How complete and how comparable are data on non-financial corporates, household sector balance sheets, and housing markets across countries? Luci Ellis Head of Financial Stability Department Reserve Bank of Australia

Context Current crisis unusually triggered by US household sector –Arrears rates rose and prices fell sharply, before macro slowdown or credit tightening Other financial/banking crises triggered by excesses in nonfinancial corporates (CRE, LBO) But many observers pre-crisis thought US households less vulnerable than those elsewhere –What information didn’t they know, that could have stopped them being led astray?

Encouraged FSIs in IMF Guide Nonfinancial corporations sector –Total debt to equity –Return on equity –Earnings to interest and principal expenses –Net foreign exchange exposure to equity –Number of applications for protection from creditors Households –Household debt to GDP –Household debt service and principal payments to income Source: IMF Financial Soundness Indicators Compilation Guide 2006.

General Principles for Constructing Suitable Indicators Relevant: provides an informative reading on vulnerabilities and build-ups of imbalances Based on evidence: grounded in both theory and empirical evidence Risk-oriented: focussed on tail risks and tails of distributions, not just averages

Assessing the Size of Changes in Macro-financial Indicators Macro ratios covered by existing SNA etc –Financial accounts, income, business assets? But financial stability is about tail risks: distribution matters (leverage, interest burden etc) –Housing: LTVs etc –Corporates: listed firms’ disclosures –Limited international comparability: surveys, different disclosure regimes, proprietary data

Measuring Housing Prices Stock versus transactions –And inclusion of appraisals in transactions Quality adjustment –Repeat-sales, hedonics, stratification Coverage of sample –Cities, whole country, particular dwelling or buyer type? Source of data –Land titles records, lender, real estate agent

Assessing Extent of Vulnerabilities Aggregate ratios often used –But these can lead us badly astray –Don’t capture tail of distribution –Ratios of aggregates are not ratio of average

Assessing Extent of Vulnerabilities Aggregate ratios often used –But these can lead us badly astray –Don’t capture tail of distribution –Ratios of aggregates are not ratio of average Need theoretical and analytical grounding –e.g. aggregate debt-income ratios not constant if long-run average inflation or credit constraints change Institutions matter (eg penalties for default) Market segment matters (owners or landlords?) Measuring (sustainable) lending standards

Assessing the Extent of the Damage How badly have things gone wrong? What implications for macroeconomy / financial system? Different measures –NPLs, impaired assets, arrears, foreclosures –Model effect on consumption, investment, financial sector’s loan losses, etc

Concluding Remarks FSIs (or other rules of thumb) are not a substitute for human analysis Macro indicators alone can lead us astray Institutional details matter Be aware of distribution across agents “Soft signals” might be informative –Especially the existence of practices unique to that country