ISWGNA Task Force on FISIM
Status Report
OECD Working Party on Trade in Goods and Services
Paris, November 2011
Contact: nadim.ahmad@oecd.org
A simple world
Loans matched to deposits
Assuming no credit-default risk
• Matched-maturity
approach = single
reference rate approach
120
100
80
Loans
60
Deposits
40
20
0
1
2
3
4
A slightly more complicated
world
Loans = deposits but not matched
300
250
200
Loans
150
Deposits
100
50
0
1
2
3
4
• (assuming margin rate is
the same for all
maturities) Matchedmaturity approach is
unchanged.
• But FISIM higher with
single reference rate
approach.
• Liquidity transformation
services?
Background
• Task Force created in late 2010.
• Partly in relation to 2008 SNA research agenda:
– The SNA recommends that FISIM should be calculated with
respect to a reference rate that contains no service element
and reflects the risk and maturity structure of deposits and
loans. Different reference rates may be needed for domestic
and foreign financial institutions. The assumption behind the
FISIM approach is that it is the service element, and not the
interest flows, that reflect varying degrees of risk, with riskier
clients paying a higher service charge. This assumption has
been queried and is being investigated.
• But also partly in response to volatile (including
negative) and difficult to interpret FISIM series in wake
of recent financial crisis
Terms of Reference
• Two meetings: March and July 2011 (merged with
European Task Force) with following ToR:
1. How does the composition of the services that
FISIM covers—particularly risk management and
liquidity transformation—affect the selection of the
reference rate and the price and volume
breakdown of FISIM.
2. What should be the financial instrument and unit
scope of FISIM
3. What are the connections between the
recommendations on implementation of FISIM and the
definition of income.
Short-term clarification questions
• How can FISIM be made consistent in
international trade?
• Liquidity transformation, a service or not?
• Credit-default risk? Compensation for riskmitigation/purchased insurance or a
distributive flow (analogous to insurance).
• What are the implications for the price and
volume measures of FISIM?
International Trade
• FISIM should be calculated by at least two groups of
currencies (national and foreign currency).
• But recognition that data availability across countries
is sparse and, so, there may be a need for
international coordination to better estimate the
imports/exports of FISIM through counterparty data.
Liquidity Transformation
• #6.158 of 2008 SNA explicitly recognises that financial
intermediation services include liquidity
transformation.
• SNA refers to FISIM as being:
(RR – RD).D (Deposits) +
(RL –RR).L (Loans)
• However, there is a view that liquidity transformation is
a non-productive activity related to risk-bearing
services, and, so, should be excluded from FISIM.
• Matched-Maturity method removes term-premium
So, e.g. FISIM on Loans
= Σ (RtL –RRt).Lt
Two interesting points
Ignoring credit-default risk
• Matched maturity approach = single reference rate
approach if the maturity structure and size of loans
and deposits is the same. But deposit/loan FISIM
varies. So, extending the range of instruments on
which FISIM could be calculated probably closes the
gap.
• And total FISIM using a single reference rate is the
same irrespective of the reference rate chosen if total
deposits = total loans.
Liquidity Transformation
• Many countries use inter-bank lending rate for RR, which proved
troublesome during the crisis, creating volatility and negative
component estimates of FISIM. Matched maturity rates should
provide greater stability. But the Task Force has tentatively
concluded that the removal of LT would result in implausibly
low estimates of FISIM.
• One key argument for a matched approach related to the view
that the VA of firms should be indifferent to their means of
financing (corporate bond versus a loan – where the term
premium for the former is interest but with a loan it is FISIM). But
the TF felt this assumed an equivalence between bonds and
loans that did not hold, and did not negate the inclusion of LT but
rather raised the question about the instrument and institutional
scope of FISIM.
• The TF also recognised that in removing LT from FISIM it would
by default arise in SNA interest; changing the definition,
Liquidity Transformation
• However.
• The TF recognised that, in practice, the use of single reference
rate based on short-term maturities had proved problematic.
– All other things being equal, does it make sense for the split of FISIM
services provided by a bank to depositors and borrowers to change
(potentially significantly), from one day to the next, in line with changes in the
interbank lending rate, if the bank changes none of the terms and conditions
to borrowers or savers and requires no additional funding itself from one day
to the next? And so affect GDP?
– All other things equal, why should changes in the interbank lending rate
necessarily mean differing price movements in FISIM prices for deposits and
FISIM prices for borrowers, when the bank's actual costs of production have,
to all extents and purposes, remained unchanged?
• And so the TF have tentatively concluded that the reference rate
may be better estimated if it reflects a mix (average) of underlying
rates for deposits and loans with different maturities.
• The TF also considered and still is a ‘Cost of funds’ approach,
which defines the reference rate for an institution based on its
interest costs including the implicit costs of its own funds.
Liquidity Transformation
• Action:- To test the following:
– Single reference rate using inter-bank lending
rates.
– Reference rate calculated using the midpoint of
interest rates on deposits and interest rates on
loans.
– Average reference rate (weighted by the stocks of
short-term and long-term loans and deposits)
calculated using different rates for the short-term
and long-term reference rates.
– Matching reference rates using different rates for
short-term and long-term deposits and loans
Credit-default risk
• The majority of the TF (so far) have concluded that
credit-default risk should be removed from FISIM and
treated in an analogous way to non-life insurance
services.
• Estimates could be derived using information on CDS,
write-offs, provisions. This is currently being tested
using an approach developed by Eurostat. Once these
results have been completed the TF will review its
position, vis-a-vis the feasibility of removing creditdefault risk.
• A secondary issue concerns the accounting treatment
of bad debt write-offs. The insurance analogy would
mean that households receive a transfer from banks
i.r.o of write-offs, increasing saving.
Price and Volumes
• Direct output approach has merit but is a
complex task requiring very detailed data.
• Task Force expressed a preference for direct
deflation methods using a general price index
for deflating stocks of loans and deposits.
• However it was emphasised that the
calculation of volume estimates needed to be
made by type (maturity) of loan and deposit as
the margin varied by maturity.
Next steps
• Preliminary report with TF.
• Tests are being conducted by European
countries (except the matched-maturity
approach) both for reference rate and creditdefault risk.
• ISWGNA TF members conducting similar tests
for reference rate.
• ABS and BEA volunteered to investigate cost
of funds approach.
• Assessment of returns, and subsequent next
steps, to be conducted in Q1 2012.