The Calculation and Allocation

of FISIMYusuf Siddiqi

CARTAC short-term expert

CARTAC/ECCB Workshop on the 2008 System of National Accounts, Marriott ResortBasseterre, St Kitts & NevisDecember 11-12, 2014

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Introduction Banks (and other similar financial

intermediaries) as their core activity provide an intermediation service.

i.e., they channel funds between lenders and borrowers.

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IntroductionBanks 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.

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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.

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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.

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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.

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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.

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As reported by banks

Conventional treatment of non-financial sectors

Banks after FISIM

Revenues

Interest received 420

Explicit charges 50 50 50

FISIM ------- 40 (= 420 - 380)

Total Revenue 470 50 90

Expenses

Interest paid 380 380 -------

Intermediate consumption 40 40 40

Wages + salaries 35 35 35

Total Expenses 455 455 75

PROFIT 15 -405 15

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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.

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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)

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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

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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%

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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.

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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.

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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.

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FISIM 2008 SNA4. 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).

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FISIM 2008 SNA The 2008 SNA calculates the output of FISIM on

loans (yL) and deposits (yD) using a reference rate (rr).

Assuming that these loans and deposits attract interest rates of rL and rD respectively, the output of FISIM should be calculated according to the formula:

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FISIM 2008 SNA The difference between the interest rate paid by

borrowers (rL) 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 (rd) 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.

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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.

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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.

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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)

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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.

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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%

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Allocation of Loan FISIM to sectors of the economy using unrevised FISIMSectors Loan

assets (million

of $)

Interest receive

d (million

of $)

Bank interest rate (in

%)

Refe-rence

interest rate(in %)

FISIM

1 23 = (col. 2/

col. 1)4

5 = (col. 3 – col. 4) x col.

1/100

Households 1327 108 8.1 5.6 33.2

Non-resident 327 27 8.3 5.6 8.7

Government 568 45 7.9 5.6 13.2

Businesses 1258 103 8.2 5.6 32.6

TOTAL 3480 283 8.1 87.6

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Allocation of Deposit FISIM to sectors of the economy using unrevised FISIM (cont’d)Sectors Deposit

liabilities

(million of $)

Interest paid (million of $)

Bank interest rate (in

%)

Refe-rence

interest rate (in %)

FISIM

1 23 = (col. 2/

col. 1)4

5 = (col. 4 – col. 3) x col.

1/100

Households 2172 63 2.9 5.6 58.6

Non-resident 191 5 2.6 5.6 5.7

Government 171 8 4.7 5.6 1.6

Businesses 935 27 2.9 5.6 25.4

TOTAL 3469 103 3.0 91.3

TOTAL FISIM = 87.6 + 91.3 = 178.9

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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.

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FISIM provided by moneylenders

Sectors Stock of loan

assets

Interest received

Money lenders interest

rate (in %)

Refe-rence rate (in %)*

1 2 3 4

Business 500 60 12 5.5

Households 100 20 20 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.

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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.

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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.

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The ENDThank you