Financial Services
UN STATISTICS DIVISION
Economic Statistics Branch
National Accounts Section
UNSD/ECA National accounts workshop November 2005
1
1. Definition of financial corporations
2. Treatment of own funds
3. Treatment of SPE and customers
4. Identifying financial services
5. Treatment of holding gains and losses
6. Choice of the reference rate
7. Treatment of market makers
Background
Developments in the financial markets
have changed the way financial
corporations operate
Is the 1993 SNA recommendation for
calculating output of financial
corporation services still relevant?
Current SNA –FISIM
The total value of FISIM is measured in the System
as
the total property income receivable by financial
intermediaries
minus their total interest payable,
excluding the value of any property income
receivable from the investment of their own funds,
as such income does not arise from financial
intermediation
(par 6.125)
Current SNA - allocation
When the output is allocated among different users, one way is
to base the allocation on the difference between the actual
rates of interest payable and receivable and a "reference" rate
of interest.
(a) For those to whom the intermediaries lend funds: the
difference between the interest actually charged on loans, etc.
and the interest based on a reference rate;
(b) For those from whom the intermediaries borrow funds:
the difference between the interest based on the reference
rate and the interest they actually receive.
Current SNA - allocation
The reference rate to be used represents the
pure cost of borrowing…
Alternatively, allocation in proportion to the total
financial assets and liabilities …, or other relevant
financial variables.
Some flexibility is accepted in the way in which
the output is allocated.
Some countries preferred to continue to use the
convention in the 1968 SNA by recording output
of FISIM to intermediate consumption of a
nominal industry.
What has changed?
Risk management
and
Liquidity transformation
SNA93 focuses on activities of the
financial corporations
Financial corporations are defined as:
“…all resident corporations or quasicorporations principally engaged in
financial intermediation or in auxiliary
financial activities which are closely
related to financial intermediation”
(Paragraph 4.77).
Definition of financial
corporations
SNA 93 perspective
• Definition mainly related to activity (financial intermediation)
• Key elements: “Risk taking’’ and “repackaging’’
• No services or composition of assets and liabilities are
specified
• Ambiguity about the role of own funds
Definition of financial corporations
Financial corporations consist of all resident
corporations and quasi corporations that are principally
engaged in providing financial services including
insurance and pension funding services to other
institutional units. The production of financial services is
the result of financial intermediation, risk management,
liquidity transformation and/or auxiliary financial
activities.
Definition of financial corporations
Financial intermediation, financial risk management and
liquidity transformation are productive activities in which an
institutional unit incurs financial liabilities for the purpose of
acquiring mainly financial assets. Corporations engaged in
these activities obtain funds by taking deposits and issuing
bills, bonds or other securities. They use these as well as
own funds to acquire mainly financial assets by making
advances or loans to others and by purchasing bills, bonds,
or other securities.
Definition of financial corporations
Financial services provided include
monitoring services, convenience
services, liquidity provision services, risk
assumption services, underwriting
services and trading services.
Definition of financial corporations


Auxiliary financial activities facilitate the
provision of financial services
Financial auxiliaries – the units that are
primarily engaged in auxiliary financial
activities – typically act on behalf of
other units and do not put themselves
at risk by incurring financial liabilities or
by acquiring financial assets.
Definition of financial corporations
In principle, financial services can be provided as a
secondary activity. In practice, however, in many
countries, the provision of financial services is so
strictly regulated that there may be no other unit
providing financial services. By convention, even if
financial services are provided by non financial
corporations, no indirect charges are imputed. On the
other hand, financial services provided for explicit
charges are recorded as such.
Own funds
SNA 93 perspective
• Relates to units that finance themselves exclusively via
equity.
• SNA (6.134): lending of own funds “ (…) is not financial
intermediation as [units] do not channel funds from one
group of institutional units to another. Lending as such
is not a process of production and the interest received
from the lending of own funds cannot be identified with
the value of any services produced.”
Own funds
The 1993 SNA states that lending own funds does not give
rise to production. While it is true that units lending own
funds do not engage in financial intermediation, with a
broader definition of financial services, units lending own
funds may provide a financial service.
Own funds
At a minimum, an incorporated enterprise (thus with a full
set of accounts) which, as its main activity, provides loans to
a range of clients and incurs the financial risk of the debtor
defaulting, should be treated as a financial corporation. Its
allocation to the appropriate sub-sector has yet to be
determined.
Own funds
In addition, some unincorporated enterprises which
provide loans to a range of clients (other than just
family and friends) on a regular business basis may
also be treated as providing financial services. The
advice of experts from countries where this practice is
widespread is needed to specify when and how such
units are to be identified and whether they are to be
treated as unincorporated enterprises in the household
sector or quasi-corporate enterprises in the financial
sector.
Activities and customers
What about units which :
• Are set up to carry out well-specified activities or
transactions directly related to a specific purpose ?
For example: Asset management, corporate treasury
services, special purpose vehicle companies
Provide financing and asset holding services to one
company ?
For example holding companies and trusts but also
Government sector (public-private partnerships,
securitization programs, etc)
Special Purpose Entities
(SPEs): Institutional units?
Ancillary units:
1. Restriction: “…providing services to the parent
corporation” (SNA 93,paragraph 4.40).
2. “(…) not treated as separate institutional units
because they can be regarded as artificial units
created to avoid taxes, to minimise liabilities in the
event of bankruptcy, or to secure other technical
advantages under the tax or corporation legislation in
force in a particular country’’ (SNA93,paragraph
4.44).
Activities and customers
An entity providing financial services to only one unit or
a group of units is considered to be a separate
institutional unit (and a financial corporation) if it keeps
a complete set of accounts and is capable of acquiring
assets and incurring liabilities on its own account.
Activities and customers
A similar entity which does not have a complete set of
accounts is treated an institutional unit (and a financial
corporation) only if it is resident in a country other than
any of the units to which it is providing the services, in
accordance with SNA/BPM practice of treating nonresident unincorporated enterprises as quasicorporations
Identifying financial services
• Financial services: output provided by financial
corporations to customers, either explicitly or
implicitly
• Financial instruments: means through which financial
corporations provide packages of financial services to
their customers.
Identifying financial services
Financial institutions charge for some services explicitly
and some implicitly. From an economic perspective, all
financial instruments are potentially involved in the
production of financial services. Some financial
instruments attract only explicit charges but several
may attract implicit charges alone or in addition to
explicit charges. Deposits and loans attract implicit
charges and these instruments are included in the
calculations of FISIM. Other instruments may attract
FISIM but will not be included unless a clear allocation
to users is possible. Thus, in practice, FISIM may be
limited by convention to loans and deposits.
Treatment of holding
gains and losses
• Expectations of holding gains provide
incentives to engage in productive
processes.
• Holding gains expectations are part of the
decision making process.
• Holding gains are components of returns
on financial assets.
Treatment of holding
gains and losses
When measuring the implicitly valued output of
financial institutions, the question arises of whether
expected holding gains and losses of financial
institutions on their own account should be included in
the measure. There is no question of including holding
gains and losses as such in a direct measure of output
in the SNA. However, for certain financial instruments,
expected price changes constitute an important part of
expected returns. In principle, therefore, they could be
considered when approximating the value of financial
services indirectly measured.
Treatment of holding
gains and losses
Despite this conceptual position, given the empirical
difficulties in estimating expected holding gains and
losses, it is presently not recommended to include
expected holding gains and losses in the measurement
of financial services output.
The choice of the reference rate
• SNA 93: the reference rate “…represents the pure
cost of borrowing funds – that is a rate from which the
risk premium has been eliminated to the greatest extent
possible and which does not include any intermediation
services”.
The choice of the reference rate
The reference rate used in the compilation of
FISIM should be a risk-free rate that has no
service element in it and that reflects the
maturity structure of the financial assets and
liabilities to which FISIM applies.
It is recommended that a single reference rate
be used for transactions in the local currency,
but different reference rates may be used for
transactions in other currencies.
Market makers
In practice, virtually all transactions in foreign exchange and
securities are carried out via financial corporations. Two
prices are quoted for transactions in securities: a bid price
and an ask price. The first is the price which the potential
buyer is to pay, and the second is the price that the owner
receives on sale. The mid-price is by convention taken to be
the average of these two prices. The difference between the
bid price and the mid price is a margin paid by the buyer to
the financial corporation, and the difference between the mid
price and the ask price is a margin paid by the seller. The
value of securities in the balance sheet is at mid price and
excludes theses margins.
Market makers
Financial corporations buy and sell securities both on their
own account and on behalf of clients. Buying and selling on
behalf of clients may be on demand, that is in immediate
response to an instruction from the client to buy or sell a
specific security. Alternatively, a financial corporation may
acquire a stock of securities in order to meet future demand
immediately. This activity is called market making and may be
undertaken by specialised financial corporations or financial
corporations providing a wide range of financial services.
Quotes, market makers and
margins
The SNA should measure the margins on the buying and
selling of all securities by all financial corporations and
attribute these as being paid by the seller and the buyer
respectively, regardless of the purpose for which the
securities and other instruments are being bought or sold.
When there is a delay between the purchase and sale of a
security, in order to avoid including holding gains and losses,
the margins are calculated on the basis of the prices
prevailing at the time the purchase and sale take place.
Thank You