term debt securities issued by MFIs resident in DE, IE, NL Monetary aggregates and counterparts

2. The statistical framework of monetary analysis (14) Definition of the euro area monetary aggregates M1 M2 M3 Currency in circulation x Overnight deposits Deposits with an agreed maturity of up to 2 years Deposits redeemable at notice of up to 3 months Repos MMF Share/units Debt securities with a maturity of up to 2 years An all currency concept is being followed, i.e. instruments in foreign currency are included

2. The statistical framework of monetary analysis (15) Some alternative definitions of monetary aggregates USA M1 = currency + cheque deposits M2 = M1 plus other deposits held by households Euro area M1 = Currency + overnight deposits M2 = M1 + s-t deposits (2 years or redeemable in 3 months) M3 = M2 + s-t securities issued by MFIs + money market mutual funds. Japan M1 = cash + demand deposits (commercial banks only) M2 = M1 + time deposits + CDs (commercial banks only) M3 = as for M2, but covering all deposit taking institutions Thailand M1 = Currency + on call deposits. M2 = M1 + fixed and savings deposits M3 = M2 + other funds from public e.g. promissory notes.

2. The statistical framework of monetary analysis (16) Assets: Loans to euro area residents Holdings of securities other than shares issued by euro area residents Holdings of shares/other equity issued by other euro area residents External assets Fixed assets Remaining assets Liabilities: Currency in circulation Short-term deposits of other general government/ other euro area residents Money market fund shares/units Short term debt securities issued Deposits of central government Long-term debt securities Long term deposits of other general government/ other euro area residents Capital and reserves External liabilities Remaining liabilities Excess of inter-MFI liabilities M3 = Credit + NEA – CGD – LTFL + OA

2. The statistical framework of monetary analysis (17) M3 and counterparts (annual flows, EUR bn)

2. The statistical framework of monetary analysis (18) Stocks, flows, indices and growth rates Stock data refer to the last (working or calendar) day of the period (month or quarter) Flows for period t calculated as difference between stock at end of period t and stock at the end of period t-1, adjusted for effects that do not arise from transactions Index of adjusted stocks derived from flows and used to calculate growth rates Growth rate over the n months ending in month t calculated by dividing the index for month t by the index for month t - n

2. The statistical framework of monetary analysis (19) Derivation of flows (transactions) by the ECB Flow at time t for any balance sheet item is given by: Ft = Flow Lt = Level at end of the period t Lt-1 = Level at end of the period (t-1) Ct = Reclassification adjustment (reported by NCBs) Vt = Revaluation adjustment (reported by “other MFI”) Et = Exchange rate adjustment (calculated by ECB) Ct , Vt , Et are "non-transactions-related" factors

2. The statistical framework of monetary analysis (20) Seasonal adjustment M3 components and counterparts, as included in press release, are seasonally adjusted Seasonal adjustment by the ECB also includes trading-day adjustment as underlying series are end-of-month stocks Method is X-12-ARIMA (U.S. Bureau of Census); for internal purposes, TRAMO-SEATS (A. Maravall – Bank of Spain) is also used

Contents 0. ESCB statistics Aim and scope of Monetary Financial Institutions (MFIs) balance sheet statistics The statistical framework of monetary analysis Coping with financial innovation: Securitisation Central counterparties

3. Coping with financial innovation (1) (Traditional) securitisation: An originator (e.g. a bank) pools a set of assets and sells them to a financial vehicle corporation (FVC) The FVC issues asset-backed securities (ABS) to investors, the principal and interest of which depend on the cash flows produced by the asset pool The ABS are typically issued in different tranches of seniority (priority in payment/loss absorption) The FVC is usually set-up as a bankruptcy remote entity (the pool of assets is beyond the reach of the originator’s creditors)

3. Coping with financial innovation (2) Motives for securitisation: Financing especially during phases of large credit expansion (rates usually lower than other sources) Risk diversification for both originators and investors Conversion of illiquid assets into marketable securities that can be used in the repo market (including refinancing with the Eurosystem) Regulatory capital relief and/or capital arbitrage Flexibility in creating investment products for a wider investor base (e.g. tranching)  enhanced revenues (arbitrage, fees, etc.) Moving of business to lighter regulated or unregulated entities (e.g. ABCP conduits)

3. Coping with financial innovation (3) (Among other needs) data on securitisation are needed to get reliable interpretation of MFI credit data: need to correct for negative financial transactions when loans are securitised and derecognised from the MFI balance sheet! Table 2.3 of the ECB Monthly Bulletin 

3. Coping with financial innovation (4)

3. Coping with financial innovation (5) Previous data was insufficient: non-harmonised definitions and compilation approaches different availability and coverage among Member States no sectoral detail available (NFC, household etc.) New statistical Regulation (ECB/2008/30) to address these limitations (among others)  publication of new statistics from June 2011

Bank A  repo  CCP  inverse repo  Bank B 3. Coping with financial innovation (6) Central counterparties (CCPs): Financial institutions acting as intermediaries between financial and money market participants – reduce counterparty risk More and more active on the (secured) interbank market: Bank A  repo  Bank B vs. Bank A  repo  CCP  inverse repo  Bank B

3. Coping with financial innovation (7) Impact on M3 and credit: CCPs are part of the money-holding sector; therefore: M3 is artificially inflated (repos are part of M3) Credit is artificially inflated (the MFI in the reverse repo records a loan to an OFI)

3. Coping with financial innovation (8) New requirements under Regulation ECB/2008/32 cope with this problem:

References Regulation (EC) No 25/2009 of the ECB of 19 December 2008 concerning the balance sheet of the monetary financial institutions sector (Recast) (ECB/2008/32): http://www.ecb.europa.eu/ecb/legal/pdf/l_01520090120en00140062.pdf Guideline of the ECB of 1 August 2007 on monetary, financial institutions and markets statistics (recast)  (ECB/2007/9) and amendments: http://www.ecb.europa.eu/ecb/legal/pdf/l_34120071227en00010232.pdf http://www.ecb.europa.eu/ecb/legal/pdf/l_05320090226en00760091.pdf http://www.ecb.europa.eu/ecb/legal/pdf/l_01620100121en00060047.pdf Regulation (EC) No 24/2009 of the ECB of 19 December 2008 concerning statistics on the assets and liabilities of financial vehicle corporations engaged in securitisation transactions (ECB/2008/30): http://www.ecb.europa.eu/ecb/legal/pdf/l_01520090120en00010013.pdf

Working for the ECB Various job opportunities are available on the ECB website at: http://www.ecb.europa.eu/ecb/jobs/html/index.en.html The ECB Statistics Traineeship Programme is dedicated to traineeships opportunity at the Directorate General Statistics of the ECB; see: http://www.ecb.europa.eu/ecb/jobs/apply/html/index.en.html

Further information available on www.ecb.europa.eu