1 Update on Work of ISWGNA Task Force on FISIM Herman Smith UNSD/DESA Workshop on the Implementation of the 2008 SNA, Kiev, 29 November – 2 December 2011 Agenda item 6c

2 Outline of Presentation Background to FISIM issue Terms of Reference of ISWGNA Task Force on FISIM Update on work of ISWGNA Task Force Conclusions Way forward

3 Background to FISIM Issue Calculation of FISIM Refined with every SNA revision Financial services are defined in paragraph 4.98 of the 2008 SNA: The production of financial services is the result of financial intermediation, financial risk management, liquidity transformation or auxiliary financial activities

4 Background to FISIM Issue Calculation of FISIM Broad international consensus to investigate further On 2008 SNA Research Agenda

5 Background to FISIM Issue Calculation of FISIM ∙ ISWGNA Task Force to deal with clarification issue and focus on determining at most one reference rate per currency for calculating FISIM ∙ Coordination with regional Task Forces ∙ European ∙ Latin American

6 Terms of Reference of ISWGNA Task Force on FISIM ISWGNA Task Force to address 4 clarification questions ∙ Risk management ∙ Liquidity transformation ∙ Consistency of FISIM in international trade ∙ Implications for price and volume measures

7 Terms of Reference of ISWGNA Task Force on FISIM Risk management (How to characterise and reflect risk management/mitigation activities, including exchange rate risk, in FISIM?) – 2 views ∙ 1 st view – Include risk premium in FISIM ∙ Covers risk mitigation activity ∙ Do not match reference rate to risk profiles of loans/deposits ∙ 2 nd view – Exclude risk premium from FISIM ∙ Represents distributional flows, not payment for services ∙ Use risk-matched reference rates

8 Terms of Reference of ISWGNA ask Force on FISIM Liquidity transformation (How to reflect transformation of short-term deposits into long-term loans in FISIM?) – 2 views ∙ 1 st view – Include this element in FISIM ∙ Use reference rate not matched to specific maturities of loans/deposits ∙ 2 nd view – Exclude this element from FISIM ∙ Use maturity-matched reference rates ∙ Question of whether FISIM should cover cost of hedging term risk arising from deposit-taking corporations lending long-term and borrowing short- term

9 Terms of Reference of ISWGNA Task Force on FISIM Consistency of FISIM in international trade ∙ How is equality of exports and imports of FISIM between economic territories affected by ∙ Conversion between domestic and foreign currencies? ∙ Choice of reference rate? ∙ Link to idea of using different reference rates for different currencies ∙ Need for national accounts compilers to provide exports and imports of FISIM by institutional sector (including the rest of the world) to improve coherence between national accounts and balance of payments statistics

10 Terms of Reference of ISWGNA Task Force on FISIM Implications for price and volume measures ∙ How will the clarification of above issues, including the choice of reference rate, affect price and volume measures of FISIM?

11 Update on work of ISWGNA Task Force Two meetings held March 2011 July 2011 Attended by wide range of experts from various countries and international organisations Intense and extensive discussions on the four clarification questions

12 Conclusions Risk Management General agreement that credit default risk should excluded from FISIM However, by convention, it may not be excluded due to lack of information

13 Conclusions Liquidity transformation Term premium should be included in FISIM, but a single reference rate should be used Tests will be conducted on the following various methods to calculate reference rate Single reference rate using inter-bank lending rates Matching reference rate using different rates for short-term and long-term deposits and loans

14 Conclusions Liquidity transformation 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

15 Conclusions Consistency of FISIM in international trade Single reference rate should be used to calculate domestic FISIM Appropriate reference rates for should be used to calculate FISIM for each underlying currency When stocks of deposits and loans are not available to allocate FISIM to industries, shares of value added could be used International cooperation is needed to obtain information on FISIM imports using mirror statistics on the exports of FISIM

16 Conclusions Price and volume measures In principle, output indicators could be used to calculate volume measures of FISIM However, method is data intensive Also, difficult to determine weights for the output indicators Deflated stocks approach preferred To use general price indices (excluding FISIM) as deflators

17 Way forward Draft preliminary report Detailed guidance, including formulae, on tests Decision on need for additional meeting Final report to include results of tests Timeline for completion of reports to be determined after evaluation of time needed for tests

18 Thank you