FINANCIAL CORPORATIONS SECTOR Leslie Nootenboom

Introduction S.11 Non-financial corporations S.12 Financial corporations S.13 Government S.14 Households S.15 Non-profit institutions serving households S.2 Rest of the world

Contents General topics: Characteristics of subsectors of financial corporations (S.12) Specific topics: FISIM, investment income attributable to shareholders, securitisation of assets, calculation of non-life insurance output using adjusted claims and the recording of pension liabilities

Subsectors of financial corporations S.121 Central bank S.122 Deposit-taking corporations except the central bank S.123 Money market funds (MMFs) S.124 Non-MMF investment funds (Non-MMFs) S.125 Other financial intermediaries S.126 Financial auxiliaries S.127 Captive financial institutions and money lenders S.128 Insurance corporations (IC) S.129 Pension funds (PF)

S.121 Central bank This subsector’s principal function is to issue currency, to maintain the internal and external value of the currency and to hold all or part of the international reserves of the country.

S.121 Central bank Current accounts Balance sheets Output is equal to the sum of costs Resources are dominated by interest (D.41) Uses are dominated by dividends (D.421) Balance sheets Assets consist mainly of monetary gold & special drawing rights (AF.1) Liabilities consist mainly of currency and deposits (AF.2)

S.122 Deposit-taking corporations Deposit-taking corporations’ business is to receive deposits and, for their own account, to grant loans and/or to make investments in securities.

S.122 Deposit-taking corporations Sources For the current and capital accounts: Finrep For the financial account: Social-economic reports (SE); only opening and closing balance sheets. Exchange rates (to determine other changes) Stock market indices (to determine other changes)

S.122 Deposit-taking corporations Current accounts Output consists mainly of fees and FISIM Resources are dominated by FISIM (P.119) and interest (D.41) Uses are dominated by interest (D.41)

S.122 Deposit-taking corporations Balance sheets Assets are dominated by loans (AF.4) and securities (AF.3) Liabilities are dominated by deposits (AF.2)

S.122 Deposit-taking corporations Financial Intermediation Services Indirectly Measured Calculated for types (n) of loans (A) and deposits (D) Interest spread (p) based on a reference rate (rR) Average balance (q) and period (t)

S.122 Deposit-taking corporations Financial Intermediation Services Indirectly Measured

S.123 Money Market Funds (MMFs) MMFs’ business is to issue investment fund shares or units as close substitutes for deposits, and, for their own account, to make investments primarily in money market fund shares/units, short-term debt securities, and/or deposits. Source DNB (opening and closing balance sheets)

S.123 Money Market Funds (MMFs) Current accounts Output is equal to the sum of costs Resources are dominated by interest (D.41 ) Uses are dominated by investment income attributable to shareholders (D.443) Balance sheets Assets are dominated by deposits (AF.2) and securities (AF.3) Liabilities are dominated by investment fund shares (AF.52)

S.124 Non-MMF investment funds Non-MMF investment funds’ business is to issue investment fund shares, and, on their own account, to make investments other than short-term financial assets and in non-financial assets (usually real estate). Source Direct Report (DRA) from DNB

S.124 Non-MMF investment funds Current accounts Output consist of rental income and fees. The output value of fees is equal to the sum of costs Resources are dominated by interest (D.41) and dividends (D.421) Uses are dominated by investment income attributable to shareholders (D.443)

S.124 Non-MMF investment funds Balance sheets Financial assets are dominated by securities (AF.3) and shares (AF.5) Financial liabilities are dominated by investment fund shares (AF.52)

S.124 Non-MMF investment funds Investment income attributable to shareholders (D.443) Dividends attributable to collective investment fund shareholders (D.4431) -> data source available Retained earnings attributable to collective investment fund shareholders (D.4432) -> no data source available.

S.124 Non-MMF investment funds Retained earnings attributable to collective investment fund shareholders (D.4432) D.4432 is calculated. Net saving is equal to 0. Retained earnings are re-injected into the fund and recorded as a transaction in the financial account (F.52).

S.125 Other financial intermediaries Other financial intermediaries’ business is to incur liabilities in forms other than currency, deposits, or investment fund shares, or in relation to insurance, pension and standardised guarantee schemes. Examples Financial vehicle corporations engaged in securitisation transactions (FVC) Non-MFI subsidiaries of MFIs

S.125 Other financial intermediaries Sources FVC: quarterly (from DNB) Non-MFIs and lease: DNB (annually, only opening and closing balance sheets) Other OFIs: annual reports Current accounts Output consist of fees and FISIM. Resources are dominated by FISIM and interest (D.41) Uses are dominated by interest (D.41)

S.125 Other financial intermediaries Balance sheets Assets are dominated by loans (AF.4) Liabilities are dominated by long-term securities (AF.32) and loans (AF.4)

S.125 Other financial intermediaries Securitisation of home mortgages MFI Assets Liabilities Home mortgages -10   Long-term securities 10 FVC Long term securities

S.125 Other financial intermediaries

S.126 Financial auxiliaries Financial auxiliaries are engaged in activities closely related to financial intermediation but which are not financial intermediaries themselves. Examples Head offices of financial corporations Insurance agents Pension consultants

S.126 Financial auxiliaries Sources Quarterly and annual reports Market indicators Current accounts Output consist of fees (charges for financial services) Resources are dominated by output and dividends (D.421) Uses are dominated by dividend (D.421) and interest (D.41)

S.126 Financial auxiliaries Balance sheets Assets and liabilities are dominated by shares (AF.5)

S.127 Captive financial institutions and money lenders The captive financial institutions and money lenders are neither engaged in financial intermediation nor in providing auxiliary services, and most of either their assets or their liabilities are not transacted on open markets. Examples SPEs Holding companies

S.127 Captive financial institutions and money lenders Sources SPEs; quarterly data from DNB Holding companies; annual reports

S.127 Captive financial institutions and money lenders Current accounts Output is equal to the sum of costs Resources and uses are dominated by dividends (D.421) and interest (D.41)

S.127 Captive financial institutions and money lenders Balance sheets Assets and liabilities are dominated by shares (AF.5) and loans (AF.4)

S.128 Insurance corporations Insurance corporations are engaged in financial intermediation as a consequence of the pooling of risks mainly in the form of direct insurance or reinsurance

S.128 Insurance corporations Sources Direct Report (DRA) from DNB; insurance corporations under supervision. Annual reports; insurance corporations not under supervision

S.128 Insurance corporations Current accounts Output; different calculations for life insurance and non-life insurance services Resources are dominated by net non-life insurance premiums (D.71) and output. Uses are dominated by non-life insurance claims (D.72).

S.128 Insurance corporations Balance sheets Assets are dominated by securities (AF.3) and shares (AF.5) Liabilities are dominated by life insurance and annuity entitlements (AF.62) and pension entitlements (AF.63)

S.128 Insurance corporations Output of non-life insurers The output value for non-life insurance is equal to: Premiums earned Plus premium supplements Minus adjusted claims incurred

S.128 Insurance corporations Method of adjusting claims We use in our calculations the average of the inflated claims of the last 5 years (using the consumer price index on insurances)

S.128 Insurance corporations Example

S.128 Insurance corporations Net non-life insurance premiums (D.71) are calculated with substraction of the insurance service (based on adjusted claims) Non-life insurance claims (D.72) are equal to the real insurance claims

S.128 Insurance corporations Calculation of the output value of life insurance and pensions Output is equal to premiums earned + plus premium supplements – benefits due – increases in life insurance (and pension) technical reserves

S.128 Insurance corporations Alternative method: sum of costs Sum of costs is equal to intermediate consumption plus wages/salaries of employees and the employers’ social contributions plus an allowance for ‘normal profit’.

S.128 Insurance corporations Allowance for normal profit: Calculated with help of average yield on perpetual bonds

S.129 Pension funds Pension funds are engaged in financial intermediation as the consequence of the pooling of social risks and needs of the insured persons (social insurance). Sources Direct reports (from DNB)

S.129 Pension funds Current accounts Output is equal to the sum of costs. Resources are dominated by net social contributions (D.61) Uses are dominated by other social insurance pension benefits (D.6221), investment income payable on pension entitlements (D.442) and the adjustments for the change in pension entitlements (D.8).

S.129 Pension funds Balance sheets Assets are dominated by investment fund shares (AF.52) and securities (AF.3) Liabilities are dominated by pension entitlements (AF.63)

S.129 Pension funds Importance of pension funds relative to the size of the economy, OECD countries, 2010 (OECD)

S.129 Pension funds Recording of pension liabilities Pre-revision: the other changes of the pension reserves (AF.612 in ESA1995) were mainly affected by changes in stock prices, exchange rates and bond prices. Post-revision: the other changes of the pension entitlements are largely affected by a change in the interest rate.

S.129 Pension funds Buffers of pension funds are considered equity capital of pension funds. There is one exception: Buffers of corporate pension funds with defined benefit schemes are taken into account in the transaction claims of pension funds on pension managers (AF.64).

S.129 Pension funds The financial transaction of pension entitlements (F.63) consists of additions less reductions. The additions consist of actual contributions and contribution supplements, after deduction of service charges. The reductions consist of pension benefits.

S.129 Pension funds The employers’ imputed pension contributions only contains the premium surpluses/shortages of corporate pension funds. The investment income payable on pension entitlements (D.442) is equal to households’ pension contribution supplements (D.6141).

S.129 Pension funds The opening and closing balance sheets are obtained from our data source (the Dutch central bank). The financial transaction is calculated. The other changes are equal to the difference between the closing and opening balance sheet minus the financial transaction.

S.129 Pension funds

S.129 Pension funds The recording of only actual contributions in the case of non-corporate pension funds causes a somewhat strange situation in pension entitlements (AF.63): The balance sheets of AF.63 are based on actuarial calculations. The financial transaction F.63, which is calculated with contributions and benefits, is based on actual payments.

S.129 Pension funds

Financial corporations sector Thank you very much for your attention!

FINANCIAL CORPORATIONS SECTOR Leslie Nootenboom