Measuring Banking and Insurance: The U.S. Experience Brian C. Moyer Associate Director for Industry Accounts 12 th OECD-NBS Workshop on National Accounts Paris, France October 27-31, 2008

2 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

3 I. Output of commercial banks Based on the 1993 System of National Accounts Financial intermediation services indirectly measured (FISIM) FISIM of commercial banks recognized for both depositors and borrowers

4 Depositors and borrowers services Output of depositors services Y i D = (r – average rate paid) * average liability balance Output of borrowers services Y i B = (average rate received – r) * average asset balance Total implicit output Y i = Y i D + Y i B

5 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

6 Calculation of the reference rate 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

7 Average rates and the reference rate percent average rate received reference rate average rate paid

8 Sector allocations of output Consumption of implicit output allocated to persons, government, rest of world, and businesses 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

9 Constant-price bank output Steps in the calculation Reference 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

10 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 Consistent with treatment recommended in the revised 1993 System of National Accounts

11 P&C insurance output Output = direct premiums earned + premium supplements – dividends paid to policy holders – normal (expected) losses incurred Consistent with the behavior of insurance companies

12 Consumption of household insurance premiums normal losses consumption = premiums – normal losses

13 In contrast to actual losses… Hurricane Andrew Sept 11 consumption = premiums – actual losses actual losses premiums

14 P&C insurance output 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

15 P&C insurance output 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 losses t = direct premiums earned t * {0.3 * (direct losses incurred t-1 / direct premiums earned t-1 ) * E[(direct losses incurred t-1 / direct premiums earned t-1 )]}

16 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

17 Constant-price P&C insurance output 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