Nadim Ahmad, OECD Presented by Peter van de Ven, OECD Agenda Item 2 FISIM   Meeting of the Advisory Expert Group (AEG) on National Accounts Luxembourg, 29-31 May, 2013 Nadim Ahmad, OECD Presented by Peter van de Ven, OECD

What is the issue? Financial crisis: Interpretative difficulties of FISIM-movements Occurrence of negative FISIM Manipulation of LIBOR-rates Should liquidity transformation and credit fault risk be excluded from FISIM? Two Task Forces created: Eurostat Task Force and ISWGNA Task Force, which were later on merged into one Task Force

Mandate of the ISWGNA Task Force How the composition of the services that FISIM covers – particularly (credit default) risk management and liquidity transformation – affects the selection of the reference rate and the price and volume breakdown of FISIM The financial instrument and unit scope of FISIM The connection between the recommendations on implementation of FISIM and the definition of income First issue considered a clarification issue, the other two issues need to form part of a medium-term research agenda Additional issue: Occurrence of negative FISIM?

Mandate of the ISWGNA Task Force Four clarification questions: How should (credit default) risk management be characterised and reflected in FISIM? How should liquidity transformation, the transformation of short-term deposits into long-term loans, be reflected in FISIM? How can FISIM be made consistent in international trade? What are the implications of the above for the price and volume measures of FISIM?

AEG meeting 2012 Supported the recommendation of the FISIM task force on the measurement of international trade. A majority agreed with the tentative findings of the FISIM task force that liquidity transformation (LT) services are part of FISIM and a single weighted reference rate reflecting the maturity structure of loans and deposits should be used. Expressed divergent views on treating credit default risk as non-life insurance services, and excluding this risk element from the calculation of FISIM, although a majority supported this approach in principle. Recognized that, if it was decided to exclude credit default risk from the calculation of FISIM in principle, it may be difficult to implement this in practice, and that there may be implications for the treatment of risk in other parts of the accounts. Agreed that the concept of negative FISIM required further discussion and requested the FISIM task force to consider this issue and its implications, amongst others for volume measures of FISIM, in more depth. Requested the FISIM task force to review the 2008 SNA for possible inconsistencies in the guidance on inter-bank services.

What has happened after AEG meeting 2012? Extensive testing of using different reference rates, especially within the EU: Short-term inter-bank rate Weighted average reference rate Conclusion: some improvement in the occurrence of negative FISIM, mixed results regarding volatility Decision: to keep the current method (short-term inter-bank rate) Also testing the exclusion of credit default risk Results inconclusive, due to data limitations Decision: no exclusion of credit default risk Drafting of report for the AEG, based on written consultation of the ISWGNA Task force

Recommendations on treatment of loans/deposits in different currencies Recommendation 1: For international trade in FISIM: FISIM should be calculated by at least two groups of currencies (national and foreign currency) Recommendation 1(bis): The reference rate for a specific currency need not be the same for FISIM providers resident in different economies. Although they should be expected, under normal circumstances, to be relatively close and so national statistics agencies are encouraged to use partner country information where national estimates are not available

Recommendations on liquidity transformation Basic question: Which reference rate(s)? Single reference rate: Applicable for all financial intermediaries single observable exogenous rate a weighted average of observable exogenous rates of maturities with different terms a weighted average of the endogenous interest rates on loans and deposits Costs of funds approach (reference rate differs depending on risk profile of the financial intermediaries Multiple (matched maturities) reference rates Alternative: vintage reference rate approach (annex 1)

Recommendations on liquidity transformation Additional question: Occurrence of negative FISIM? Depositors are offered loss-leading products with a view to profits being generated via borrowers (equivalent to retailers) => however, depositors and borrowers often different, sometimes forced because of liquidity problems Complementary nature of explicit and implicit charges Movements in FISIM because of movements in the temporal reference rate reflect changes in the market value of loans and deposits and not changes in FISIM Conclusion: Negative FISIM may be possible, but usually something else is going on => Try to minimise, by adopting calculation methods

Recommendations on liquidity transformation Recommendation 2: The recommendations of the Task Force are that liquidity transformation services should remain part of FISIM and that there should be a single temporal reference rate used to determine FISIM Recommendation 3: The calculation (definition) of the reference rate should be determined according to national circumstances, using any of the following approaches: a reference rate based on a single observable exogenous rate for a specific instrument, such as interbank lending rates; a reference rate based on a weighted average of observable exogenous rates of maturities with different terms (weighted by the stock of loans and deposits in each maturity); or a weighted average of the endogenous interest rates on loans and deposits

Recommendations on liquidity transformation Recommendation 4: The Task Force also recommends that during periods of volatile movements in reference rates and when liquidity markets begin to disfunction, considerable care should be taken in determining FISIM estimates. These periods may be characterised by negative FISIM estimates, particularly for depositors, but also for borrowers. When such incidences occur countries are encouraged to review the applicability of the underlying reference rate for that period to calculate FISIM

Recommendations on credit default risk Recommendation 5: The Task Force has concluded that there is conceptual merit in excluding credit default risk from FISIM. At present many countries will not be in a position to do this in a way that ensures reasonable comparability across most countries. However, a number of countries have demonstrated that it is feasible, in their cases, to produce meaningful results and these countries have developed plans to estimate FISIM on this basis. The recommendation of the Task Force therefore is that research continues in this area, both within the FISIM Task Force and within national agencies, to develop methods and data that can support estimation in the future. Recognising that these improvements will take some time to materialise, the Task Force recommends that, in the interim, in the interest of maintaining international comparability, those countries that exclude credit default risk from their FISIM estimates, should also provide supplementary estimates that include credit default risk to international agencies

Recommendations on price and volume measures Recommendation 6: The Task Force agreed that, in principle, output indicators could be used to calculate volume measures of FISIM (as long as double counting for explicitly charged services was avoided), but there was an overriding preference, not least because of simplicity, to use a deflated stocks approach that differentiated between the types of loans and deposits. The Task Force also agreed that stocks of loans and deposits should be deflated using a general price index. The Task Force further agreed that domestic price indices should be used for exports, while for imports the appropriate country price indices should be used. The Task Force further recommended that the general price index used to deflate FISIM should itself exclude FISIM

Medium/long term research agenda Developing more clarity regarding FISIM(-related) references in the SNA 2008, especially in relation to treatment of risk and definition of financial services Treatment of Credit Default Risk Developing the ‘costs of funds’ approach and alternative approaches (vintage reference rate) Look into the scope of FISIM (financial instruments and units) Look into possible hybrid approaches to price and volume measurement The connection between the recommendations on implementation of FISIM and the definition of income Agree on a new Terms of Reference

Thank you for your attention!