FISIM | May 2014
Changes to the UK National Accounts: Financial
Intermediation Services Indirectly Measured
(FISIM)
Authors: Karen Grovell and Daniel Wisniewski, Office for National Statistics
Date: 29 May 2014
Executive summary
This article covers the changes to financial intermediation services indirectly measured
(FISIM) that will be introduced when revised figures for the UK National Accounts, consistent
with Blue Book 2014, are published in September 2014.
The change to FISIM is as a result of ensuring comparability in measuring Gross National
Income (GNI) across the European Union (EU).
The ONS implemented the concept of FISIM into the UK National Accounts at Blue Book
2008. The Office for National Statistics (ONS) in collaboration with the Bank of England
(BoE) have reviewed FISIM methodology, and will be implementing improvements to the
reference rates used in calculating current price FISIM. In addition, interbank FISIM,
calculated on services between FISIM producing financial intermediaries, has been removed
following clarity in international statistical standards.
1
Introduction
Gross National Income (GNI) is an important statistic within the National Accounts. It is used
in the calculation of a Member State’s contribution to the EU budget. Due to its operational
importance, the EU statistical office (Eurostat) carries out regular audits of the methods and
data used to estimate GNI. In 2012, following a comprehensive audit of the methods used
across EU countries, a number of areas for improvement were identified which Member
States have to address by 2014. One of the improvements is to bring the calculation of
FISIM in line with European regulation; this article provides a technical overview of the
associated methodology. The UK National Accounts, consistent with Blue Book 2014, will be
published in September 2014 and will include improvements to methods and data to address
this issue with respect to the UK.
This article does not provide a numerical assessment of the impact; this can be found in the
article ‘Impact of ESA95 changes on current price GDP estimates’.
1.1
Overview of the key methodological changes
The ONS implemented the concept of FISIM into the UK National Accounts at Blue Book
2008. Recently an international task force led by Eurostat, the European Central Bank (ECB)
and the Organisation for Economic Co-operation and Development (OECD) reviewed FISIM
methodology. The report of that task force was used by Eurostat to redefine the regulation
and was used by the ONS and BoE to review UK FISIM estimates. Although European
regulations are closely followed both in the calculation of FISIM and in the allocation of
FISIM into user sectors, to come fully in line with regulations the UK will be implementing a
number of improvements; firstly, the reference rates used in calculating current price FISIM
will be changed, resulting in a new internal reference rate and a new external reference rate;
and secondly, interbank FISIM will be removed following clarity in international statistical
standards.
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National Accounts concepts
FISIM is the process whereby a financial institution such as a bank accepts deposits from
units (people and institutions) wishing to receive interest on funds, and lends them to units
wishing to borrow. The bank acting as an intermediary provides a mechanism to allow the
first unit to lend to the second. The unit lending funds accepts a rate of interest lower than
that paid by the borrower. A 'reference rate' of interest is the rate at which both lender and
borrower would be happy to strike a deal. The difference between interest calculated at the
reference rate and interest actually paid to depositors and charged to borrowers is a financial
intermediation service charge indirectly measured (FISIM). Total FISIM is the sum of the
implicit fees paid by the borrower and the lender.
FISIM are produced by the following financial intermediaries (FIs): deposit-taking
corporations except the central bank (S.122); and other financial intermediaries, except
insurance corporations and pension funds (S.125).
Interbank FISIM are the FISIM produced between FIs. By convention, no interbank FISIM
has to be calculated between resident FIs, nor between resident FIs and non-resident FIs.
FISIM are calculated in respect of non-bank user institutional sectors only.
FISIM are allocated into intermediate and final consumption. A full description of the
implementation of FISIM in the UK National Accounts can be seen in the article, ‘Improving
the measurement of banking services in the UK National Accounts. Economic & Labour
Market Review’.
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3.1
Data sources and methodology
Current approach
3.1.1 Current calculation of reference rates
According to European regulation, the internal reference rate used to calculate FISIM in
relation to resident user sectors should be calculated as the ratio of accrued interest
received on interbank loans to the corresponding average stocks. However, in the UK we
use official interest rates as the reference rates. The sterling rate applies to sterling business
and Euro/US rate applies to foreign currency business, based on the resident sector split of
balance sheet holdings. Regulation also specifies that an external reference rate should be
used to calculate FISIM exports and imports stemming from business with non-residents.
This is calculated as the ratio of accrued interest received on loans and paid on deposits
between resident and non-resident FIs to the corresponding average stocks. However,
separate data with non-resident FIs were not available in the UK, and the external reference
rate is calculated as the mid-rate between the calculated loan and deposit rates from the
stocks and interest data (see 3.2.1 below).
3.1.2 Current interbank FISIM
Recent guidance clarifies that “by convention, no interbank FISIM have to be calculated
between resident FIs, nor between resident FIs and non-resident FIs. FISIM are calculated
in respect of non-bank user institutional sectors only.” (European System of Accounts (ESA
2010) section 14.11). Currently the UK excludes the calculation of interbank FISIM between
resident deposit-taking corporations except the central bank (S.122); it also excludes
interbank FISIM between non-resident deposit-taking corporations except the central bank
(S.122) and resident FIs.
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3.2
New approach to be implemented in September 2014
3.2.1 New calculation of reference rates
Internal reference rate
Following the regulation, the rate can be calculated using either loans or deposits data, or
both, depending on which is more reliable. It was agreed (between ONS and BoE) that the
loan data was of better quality than the deposit data, and thus the new reference rate is
calculated as follows:
Internal reference rate = interest receivable on domestic (intra-UK) interbank loans
average stock of domestic (intra-UK) interbank loans
The average stock of loans over the quarter is calculated as an average of the monthly data
reported in the four months across the quarter
External reference rate
The regulation specifies that the calculation of the external reference rate should follow a
similar approach using interest flows and comparable stocks for business with non-resident
banks. However, using this approach in the UK raises several concerns. The biggest of
which is the effect that large intrabank flows have on the reference rate. As London is a
major financial centre, there are sizeable intrabank loans and deposits, which are often just
used for liquidity/cash flow management purposes, rather than reflecting true funding. The
associated interest does not reflect the cost of funding or a realistic price of risk, so there are
often large balance sheets with little corresponding interest resulting in an unrealistically low
reference rate. The low reference rate then leads to sustained and implausible negative
deposit FISIM when applied to non-bank sectors.
This issue was discussed with Eurostat, and they supported the UK’s efforts to bring
methodology closer in line with the guidance but understood the UK’s concerns with the
proposed approach to calculating the external reference rate.
Considering that the use of a separate external reference rate seems inappropriate for the
UK, Eurostat agreed that the resident reference rate can be applied in the UK for calculating
exports and imports of FISIM. This more accurately reflects the pure cost of funding for
banks, creating a more realistic time series.
3.2.2 New interbank FISIM
In the new approach to the calculation of FISIM the convention of interbank FISIM has been
comprehensively adhered to. In addition to the current practice of on interbank FISIM (see
3.1.2), the UK will exclude interbank FISIM between resident deposit-taking corporations
except the central bank (S.122) and resident other financial intermediaries (S.125); it will
also exclude interbank FISIM between resident deposit-taking corporations except the
central bank (S.122) and non-resident FIs.
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4.1
Impact of the changes
Impact overview
This article does not provide a numerical assessment of the impact; this can be found in an
associated article ‘Impact of ESA95 changes on current price GDP estimates’.
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FISIM | May 2014
In the new methodology the reference rates are generally higher. This has the impact of
reducing the margins receivable by FIs on loans and increasing the margins receivable by
FIs on deposits.
GDP and final consumption FISIM
Revisions to GDP are positive in most periods. The overall change to final consumption
FISIM is mostly from large upwards revisions to consumer deposit FISIM across the period.
These are then partly offset by downwards revisions to both export loan and deposit FISIM.
Resident FISIM
With respect to the changes to resident FISIM, revisions are driven by the change in
reference rate. The new methodology more realistically reflects interbank lending rates,
which are higher than official interest rates in all periods, and significantly so during the UK
financial crisis. The reference rate is thus higher in all periods; the result being higher
deposit FISIM and lower loan FISIM than we see in current data. Given that the deposit
stocks that feed into final consumption FISIM are larger than the corresponding loan stocks,
the increase in deposit FISIM exceeds the fall in loan FISIM. The exception to this is when
the margin on deposits turns negative.
The largest revisions are within consumer deposit FISIM. These occur because of the high
proportion of stocks here relative to other sectors. Any increase in margin caused by the
increase in the reference rate therefore impacts consumer deposit FISIM most significantly.
This impact is at its largest during 2008-2009 where the difference between current and new
reference rates is greatest; during periods when there is less stress on interbank markets
these revisions are reduced significantly.
Under the current methodology the low reference rate resulted in persistent negative
consumer deposit FISIM from Q3 2008. While there are still some periods of negative FISIM
under the new methodology, these are much smaller than those seen previously and
intuitively the concept of negative consumer deposit FISIM on a small scale is credible. The
change in methodology has therefore led to a much more plausible time series.
Non-resident FISIM
Revisions to non-resident FISIM will be predominantly downwards across the period. These
are for the most part driven by the exclusion of interbank FISIM FI business. As outlined in
section 3.2.1, export FISIM is currently calculated on business with all non-resident FIs,
while the new methodology will calculate export FISIM only on business with non-resident
non-FIs. The removal of interbank FISIM FI business will therefore lead to a fall in both
export loan and deposit FISIM. The largest revisions will occur over 2008 where in current
data there is a peak. This was caused by a sharp increase in both non-resident loan and
deposit stocks over the year, the majority of which was business with non-resident FIs. This
large increase in stocks led to elevated FISIM exports, when in reality FISIM should not have
been calculated on the majority of this activity. By removing interbank FISIM FI business we
get large downwards revisions to both loan and deposit FISIM exports, but this is a more
accurate depiction of the real time series.
The change in the reference rate also impacts non-resident FISIM, but works in the
opposition direction to the removal of interbank FISIM FI business. The change in the
reference rate alone increases total export FISIM, as the rate increases across all periods
reducing loan FISIM but increasing deposit FISIM. As on the resident side, the deposit
stocks are larger, and thus the increase here more than offsets the fall in loan FISIM. The
removal of interbank FISIM FI business, however, exceeds this effect. Around 75-80% of all
non-resident loan and deposit stocks are with FIs; by removing this non-resident business,
FISIM exports fall significantly. It is therefore this methodological change that is driving the
revisions to non-resident FISIM.
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Conclusions
The changes that have been made bring the UK National Accounts in line with international
statistical standards. The new reference rates better reflect the cost of funding for FIs. This
combined with the removal of interbank FISIM greatly improves the UK’s FISIM time series.
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Contact
Karen Grovell email: Karen.l.grovell@ons.gov.uk
7
Acknowledgements
ONS would like to thank their BoE colleagues for their contribution to this paper: Katrina
Farrell, Lauren Bowers, Perry Francis and Tristan Broderick.
8
References
Akritidis, L. (2007): Improving the measurement of banking services in the UK National
Accounts. Economic & Labour Market Review
European System of Accounts (ESA 2010)
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