Accounting for Credit Default Risk
in FISIM
Brent Moulton
Advisory Expert Group on National Accounts
13–15 April 2016
Overview
• What is credit default risk?
• How does it affect measured FISIM?
• Should it be included in FISIM?
• Proposal to remove credit default margin from
FISIM
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What is credit default risk?
• Paper refers to “charge-off rates”
– Loan write-offs per period divided by loan balances
• Credit default risk
– Risk that a loan won’t be repaid
– May be measured by expected (normal) charge-off
rate (“default margin”)
• Credit default risk varies across
– Type of loan (credit card versus mortgage)
– Time (before and after financial crisis)
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How does credit default risk affect FISIM?
• Financial institutions charge higher interest rates to
borrowers with higher credit default risk
• Credit default risk is included in borrower FISIM
r loan = r reference + s
r loan = interest rate on loans, r reference = reference rate, s = FISIM
• During periods of higher risk, lenders charge higher
interest rates, causing borrower FISIM to grow
– In United States (under old SNA 1993 treatment)
commercial bank borrower FISIM at current prices
increased 45% from 2007 to 2011.
– Thus, even though gross lending was flat, measured
nominal bank output was increasing
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Should credit default risk be included in
FISIM?
• FISIM is a source of funds (instead of explicit fees)
allowing financial intermediaries to purchase labor,
capital, and intermediate consumption to produce
services
• But the credit default margin is not available to pay
for labor, capital, or intermediate consumption
– Analogous to exclusion of adjusted claims from measured
services of non-life insurance
r loan – d = r reference + s
d = default margin
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Previous Task Force and AEG recommendations
• In 2012 issues paper, majority of FISIM task force
concluded that credit default risk should be excluded
from FISIM, but recommended waiting for Eurostat tests.
• At 2012 AEG meeting, majority of AEG supported
excluding credit default risk in principle, but recognized
that it may be difficult to exclude it in practice.
• In 2013 final report, FISIM task force recommended on
practical grounds that credit default risk remain part of
FISIM, but recommended further research.
• At 2013 meeting, AEG could not agree on the conceptual
merits of either excluding or including credit default risk
and recommended that research continue.
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Proposal to remove credit default margin
• Charge-off rate generally not an appropriate measure
of credit default margin
– Volatile
– Charge-off rates refer to past loans that may have been
non-performing for a while
– Conceptually, prefer ex ante measure of expected default
rate, relevant to interest rates currently being negotiated
• Alternative treatment – analogous to SNA 2008
treatment of adjusted claims in non-life insurance:
dQ = dQ – 1 + 0.075 (cQ – dQ – 1)
Q = quarter, Q – 1 = previous quarter, cQ = charge-off rate
Parameter of 0.075 is based on average loan maturity for U.S.
banks of about 3 years
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1985.1
1985.4
1986.3
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1988.1
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1989.3
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1991.1
1991.4
1992.3
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1997.1
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1998.3
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2000.4
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2003.4
2004.3
2005.2
2006.1
2006.4
2007.3
2008.2
2009.1
2009.4
2010.3
2011.2
U.S. banks—actual charge-offs on loans and expected defaults
Billions of current dollars, annual rate
200
160
120
80
40
0
Quarter
Expected default
Total domestic charge-offs, unadjusted
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Effects of alternative treatment on U.S.
national accounts
• BEA implemented this alternative treatment as part
of its 2013 comprehensive revision
• For 2008, reduced overall commercial bank FISIM
about 17%
• Because borrower services mostly assigned to
intermediate consumption, effect on GDP was
smaller
– Revised down less than 0.1%
• Previously published increase in borrower FISIM (in
current prices) of 45% from 2007 to 2011 was revised
down to about 1%.
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Proposal doesn’t deal with other issues
This proposal is distinct from several other FISIM issues that
have been discussed:
• There’s an argument that interest on non-performing
loans shouldn’t be included in calculation of FISIM
borrower services
– Our proposal here, however, refers to principal, not interest
• Wang and coauthors (Basu, Fernald, Inklaar) have
proposed also removing risk premium from FISIM
– Default margin refers to expected loss (1st moment)
– Risk premium refers to premium required for risk averse investors
to hold higher variance debt (2nd moment)
– Risk premium includes, and generally larger than default margin
• Proposal doesn’t require changes to SNA treatment of
loan write-offs in “other changes in assets” account
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Questions for discussion
• Should there be a “next step” in continuing
research on this proposal?
• If so, what should the next steps be?
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