How To Calculate Fisim

Transcription

1 An alternative methodology for measuring financial services sector output in Ireland 29 th April 214 Central Bank of Ireland Conference: Macro to Micro- A New Era in Financial Statistics Jenny Osborne-Kinch, Dermot Coates, Aoife Moloney (CBI) and Christopher Sibley (CSO)

2 When someone confidently quotes the contribution of financial services to national income, you can be sure they have no understanding of the esoteric concept of financial services indirectly measured (don t ask) (John Kay, Financial Times, 15 th April 214) Challenges to measuring banks output: Explicit charges a Implicit charges? = FISIM

3 Content Motivation and background Current CSO approach used to calculate FISIM ESA 21 approach Alternative methodologies Results Methodological issues and future workplan Conclusions

4 Motivation Value added conundrum of the banking sector; How is banking sector contribution currently measured in annual National Accounts? ; Attempt to fill the gap in research in this area for Ireland; European System of National Accounts (ESA) 21 (September 214).

5 The puzzle At the height of the financial crisis banks balance sheets contracted, suffered large losses in published financial statements; Required capital transfers to the sum of 42.96bn; Yet they continued to generate consistently positive value added; Banking sector value added nearly 7% of GDP in 21. billion 1,6 1,4 1,2 1, % 7.% 6.5% 6.% 5.5% 5.% 4.5% Total Assets of Irish Resident Credit Institutions Source: Money and Banking Statistics, Central Bank of Ireland. Value added of banking sector % of GDP 4.% Source: Central Statistics Office

6 Theory: Calculating Implicit Output (FISIM) Implicit bank output Y is dependent on the spread between the retail interest rates on loans r L and deposits r D and a reference rate r R (riskfree rate), and the outstanding stock of loans (L) and deposits (D). implicit bank output (Y t ) is: Y t = Y t L + Y t D Where Y t L = (r t L r t R )L t and Y t D = (r t R r t D )D t Changes in FISIM explained by volume changes, relative interest rate movements or a combination of both.

7 National Accounts Expenditure Approach (Final Demand) Final Demand = Total FISIM output intermediate consumption Final Demand consists of Loans (excl. mortgages) and Deposits for Households and Gov. Income Approach (Value Added) Value added = Gross Operating Surplus and Compensation of Employees. FISIM major component of Operating Surplus. Final Demand contributes directly to GDP. Total FISIM increases output and GVA of financial sector. FISIM identified explicitly in expenditure approach in annual National Accounts publication NIE 212 (table 13). Value added of other sectors is reduced by the intermediate consumption of FISIM.

8 Current Methodology ESA 95 framework: choice of multiple methodologies for arriving at a risk-free reference rate; Current approach has evolved: - Data availability has improved - Taking into account Council Regulations 448/1998 and 1889/22; Reference rate: estimated using an average of the Eonia Overnight, I,3,12 month Euribor; Retail rate: retail interest rates calculated using the MFI interest rates (MIR) statistics and stock of loans and deposits; Interest margin: spread between retail rates and the reference rate.

9 ESA 21 Methodology per cent Reference Rate Current Approach (CSO Blended Rate) ESA21 Estimates Reference rate: Ratio of interest receivable (or payable) on loans between resident financial intermediaries to the relevant stock. Calculated using quarterly survey data for both loans and deposits with Irishresident banks. Retail rate: Based upon MIR statistics (as per current approach) Ongoing work to derive alternative retail rates using quarterly survey data

10 Alternative Methods 1. Reference rate testing Term spread adjusted #1: Addition of a 5-year swap Term spread adjusted #2: Addition of Irish Government Securities 2. Inclusion of Eurosystem Funding in the reference rate ESA 21 stipulates that FISIM do not need to be calculated for the Central Bank. By convention, output is measured as the sum of costs. Given scale of support to the Irish banking system, we re-estimated the reference rate to include Eurosystem funding.

11 Feb-8 Jul-8 Dec-8 May-9 Oct-9 Mar-1 Aug-1 Jan-11 Jun-11 Nov-11 Apr-12 Sep-12 Feb-13 Jul-13 Dec-13 Comparative Results per cent Reference Rate Reference Rate varies compared to current approach Rate is higher under each scenario when compared to rate under ESA 95 (current approach) ESA 21 ESA 21 (incl EF) Current Methodology Term Premia (1) Term Premia (2)

12 Feb-8 Jul-8 Dec-8 May-9 Oct-9 Mar-1 Aug-1 Jan-11 Jun-11 Nov-11 Apr-12 Sep-12 Feb-13 Jul-13 Dec-13 Results: Impact on GDP Final Demand Impact on GDP: 213 millions Term Premia (1) + 114m.7% Term Premia (2) m.53% ESA 21 (incl EF) + 897m.55% ESA m.71% ESA 21 ESA 21 (incl EF) Current Term Premia (1) Term Premia (2)

13 Methodological Issues and Future Workplan Should we use multiple reference rates? How should risk be measured? Should securities be included in the measurement of FISIM? Should other entities such as treasury companies be included? It would be interesting to examine non-fisim bank output (i.e. explicit charges such as fees and commissions).

14 Conclusions FISIM (implicit charges) contribute to GDP through Final Demand this net contribution is just under 1%. Looking at the alternative scenarios tested, each of these resulted in a higher risk-free reference rate and higher Final Demand. There remains a wealth of conceptual issues to be addressed to further refine our estimates.

15 Thank you for your attention

16 Annex Slides

17 Results: Implications for GDP Table 2: Annual effect of Final Demand on GDP (28-213): millions Total Current ESA 21* ESA 21 (incl EF) Term Premia(1) Term Premia(2) Midpoint Difference to current approach as per cent GDP (in value terms) *Refers to the use of MIR-based retail rates in the first example (see above)

18 Components of FISIM under various methodologies Current ESA 21 ESA 21 (Incl EF) Term Premia(1) Term Permia (2) Midpoint Total FISIM 5,268 5,661 3,337 4,277 3,977 4,594 5,14 5,53 2,972 4,645 3,44 3,936 Intermediate Consumption 5,141 5,313 2,82 2,767 3,93 3,35 4,882 5,69 1,523 3,422 1,62 2,97 Final Demand ,255 1, , ,449 1,224 1,424 1,839

19 Thousands Annex charts Comparative Risk-free Reference Rate per cent billion Eurosystem Funding and Resident Interbank Liabilities Current Approach (CSO Blended Rate) ESA21 Estimates ESA21 Estimates (incl. EF) Eurosystem Funding Resident Interbank Liabilities (L&D)

20 million Current Methodology Millions ESA 21 Methodology Calculation of Risk-free Rate under ESA 21

21 Example of redistribution effect Scenario Total FISIM Output increases by 1 5 of which is attributable to Intermediate Consumption and 5 is attributable to Final Demand. Income Measure of GDP: FISIM Output +1 Consuming sectors Income (Intermediate Consumption) -5-5 Financial Services Income Gross Value Added Expenditure Measure of GDP: FISIM Output +1 Intermediate Consumption +5 Final Demand +5 Gross Value Added + 5 Notes: 1. Household expenditure increases by 5 thereby reducing household income by an equivalent amount. 2. Financial sector output is increased by output of FISIM. Output of other sectors is reduced by intermediate consumption of FISIM.

22 Table 1: Government subventions Billion Government Capital Transfers Government Capital transfers % GDP 29 4, , , Sources: CSO Government Financial Statistics

23 Jan-3 Dec-3 Nov-4 Oct-5 Sep-6 Aug-7 Jul-8 Jun-9 May-1 Apr-11 Mar-12 Feb-13 Jan-14 Rate 1 Yr Irish Sovereign & Market Interest Rates Rate Market Interest Rates & Swaps Irish 1 Yr EONIA EURIBOR 3 MTH Euribor 5 Yr Swap EONIA 2 Yr Swap Rate Irish Sovereign Bond Rates Rate EONIA & EURIBOR 3 Month Irish 1 Yr Irish 5 Yr Irish 3 Yr EONIA EURIBOR 3 MTH