1. Financial Corporations
Leonidas Akritidis
National Accounts in Practice – Advanced course
Luxembourg, 3-12 October 2016
THE CONTRACTOR IS ACTING UNDER A FRAMEWORK CONTRACT CONCLUDED WITH THE COMMISSION

2. Content Definition of Financial Corporations (FC)
Sub-sectors of FC, units and source data
Special treatment of:
Insurance Corporations and Pension Funds
Investment Funds
Market Makers
FISIM

3. Institutional Sectors
Domestic Economy
S.1
Rest
of the
World
S.2
Non-Financial
Corporations
S.11
Financial
Corporations
S.12
General
Government
S.13
Households
S.14
Non-Profit
Institutions
Serving
Households
S.15
Monetary
financial
institutions
S.121
Deposit
taking Co.
S.122
MMF
S.123
Non-MMF
S.124
Other
financial
intermediaries
S.125
Financial
auxiliaries
S.126
Captive
financial &
money lenders
S.127
Insurance
corporations
S.128
Pension
funds
S.129

4. Institutional Sectors

5. Sequence of Accounts Typical source data Non-Financial Account (NFA)
Current Accounts
Non-Financial Account (NFA)
*admin/surveys
Source data:, e.g.
->Profits and loss accounts,
->Income statements
-> Income and expenditure
-> Non-financial balances
Accumu-
Accounts
lation
Financial Account (FA), e.g.
*Financial assets/aiab. balances

6. Sub-Sectors of FC Financial corporations sector (S.12)
Consists of institutional units which are independent legal entities and market producers, and whose principal activity is the production of financial services. Such institutional units comprise all corporations and quasi-corporations which are principally engaged in:
Financial intermediation (financial intermediaries); and/or
Auxiliary financial activities (financial auxiliaries).

7. Sub-Sectors of FC
Financial intermediation is a process of channelling funds between parties with a surplus and those with a lack of funds.
In the financial intermediation process, assets and liabilities of financial intermediaries are transformed or repackaged, e.g. in relation to maturity, scale, risk, etc.
Auxiliary financial activities are activities related to financial intermediation but which do not involve financial intermediation themselves, e.g. head offices, brokers, fund managers

8. Sub-Sectors of FC S.121: Central Bank
The 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
Source data:
-> Accounts of the central banks

9. Sub-Sectors of FC
S.122: Deposit-taking corporations, except the central bank
The deposit-taking corporations except the central bank subsector (S.122) includes all financial corporations and quasi-corporations which are principally engaged in financial intermediation and whose business is to receive deposits from institutional units and to grant loans and/or to make investments in securities
e.g. Banks, Building Societies

10. Sub-Sectors of FC
S.122: Deposit-taking corporations, except the central bank
Source data:
-> administrative or surveys based on the central authority list of units with banking licence, e.g.

11. Data sources: e.g. -> Profits and loss accounts, -> Income statements -> Income and expenditure

12. Source data: Assets and Liabilities balances

13. Sub-Sectors of FC
S.122: Deposit-taking corporations, except the central bank
Non-financial account, main items:
Output (P.1):FISIM (-> more later ! ! !) , imputed market makers spread (-> more later ! ! !), Fees and commisions
Acrued interest (D.41) adjuted for FISIM
Financial Account, main items:
Assets: loans (AF.4) and debt securities (AF.3)
Liabilities: deposits (AF.2) incl. inter-bank

14. Institutional Sectors
S.123: Money market funds (MMF)
Their business is to issue investment fund shares or units as close substitutes for deposits and to make investments primarily in money market fund shares/units, short-term debt securities, and/or deposits
e.g. -> UCI/UCITS, Unit Trusts
S.124: Non- Money market funds (Non-MMF)
Their business is to issue investment fund shares or units which are not close substitutes for deposits and to make investments primarily in financial assets other than short-term financial assets and in non-financial assets (usually real estate)
e.g. -> Hedge Funds, Real Estate Investment Funds

15. Institutional Sectors
S.123: Money market funds (MMF) and S.124: Non- Money market funds (Non-MMF)
Non-financial Account
Output calculated as sum of costs
interest (D.41) receivable
investment income attributable to shareholders (D.443) payable
Financial Account, main items:
Assets: deposits (AF.2) and securities (AF.3)
Liabilities: investment fund shares (AF.52)
-> more later ! ! !

16. Institutional Sectors
S.125: Other Financial Intermediaries
They are principally engaged in financial intermediation by incurring liabilities in forms other than currency, deposits, or investment fund shares, or in relation to insurance, pension and standardised guarantee schemes
e.g. -> financial vehicle corporations (FVC)
security and derivative dealers
financial leasing
Specialised Mortgage/Credit Lenders
Factoring
Venture and development capital companies
Export/import financing companies

17. Sub-Sectors of FC S.125: Other Financial Intermediaries
Non-financial account, main items:
Output (P.1):FISIM, imputed market makers spread, Fees and commisions
Acrued interest (D.41) adjuted for FISIM
Financial Account, main items:
Assets: loans (AF.4) and debt securities (AF.3)
Liabilities: deposits (AF.2) incl. inter-bank

18. Institutional Sectors
S.126: Financial auxiliaries
Not intermediaries ! ! !
Insurance, securities, interment brokers,
Financial consultants
Corporations providing infrastructure for financial markets
Head Offices of financial corporations
Regulatory and Supervisory Authorities
Managers of pension funds, mutual funds
Corporations providing stock exchange and insurance exchange
payment institutions (facilitating payments between buyer and seller)
e.g.->

19. Sub-Sectors of FC S.126: Financial auxiliaries
Non-financial account, main items:
Output (P.1): fees and commissions
Accrued interest (D.41) payable
Dividends (D.421) receivable and payable
Financial Account, main items:
Assets: shares (AF.5)
Liabilities: shares (AF.5)

20. Sub-Sectors of FC S.127: Captive financial institutions
Neither intermediaries nor Auxiliaries ! ! !
Trusts, estates, agencies accounts or 'brass plate' companies
Holding companies
SPEs that qualify as institutional units and raise funds in open markets
Corporations engaged in lending to students or for foreign trade, pawnshops
e.g.->

21. Institutional Sectors
S.127: Captive financial institutions
Non-financial Account
Output calculated as sum of costs
interest (D.41)
dividends (D.421)
Financial Account, main items:
Assets: loans (AF.4) and shares (AF.5)
Liabilities: loans (AF.4) and shares (AF.5)

22. Sub-Sectors of FC 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
-> more later ! ! !

23. Sub-Sectors of FC S.128: Pension finds
Pension funds are engaged in financial intermediation as the consequence of the pooling of social risks and needs of the insured persons (social insurance).
-> more later ! ! !

24. Insurance Corporations and Pension Funds

25. Insurers maximise provisions by investing and getting a return
Sales are not a reference for insurers output, thus their output is calculated as premiums less claims
Insurers maximise provisions by investing and getting a return
Return on investment
premiums
investment

26. However, the provisions belong to the policyholders
Thus, we need to send the money to their owners…and feed it back to the insurer as a supplement to output
premiums
investment
Return on investment
premium supplements

27. The output of life insurance services are calculated as
[gross] premiums earned
+ [gross] premium supplements
- [gross] benefits due
± changes in technical reserves (provisions) *
* Holding gains (realised and not-realised) must be eliminated

28. Important: Life Insurance
Premiums earned = 100
Premium supplements = 20
Benefits due = 65
Change in technical reserves = 50
Holding gains = 10
Output ?

29. Important: Life Insurance
Premiums earned = 100
Premium supplements = 20
Benefits due = 65
Change in technical reserves = 50
Holding gains = 10
Output = 15

30. The output of non-life insurance services are calculated as
[gross] premiums earned
+ [gross] premium supplements
- [gross] adjusted claims incurred*
* Adjusted non-file claims incurred can be calculated:
a) based on past experience (expectation approach), or ;
b) as claims due less changes in equalisation provisions less changes to own funds (accounting approach)
Catastrophic losses must be eliminated and recorded as capital transfers

31. Important: Non-life Insurance
Allocation of output is based on share paid by each customer
In case of non-life, for each insurer-customer relation, we split the premiums payment into
A production flow (P.1 output)
A distributive flow (D.71 net premiums)
There is a second distributive flow (D.72 claims) and correspond other capital transfers recording catastrophic losses (D.99)

32. Important: Non-life Insurance
Premiums + supplements = 100
Claims incurred = 150
Adjusted claims incurred = 70
Output (P.1) = Consumption = 30
Net Premiums (D.71) = premiums – P.1 = 70
Claims (D.72) = 150
Catastrophic losses (D.99) = 80

33. Direct insurance and reinsurance services

34. Focus on pension schemes
Pensions in Social insurance
Social Security pensions
Other employment-related pension schemes
Defined contributions schemes (DC)
Defined benefit schemes (DB)

35. Social Security Treated on payable basis, thus
Social Contributions recorded as they are payable (from households)
Social benefits recorded as they are payable (to households)

36. Other employment-related schemes
Treated as saving schemes
Including funded schemes for government and public corporation employees

37. Imputations; only db schemes
Imputed contribution by the employer = ?
Actuarial increase in pension entitlements 15
Less employers actual contribution 10
Less employees contribution 1.5
Plus costs of operating the scheme 0.5

38. Imputations; only db schemes
Imputed contribution by the employer = 4
Actuarial increase in pension entitlements 15
Less employers actual contribution 10
Less employees contribution 1.5
Plus costs of operating the scheme 0.5

39. What is D8?
Recall that social benefits and social contributions are entered before “disposable income”, thus if no further adjustment disposable income and saving would be fully affected by the balance
However we take the view that for occupational and funded government sponsored pension schemes the increase in the household’s net equity should be included in saving (households own pension reserves)…

40. Investment Funds

41. Investment Funds (S.123 & S.124) Financial Markets, Real Estate, etc
Manager
Fund managing services
Fees
Investment
Funds
(S.123 & S.124)
currency – (A)F.21
(Share)holders of investment fund shares
funds shares -(A)F.521 & (A)F.522
Fees (sales, redemption, etc)
D.4431 & D.4432 payable
rerouted = D.4432, but recorded in financial accounts
more (A)F.521 & (A)F.522
Fees payable
Other services
D.41 & D.42 receivable
Investing in financial and non-financial assets
Rerouted retained earnings = D.4432
Services to investment fund is usually provided by external companies, e.g.:
- accountancy
- custodian
- distribution
- legal
- other admin.
Financial Markets, Real Estate, etc

42. Compiling D.443
Investment income attributable to collective investment fund shareholders (D.443), including mutual funds and unit trusts, is composed of two separate items:
Dividends attributable to collective investment fund shareholders (D.4431) are recorded in exactly the same manner as dividends for individual corporations;
Retained earnings attributable to collective investment fund shareholders (D.4432) are recorded using the same principles as those described for foreign direct investment enterprises but is calculated excluding any reinvested earnings on foreign direct investment. The remaining retained earnings are attributed to the investment fund shareholders leaving the investment fund with no saving, and are re-injected into the fund by the investment fund shareholders in a transaction recorded in the financial account. (see next slide)

43. Compiling D.4432
2008 SNA, 26.63:
Retained earnings (RE) are equal to the net operating surplus of the enterprise plus all property income earned less all property income payable (before calculating reinvested earnings) plus current transfers receivable less current transfers payable and less the item for the adjustment for the change in pension entitlements.
Thus: RE = B.2 + net D.4 + net D.7 – D.8 paid
Hence, in case of S.123 & S.124, taking only the relevant components given in b, we get: D.4432 = B.2 + D.41rec + D.42rec- D.4431paid
This would lead to confirm the statement in 2008 SNA that retained earnings is deemed to be remitted to that investor and then reinvested, in which case the saving of the enterprise must be zero.

44. Market Makers

45. Indirect measures of Financial Corporations Market Makers
When a financial institution offers a security for sale, a service charge is levied.
The purchase price (the ask price) is equal to the estimated market value of the security plus a margin.
Another charge is levied when a security is sold, the price offered to the seller (the bid price) being equal to the market value minus a margin.

46. F inancial
I ntermediation
S ervices
I ndirectly
M easured

47. Financial Intermediaries (S. 122 + S
Financial Intermediaries (S S.125) provide services for which they charge implicitly via interest margin. They pay lower rates of interest (interest payable) to those that lend them money and charge higher rates of interest (interest receivable) to those who borrow from them. In this situation, the National Accounts must use an indirect measure, called F I S I M .
Interest receivable €
Interest
Margin
Interest payable
time 47 t

48. FISIM allocation Reference rate = 2% Rate on loan
Stock on Loan of 200 €
Interest receivable by FI of 6.5 % So
FISIM on Loan = 200 € x (6. 5% - 2 %) = 9 €
Stock of Deposit of 200 €
Interest payable by FI of 1.5 %
FISIM on Deposit= 200 € x (2% - 1.5%) = 1 €
Total FISIM output = 10 €
Rate on loan %
Ref rate
Margin
loan
Rate on dep.
Margin
deposit
time t

49. FISIM allocation: by sectors

50. FISIM allocation: by sectors

51. FISIM allocation: by sectors

52. FISIM allocation: by sectors

53. FISIM allocation: in the Sector Accounts, household sector%
time
Rate on loan t
Margin
deposit
loan

54. Calculation and allocation of FISIM in practice
To calculate FISIM output and allocate it into user sectors, we need:
Matrix of stocks of deposits / loans of FIs by sectors
Matrix of interest paid / received by FIs to/from sectors

55. Example 55

56. Example
(in €)
(in €)
rr= 30€/1000€
= 3%
(in %)
FISIM

57. Example
(in €)
(in €)
rL= 150€/3000€
= 5%
(in %)
FISIM 57

58. Example FISIM D to S.11= (- + rr) * Stock D= 1 % * 600 € = 6 €
(in €)
(in €)
(in %)
FISIM D to S.11=
( rr) * Stock D=
1 % * 600 € = 6 €
FISIM L to S.11= ( ) * Stock L= 2 % * 3000 € = 60 € 58

59. Example
Solution to the example above: FISIML = 60 € to non-financial enterprise (S11) FISIMD = 24 € to households (S14) FISIMD = 6 € to non-financial enterprise (S11) Total FISIM output = 90 €

60. Exercise (FISIM)