1. The Calculation and Allocation of FISIM Yusuf Siddiqi CARTAC short-term expert CARTAC/ECCB Workshop on the 2008 System of National Accounts, Marriott Resort Basseterre, St Kitts & Nevis December 11-12, 2014

2. Introduction  Banks (and other similar financial intermediaries) as their core activity provide an intermediation service.  i.e., they channel funds between lenders and borrowers. 2

3. Introduction  Banks rely on the net interest receipts generated by the positive spread between the interest rate paid to depositors and the rate received from borrowers to finance a large part of its operating costs and provide an operating surplus. 3

4. Introduction  The services provided to depositors :  Managing the depositor’s accounts  Safekeeping of funds  Cheque and payment services  Funds transfers  Providing advice  Preparing paper or/and e-statements  On-line banking access  etc. 4

5. Introduction  The services provided to borrowers :  Loans  Financial advice  Managing the repayment of loans  Providing on-line access to loan information.  Providing paper and e-statements.  Credit scoring. 5

6. Introduction  In the SNA, interest receipts are not normally included in the corporation output and value added as they are classified as property income.  Excluding the net interest receipts would result in a measure of output that fails to capture much of the value of services that banks provide to clients because interest rate spreads are substitutes for explicit service charges. 6

7. Introduction  If the value added for banks were to be computed in the same way as for other corporations, the value added for banks would be very low or negative.  To avoid this problem, SNA incorporates the value of FISIM in the output of bank and other similar financial corporations like mortgage loan companies, credit unions, and other types of financial intermediaries.  The following table illustrates this situation. 7

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9. Scope of loans and deposits  The types of loans to be included in FISIM include:  The amounts overdrawn on overdrafts  Installment loans  Hire-purchase credit  Revolving credit  Loans to finance trade credit  Mortgage loans  Securities repurchase agreements  Gold swaps  Financing by means of financial lease may also be classified as loans. 9

10. Scope of loans and deposits  The types of deposits to be included in FISIM include:  Transferable deposits  Other deposits which typically include  Savings deposits  Fixed term deposits  Non-negotiable certificates of deposits  Deposits of limited transferability and overnight and very short term purchase agreements, if they are considered part of the definition of broad money.  Share or similar evidence of deposits issued by savings and loans institutions, building societies, credit unions and the like, as well as repayable margin payments in cash related to financial derivative contracts, are also included”  (UN- Financial production and flows and stocks in the System of National Accounts Para 3.26) 10

11. Calculation of FISIM for banks based on 1993 SNA Example from Antigua  FISIM = Total property income receivable (excluding dividends and capital gains) minus total interest payable less that portion of investment income from investment of own funds.  Own funds = Total assets – total liabilities = $3480 M – $3469 M = $11 M 11

12. Calculation of FISIM for banks based on 1993 SNA Example from Antigua  Income from own fund (11 M x 5.6% = 0.6 M)  Global FISIM= $179.4 M = interest received $283 M minus interest paid $103 M minus income from own funds 0.6m  = The reference rate being the weighted average of bank interest on loans and deposits comes to 5.6% 12

13. Allocation of FISIM to economic sectors as required by SNA 93  The consumption of FISIM should be allocated between lenders and borrowers treating the allocated amount either as intermediate consumption by enterprise or as final demand (final consumption of households and government consumption expenditure or exports.)  The 1993 SNA recognized that in practice it may be difficult to find any method of allocating FISIM among different users and therefore accepted that some countries may prefer to continue to use the convention whereby the whole of FISIM are allocated to intermediate consumption of a notional industry. 13

14. FISIM 2008 SNA: changes from the 1993 SNA 1. According to 2008 SNA, FISIM applies only to loans and deposits and only when those loans and deposits are provided by, or deposited with financial institutions.  All loans and deposits are included, not just those made from intermediated funds.  No adjustment for own-funds. 14

15. FISIM 2008 SNA: changes from SNA 93 1. The reference rate should contain no service element and reflect the risk and maturity structure of deposits and loans.  The interbank rate may be a suitable choice as a reference rate.  However, a different reference rate may be needed for each currency in which loans and deposits are denominated. 15

16. FISIM 2008 SNA 4. The reference rate should be between the bank interest rate on deposits and loans. 5. The financial institutions do not necessarily have to offer both deposit taking and loan facilities to produce FISIM.  A moneylender who has sufficiently detailed accounts may receive this type of charge.  Moneylenders grant loans and do not accept deposits  (2008 SNA, Para 6.165). 16

17. FISIM 2008 SNA  The 2008 SNA calculates the output of FISIM on loans ( y L ) and deposits ( y D ) using a reference rate ( rr ).  Assuming that these loans and deposits attract interest rates of r L and r D respectively, the output of FISIM should be calculated according to the formula: 17

18. FISIM 2008 SNA  The difference between the interest rate paid by borrowers ( r L ) and the reference rate ( rr ) is used to measure the price of FISIM for the borrowers.  The difference between the interest rate ( rr ) and rate of interest received on bank deposits ( r d ) is used as the price of FISIM for depositors.  These prices are then multiplied by total borrowing and by total deposits, in order to arrive at total FISIM consumed by various sectors. 18

19. The reference rate  The Inter Secretariat-working Group on National Accounts (ISWGNA) task force in their final report issued in May 2013 agreed that the definition of reference rate should be determined according to national circumstances, using any of the following approaches:  Single observable exogenous interest rate (e.g. interbank rate).  Rate based on a weighted average of observable exogenous rates of maturities with different terms.  Weighted average of the endogenous interest rates on loans and deposits.  The reference rate to be used in the calculation of SNA interest is a rate between bank interest rates on deposits and loans. 19

20. The reference rate  Following ISWGNA we calculate a reference rate that reflects the maturity structure of the financial assets and liabilities and is endogenous.We calculate a weighted average of interest rates on loans and deposits.  Where  r is interest payable on loans and receivable on deposits  Y is the average stock of loans and deposits. 20

21. The reference rate  We calculate FISIM for 2008 using as before using data from Antigua.  Stock of Loans= $3480 M  Interest received = $285 M  Bank interest rate= 8.1% (285/3480)  Stock of deposits = $3469 M  Bank interest paid = $103 M  Bank interest rate = 3.0% (103/3469) 21

22. FISIM 2008 SNA  Weighted average of loans and deposits rate = 5.6%  This is a reference rate according to one option recommended by AGT  FISIM on loans for 2008 = $87.6 M (= (8.1% - 5.6%) x $3480 M)  FISIM on deposits for 2008 = $91.3 M (= (5.6% - 3.0%) x $3469 M)  The FISIM rate for loans is 2.5% and for deposit is 2.6%  Total FISIM = $178.9 M. 22

23. FISIM, 2008 SNA  Note that global FISIM was $180 M; the difference in FISIM will reduce the Bank profit by $1.1 M.  My preference would be to prorate the difference over borrowers and depositors so that the bank profit remains intact.  The revised FISIM loan rate is 2.53%  The revised FISIM deposit rate is 2.65% 23

24. Allocation of Loan FISIM to sectors of the economy using unrevised FISIM SectorsLoan assets (million of $) Interest received (million of $) Bank interest rate (in %) Refe- rence interest rate (in %) FISIM 12 3 = (col. 2/ col. 1) 4 5 = (col. 3 – col. 4) x col. 1/100 Households13271088.15.633.2 Non-resident327278.35.68.7 Government568457.95.613.2 Businesses12581038.25.632.6 TOTAL34802838.187.6 24

25. Allocation of Deposit FISIM to sectors of the economy using unrevised FISIM (cont’d) SectorsDeposit liabilities (million of $) Interest paid (million of $) Bank interest rate (in %) Refe- rence interest rate (in %) FISIM 12 3 = (col. 2/ col. 1) 4 5 = (col. 4 – col. 3) x col. 1/100 Households2172632.95.658.6 Non-resident19152.65.65.7 Government17184.75.61.6 Businesses935272.95.625.4 TOTAL34691033.091.3 TOTAL FISIM = 87.6 + 91.3 = 178.9 25

26. Output of Financial services (FISIM) provided by money lenders  Assume that moneylenders are providing loans to corporation and households only.  There is no stock of deposits as moneylenders are not deposit taking institutions and use their own funds.  Example of FISIM for the moneylender is shown on the following slide.  The figures are assumed. 26

27. FISIM provided by moneylenders SectorsStock of loan assets Interest received Money lenders interest rate (in %) Refe- rence rate (in %)* 1234 Business50060125.5 Households10020 5.5 FISIM = $500 M x (12% - 5.5%) + $100 M x (20% - 5.5%) = $47 M * Since money lenders are part of the domestic economy, the reference rate in the worked example is the domestic reference rate. 27

28. FISIM at constant prices  The Inter secretariat-working Group on National Accounts (ISWGNA) task force also recommended that volume measure of FISIM should be calculated as follows:  Using a deflated stock approach.  Deflating stocks of loans and deposits using a general price indicator (e.g., CPI) which should itself exclude FISIM.  Using domestic price indices for exports, and appropriate country price indices for imports.  Output indicators could also be used. 28

29. FISIM constant prices (Example)  Suppose the CPI is 100 in 2007(base year) and 105 in 2008.  Volume of deposit holdings in 2008 = $3469 M /105 = $3303 M.  Volume of loan holdings in 2008 = $3480 M /105 = $3314 M.  Output of deposit FISIM at constant prices = $3303 M x base year FISIM price.  Output of Loan FISIM in constant prices = $3314 M x base year FISIM price.  Total FISIM is the sum of the loans and deposits FISIM. 29

30. The END Thank you 30