1st Meeting Eurostat Task Force Luxembourg October Susan Kluth and Derick Cullen Financial Intermediation Services Indirectly Measured (FISIM) and the Consumer Price Index (CPI):The Australian Experience

 FISIM in ABS Macroeconomic Statistics  Data & Methods in deriving FISIM for CPI  Concepts, Scope and Policy Issues  Methods Issues  Cost of Funds  Problem Areas  Conclusion  Contacts Contents

FISIM in ABS Macroeconomic Statistics  In national accounts and balance of payments since 1998  reviewed in 2009  2008SNA / BPM6  global financial crisis  In Quarterly CPI since 2005  experimental from 2000  reviewed 2010  historical review (16th Series)  global financial crisis

SNA: FISIM and Interest

Data & Methods in deriving FISIM for CPI  Data source  Derivation  Reference rates  Weighting  Impacts

Sample producti Derive constant price balanceBi * CPIt/CPI0 Calculate average interest rate (yield) on each type of account Yi Calculate difference between product yield and reference rate Yi - RR (loans) RR -Yi (deposits) Multiply by indexed balance to determine interest margin on product Mi = (Yi - RR)*Bi * CPIt/CPI0 (loans) Mi = ( RR-Yi)*Bi * CPIt/CPI0 (deposits) calculate a price index for each product based on the margin movements and then aggregate the product indexes P= Sum Pi Data and Method of Calculating FISIM in CPI Data source is special report to ABS of balance and price data for retail products

Yields and Reference Rates

Impact on CPI Weight in CPI is significant ~ 4% of expenditure, dependent on how FISIM calculated

Conceptual and Policy Issues  SNA, BPM and ILO Prices Manual: FISIM part of household consumption  ILO manual  FISIM is Monetary Final Expenditure  indirect measurement not an issue  part of ref aggregate #1 (outlays CPI)  part of ref aggregate # 2 (acquistions CPI)  Australia does acquistions CPI  "Investment related" expenditures

Policy Feedback:CPI FISIM and Cash Rate answer is disclosure, not omission

 Sampling  Aggregation and Predictability  Weighting Procedures  Institutional Indexes and Reference Rates  Data Quality and Sensitivity  Inertia Methods Issues

Sampling Issues

Predictability:Index Replication

Aggregation: Compositional Change

Weighting Procedures

Other Issues  Institutional Indexes and Reference Rates  institutional reference rates perform better  Data Quality and Sensitivity  hypersensitive –large balances –small margins –large weights  weighting  Inertia  not of large concern

Cost of Wholesale Funds  Rationale  in GFC spreads of bank wholesale funding to cash / deposits / goverment bonds widened  loan rates increased  but not a margin increase  Cost of Funds with single reference rate  according to standards  Cost of Funds with Multiple reference rates  analogy to retail margins: sales less cost of goods sold  cost of goods different for deposits and loans

Bank Funding Ratios

Cost of Funds: Single Reference Rates

Cost of Funds: Single Reference Rate Outcomes

Cost of Funds: Multiple Reference Rates

Cost of Funds: Multiple Reference Rate Outcomes

Problem Areas  Fixed Rate Products  Cost of Funds and Hedging  Fair Values  Securitisation  Interpretation of FISIM Statistics

Fixed Rate Products Options... (a) reference rates tailored to fixed rate characteristics (debtor approach) (b) adjust balances to account for current yields (creditor approach)

Adjusting Fixed Rate Product Yields

Fixed rate adjustment: one bank

Fixed rate adjustment: next bank

Other Problem Areas  Hedging and measuring cost of funds  SNA, derivatives and "income"  Fair value changes for loans  scope for FISIM  impact of write-offs/write backs on margin policy  Treatment of securitised loans  sale to vehicle: cost of funds for FISIM  look through: relevance of deposits

Interpretability: Nominal and Volume Indexes

Interpretability: Nominal and Volumes with cost of funds

Conclusions: FISIM in CPI  conceptual criticisms not valid  hypersensitivity  data quality and methods  incremental improvements possible  significant conceptual and methods issues  fixed rate products, hedging, fair values, reference rates  solutions seem to indicate "more data"  Predictability and Interpretability  detailed data and methods disclosures

Questions?  Contacts  