Chapter

Appendix II. Summary of Guidance for Each Financial Soundness Indicator

Author(s):
International Monetary Fund
Published Date:
April 2006
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1. This appendix brings together in summary form the guidance outlined in the Guide for each agreed FSI. The main purpose of this appendix is to support the work of compilers by bringing together in one place the various elements of guidance relating to each FSI, not least to help compilers locate the relevant detailed advice in the main text. The summaries are of one page length or less, and there is some cross-referencing among them. In addition, for ease of reference, an index of the FSI summaries is provided (Box A2.1).

2. For many of the agreed FSIs, the Guide recommends that the data series be drawn from sectoral financial statements; therefore, even though FSIs are described individually below, the compiler needs to remain aware of the broader context. In other words, the FSIs are a body of data with interrelationships that may not be apparent in the short summaries. Where relevant, the appropriate lines in the sectoral financial statements (Tables 4.1, 4.2, 4.3, and 4.4 in Chapter 4) are referenced.

3. Each summary below has the following three sub-headings.

  • Definition: provides the definition of the FSI and, where appropriate, guidance on where the component series are defined in the Guide.

  • Issues for compilers: draws out specific issues of which compilers should be aware.

  • Data sources: provides information on where the information can be obtained. Relevant to this sub-heading is Chapter 11, which provides a detailed discussion of sources of information and additional data series that might be required. Also relevant is Appendix IV, which reconciles the Guide’s methodology with the national accounts and commercial accounting frameworks. As outlined in Chapter 11, it is not possible to generalize as to what information is available from supervisory sources, but some of the key differences in methodology between national accounts and supervisory information should be explored in compiling cross-border consolidated data for deposit takers.

4. For deposit takers, it is assumed that data from supervisory sources are available on a consolidated basis, but the nature of the consolidation should be compared with the Guide’s recommendations (see Chapter 5). If countries decide that domestic consolidated data (see paragraph 5.25) can also be derived from supervisory sources, then the references under cross-border consolidated information also apply to domestic data, but in general the summaries assume that the national accounts will be the source for domestic based data.

5. In reviewing the summaries below and determining the need to collect new data (and incur increased resource costs), authorities must make a judgment as to the importance of the additional data series for compiling and monitoring FSI data.

6. To summarize the guidance in Chapters 2 and 3:

  • The definitions of deposit takers and other sectors are provided in Chapter 2 (paragraphs 2.4 to 2.19).

  • Transactions and positions should be recorded on an accrual basis, and only existing, actual assets and liabilities should be recognized (paragraphs 3.3 to 3.9).

  • The Guide prefers valuation methods that can provide the most realistic assessment at any moment in time of the value of an instrument or item. Market value is the preferred basis of valuation of transactions as well as of positions in traded securities. For positions in nontradable instruments, the Guide acknowledges that nominal value (supported by appropriate provisioning policies) may provide a more realistic assessment of value than the application of fair value (see paragraphs 3.20 to 3.33).

  • Residence is defined in terms of where an institutional unit has its center of economic interest (see paragraphs 3.34 to 3.36).

  • Transactions and positions in foreign currency should be converted into a single unit of account based on the market rate of exchange (see paragraphs 3.44 to 3.48).

  • Short-term maturity is defined as one year or less (or payable on demand), with maturities over one year defined as long term (see paragraphs 3.49 and 3.50).

Box A2.1.FSIs: Index of Summaries

Core FSIs

Deposit takers

Regulatory capital to risk-weighted assets

Regulatory Tier 1 capital to risk-weighted assets

Nonperforming loans net of provisions to capital

Nonperforming loans to total gross loans

Sectoral distribution of loans to total loans

Return on assets

Return on equity

Interest margin to gross income

Noninterest expenses to gross income

Liquid assets to total assets (liquid asset ratio)

Liquid assets to short-term liabilities

Net open position in foreign exchange to capital

Encouraged FSIs

Deposit takers

Capital to assets ratio

Large exposures to capital

Geographical distribution of loans to total loans

Gross asset and liability position in financial derivatives to capital

Trading income to total income

Personnel expenses to noninterest expenses

Spread between reference lending and deposit rates

Spread between highest and lowest interbank rate

Customer deposits to total (noninterbank) loans

Foreign-currency-denominated loans to total loans

Foreign-currency-denominated liabilities to total liabilities

Net open position in equities to capital

Other financial corporations

Assets to total financial system assets

Assets to GDP

Nonfinancial corporations

Total debt to equity

Return on equity

Earnings to interest and principal expenses

Net foreign exchange exposure to equity

Number of applications for protection from creditors

Households

Household debt to GDP

Household debt service and principal payments to income

Market liquidity

Average bid-ask spread in the securities market

Average daily turnover ratio in the securities market

Real estate markets

Real estate prices

Residential real estate loans to total loans

Commercial real estate loans to total loans

7. Moreover, as the Guide recommends that for each corporate sector—deposit takers, other financial corporations, and nonfinancial corporations—data be compiled on a consolidated basis, the word “group” is used on a number of occasions in the summaries. For deposit takers, as well as for other corporate entities, a group in this context includes the parent deposit taker, its deposit-taking branches, and its deposit-taking subsidiaries.

8. For deposit takers, the Guide requires the compilation of data covering domestically controlled deposit takers on a cross-border consolidated basis (domestically controlled, cross-border consolidated data). Data on a domestic consolidated basis might be separately compiled if the authorities believe that such data would contribute materially to financial stability analysis (for example, to illustrate the linkage with other macroeconomic information).

Core FSIs

Deposit Takers

Regulatory capital to risk-weighted assets

Definition

9. This FSI measures the capital adequacy of deposit takers using the definitions of regulatory capital and risk-weighted assets of the BCBS. Sector-wide regulatory capital is the numerator and is defined in paragraphs 4.68 to 4.73. Sector-wide risk-weighted assets is the denominator and is defined in paragraph 4.74. The FSI is defined in paragraphs 6.17 and 6.18.

Issues for compilers

10. Data are based on supervisory concepts. To derive sector-wide regulatory capital, the consolidated regulatory capital of the deposit-taking groups in the reporting population is aggregated. To derive sector-wide risk-weighted assets, the consolidated risk-weighted assets of the deposit-taking groups in the reporting population are also aggregated.

Sources of data

11. Domestically controlled, cross-border consolidated and domestic consolidated data: The availability of data reported to supervisory agencies will determine the scope of the data that can be disseminated. Consolidated regulatory capital and consolidated risk-weighted assets of each domestically controlled deposit-taking group in the reporting population should be available to supervisors.

Regulatory Tier 1 capital to risk-weighted assets

Definition

12. This FSI measures the capital adequacy of deposit takers based on the core capital concept of the BCBS. Sector-wide Tier 1 capital is the numerator and is defined in paragraphs 4.70 and 4.73. Sector-wide risk-weighted assets is the denominator and is defined in paragraph 4.74. The FSI is defined in paragraph 6.19.

Issues for compilers

13. Data are based on supervisory concepts. To derive sector-wide Tier 1 capital, the consolidated Tier 1 capital of the deposit-taking groups in the reporting population is aggregated. To derive sector-wide risk-weighted assets, the consolidated risk-weighted assets of the deposit-taking groups in the reporting population are also aggregated.

Sources of data

14. Domestically controlled, cross-border consolidated and domestic consolidated data: The availability of data reported to supervisory agencies will determine the scope of the data that can be disseminated. Consolidated Tier 1 capital and consolidated risk-weighted assets of each domestically controlled deposit-taking group in the reporting population should be available to supervisors.

Nonperforming loans net of provisions to capital

Definition

15. This FSI is intended to compare the potential impact on capital of NPLs, net of provisions. The impact of NPL losses on capital is uncertain in most circumstances, because for various reasons the lender might expect to recover some of the potential NPL losses. This FSI is calculated by taking the value of NPLs less the value of specific loan provisions (lines 42 and 18(ii), respectively, in Table 4.1) as the numerator and capital as the denominator. The FSI is defined in paragraphs 6.22 and 6.23.

Issues for compilers

16. The guidance for NPLs is the same as that provided for the ratio of NPLs to gross loans. Provisions are defined as specific provisions, which are the outstanding amount of provisions made against the value of individual loans (including a collectively assessed group of loans) (see paragraph 4.50). Provisions on intrasectoral loans are deducted from the specific provisions data. The Guide relies on national practices in identifying specific provisions but recommends that such practices be clearly documented. In calculating this ratio, it is important to understand how provisions data affect both the numerator and the denominator (see paragraph 6.24).

17. Capital is measured as total capital and reserves (line 30 in the sectoral balance sheet and defined in paragraph 4.62) and, for cross-border consolidated data, also as total regulatory capital (line 36 and defined in paragraphs 4.70 to 4.73). In measuring sector-wide capital, intrasector equity investments are deducted from the overall capital in the sector so that capital and reserves held within the sector are not double counted. Also, in line with supervisory guidance, capital excludes purchased goodwill. See the text annex to Chapter 5 for information on these adjustments to capital and reserves and those relating to intrasector provisions.

Sources of data

18. Domestically controlled, cross-border consolidated data: Information on NPLs and specific provisions (adjusted for provisions on intrasectoral loans) for the reporting population are typically available from supervisory sources, although national definitions of a NPL can vary. Similarly, capital and reserves data might be available from supervisory sources, although for total capital and reserves, the definition would need to be investigated to ensure compatibility with the approach of the Guide. See Table 11.4 for possible adjustments required. Supervisory data should already be on a consolidated basis—although coverage would require investigation—but data may need to be aggregated to calculate the numerator and denominator for this ratio.

19. Domestic consolidated data: National accounts sources do not provide information on NPLs, so additional data would need to be collected. NPLs on account of lending among deposit takers in the reporting population that are part of the same group (if any) are excluded. Data on specific provisions would also need to be collected (adjusted for provisions on intrasectoral loans, if any (paragraph 5.87)). For capital, data are available from national accounts sources, such as monetary and financial statistics, but are subject to adjustment (see Box 11.1 and the capital and reserves entry in Appendix IV). In addition to the deductions mentioned under issues for compilers, NPLs should be reduced by the amount of any specific provisions (adjusted for provisions on intrasectoral claims). Moreover, in the balance sheet, equity investments in subsidiaries and associates (and reverse investments) should be valued at the proportionate share in the subsidiary’s or associate’s capital and reserves, and this could affect total capital and reserves measured on a national accounts basis. The treatment of equity investments is discussed in Box 5.1, and the text annex to Chapter 5 provides numerical examples of the adjustments at the sector level (see in particular paragraphs 5.89 and 5.90). Information on the funds contributed by owners and retained earnings (including those earnings appropriated to reserves) may be collected separately, or perhaps from monetary and financial statistics sources if data are collected by component of capital and reserves as set out in the MFSM (paragraph 214), subject to the deductions and other adjustments mentioned above. See also Box 11.1 and Tables 11.111.3.

Nonperforming loans to total gross loans

Definition

20. This FSI is intended to identify problems with asset quality in the loan portfolio. It is calculated by using the value of NPLs as the numerator and the total value of the loan portfolio (including NPLs and before the deduction of specific loan loss provisions) as the denominator. NPLs and loans (lines 42 and 18(i) in Table 4.1) are described in paragraphs 4.84 to 4.86 and 4.45 to 4.48, respectively. The FSI is defined in paragraphs 6.54 and 6.55.

Issues for compilers

21. The Guide provides guidance for identifying NPLs. Loans are nonperforming when payments of principal and interest are past due by three months (90 days) or more, or interest payments corresponding to three months (90 days) or more have been capitalized (reinvested into the principal amount), refinanced, or rolled over (that is, payment has been delayed by agreement). In addition, NPLs should also include those loans with payments less than 90 days past due that are recognized as nonperforming under national supervisory guidance—that is, evidence exists to classify a loan as nonperforming even in the absence of a 90-day past due payment, such as if the debtor files for bankruptcy. After a loan is classified as nonperforming, it (and/or any replacement loan(s)) should remain so classified until written off or payments of interest and/or principal are received on this or subsequent loans that replace the original loan. Replacement loans include loans arising from rescheduling or refinancing the original loan(s) and/or loans provided to make payments on the original loan.

22. Data on loans should exclude accrued interest on nonperforming loans and lending among deposit takers in the reporting population that are part of the same group.

Sources of data

23. Domestically controlled, cross-border consolidated data: Information on NPLs for the reporting population is typically available from supervisory sources, although national definitions of an NPL can vary. Similarly, information on loans might be available from supervisory sources and is likely to be subject to the exclusions mentioned under issues for compilers. Also, the Guide’s definition of deposit takers should be compared with the definition used for supervisory purposes. Supervisory data may need to be aggregated to calculate the numerator and denominator for this ratio.

24. Domestic consolidated data: National accounts data do not provide information on NPLs; additional data on NPLs would need to be collected for domestic consolidated data. Data on loans should be available from monetary and financial statistics but perhaps not subject to the exclusions mentioned above. Also, the Guide’s definition of a deposit taker should be compared with the definition of “other depository corporations” used for monetary and financial statistics. Box 11.1 explains how data collected using MFSM methodology can be utilized in compiling FSIs for deposit takers.

Sectoral distribution of loans to total loans

Definition

25. This FSI provides information on the distribution of loans (including NPLs and before the deduction of specific loan loss provisions) to resident sectors and to nonresidents. The numerators and denominator for this FSI are lending to each of the institutional sectors (lines 18(i.i) and 18(i.ii) in Table 4.1) and gross loans (line 18(i)), respectively. The resident sectors are deposit takers (see paragraphs 2.4 to 2.7), the central bank (2.13), the general government (2.18), other financial corporations (2.14), nonfinancial corporations (2.15), other domestic sectors (households (2.16) and nonprofit institutions serving households (2.17)). Nonresidents are defined in paragraphs 3.35 and 3.36. Loans are defined in paragraphs 4.45 to 4.48. This FSI is defined in paragraphs 6.56 and 6.57.

Issues for compilers

26. Sectoral analysis is a concept used in the national accounts that classifies entities by the nature of their economic activity. Lending is attributed on the basis of the residence of the reporting entity.

27. Data on loans should exclude accrued interest on nonperforming loans as well as lending among deposit takers in the reporting population that are part of the same group. Because all sectors are covered, the sum of the sectoral ratios should be unity.

Sources of data

28. Domestically controlled, cross-border consolidated data: The availability of data on loans by sector might vary depending on supervisory practices. Lending by any foreign branches and/or deposit-taking subsidiaries of the reporting entity to residents of the economy for which the FSI data are being compiled is classified as lending to the relevant resident sector. In contrast, lending to residents of the local economy in which the foreign subsidiary/branch is located is classified as lending to nonresidents. To derive sector-wide data on deposit takers’ lending by institutional sector, the consolidated data may need to be aggregated to derive both the numerators and the denominator of this FSI.

29. Domestic consolidated data: Data on loans to the various sectors are available from monetary and financial statistics, subject to the adjustments mentioned above. Loans to deposit-taking branches and subsidiaries abroad are included in the data as lending to nonresidents.

Return on assets

Definition

30. This FSI is intended to measure deposit takers’ efficiency in using their assets. It is calculated by dividing net income before extraordinary items and taxes (although net income after extraordinary items and taxes (line 11 of Table 4.1) might instead, or additionally, be used) by the average value of total assets (financial and nonfinancial) over the same period. At a minimum, the denominator can be calculated by using the average of the beginning- and end-period positions, but compilers are encouraged to use the most frequent observations available to calculate the average. Net income before and after extraordinary items and taxes (lines 8 and 11, respectively, in Table 4.1) and its components are defined in paragraphs 4.17 to 4.35; total assets (nonfinancial and financial assets) (line 14) are defined in paragraphs 4.37 and 4.38. The FSI is defined in paragraphs 6.52 and 6.53.

Issues for compilers

31. Net income is calculated on a basis closer to commercial accounting and supervisory approaches than to national accounting. Unlike the national accounts, in the Guide net income includes gains and losses on financial instruments, and gains and losses from the sales of fixed assets, which are measured as the difference between the sale value and the balance sheet value at the previous end period (see Table 4.1).

32. Notably, compilers should be aware that the Guide recommends that interest income not include the accrual of interest on nonperforming assets (paragraph 4.18). It also encourages the inclusion of realized and unrealized gains and losses arising during each period on all financial instruments (financial assets and liabilities, in domestic and foreign currencies) valued at market or fair value in the balance sheet, excluding equity in associates, subsidiaries, and any reverse equity investments (paragraph 4.22).

33. At the sector level, a number of adjustments are specified to eliminate the impact of intrasector transactions on sectoral net income. These include the elimination of the following income items arising from claims on deposit takers in the reporting population: the investing deposit taker’s prorated share of the earnings of associate deposit takers, dividends receivable from other deposit takers, provisions for accrued interest on nonperforming claims, and specific provisions on claims on other deposit takers. A full list of adjustments is provided in Chapter 5 (paragraph 5.53).

34. In line with supervisory guidance, goodwill is deducted from capital and reserves. Thus, goodwill is not classified as an asset (see paragraph 4.110) and, given this, not amortized in the income account. Consistent with this, gains and losses on the sale of an associate or subsidiary (and disinvestment of a reverse investment) are also excluded from income (paragraph 5.91).

Sources of data

35. Domestically controlled, cross-border consolidated data: The data for net income available to supervisory sources may depend on the national commercial accounting practice, as might the extent to which they meet the definitions in the Guide. It is likely that there will be a need for the sector-wide adjustments set out above (see Table 11.4 and paragraph 11.51). The available information may need to be aggregated to calculate both the numerator and denominator.

36. Domestic consolidated data: For national accounts-based data, there is a need to include within net income those items classified as income items in the Guide but not in the national accounts. These adjustments include, most notably, gains and losses on financial instruments and provisions on nonperforming assets (see Table 11.1). Moreover, the sectorwide adjustments described above for net income and total assets, including those transactions and positions with other deposit takers in the reporting population that are part of the same group (see Tables 11.2 and 11.3), should be considered. Information on goodwill may also be needed (Table 11.1).

Return on equity

Definition

37. This FSI is intended to measure deposit takers’ efficiency in using their capital. It is calculated by dividing net income before extraordinary items and taxes (although net income after extraordinary items and taxes (line 11 of Table 4.1) might instead, or additionally, be used) by the average value of capital over the same period. As a minimum, the denominator can be calculated by taking the average of the beginning- and end-period positions (for example, at the beginning and the end of the month), but compilers are encouraged to use the most frequent observations available in calculating the average. Net income before and after extraordinary items and taxes (lines 8 and 11, respectively, in Table 4.1) and its components are defined in paragraphs 4.17 to 4.36. The FSI is defined in paragraphs 6.25 and 6.26.

Issues for compilers and sources of data

38. Regarding net income, issues for compilers and sources of data are discussed in the return on assets summary.

39. Capital is measured as total capital and reserves (line 30 in the sectoral balance sheet and defined in paragraph 4.62) and, for cross-border consolidated data, also Tier 1 capital (line 32 of Table 4.1 and defined in paragraphs 4.70 and 4.73). In the absence of Tier 1 data, funds contributed by owners and retained earnings (including those earnings appropriated to reserves) could be used (line 30(i) of Table 4.1 and defined in paragraph 4.64). In measuring sector-wide capital, intrasector equity investments are deducted from the overall capital in the sector so that capital and reserves held within the sector are not double counted. Moreover, in line with supervisory guidance, capital excludes purchased goodwill. See the text annex to Chapter 5 for information on these adjustments to capital and reserves and those relating to intrasector provisions.

40. Sources of data for capital are discussed in the nonperforming loans net of provisions to capital summary.

Interest margin to gross income

Definition

41. This FSI is a measure of the relative share of net interest earnings—interest earned less interest expenses—within gross income. It is calculated by using net interest income (line 3 in Table 4.1) as the numerator and gross income (line 5) as the denominator. Net interest income and its components are defined in paragraphs 4.17 to 4.19, while gross income is defined in paragraph 4.20. The FSI is defined in paragraphs 6.68 and 6.69.

Issues for compilers

42. In the Guide, interest income should not include the accrual of interest on nonperforming assets (see paragraph 4.18). However, to avoid asymmetric reporting at the sector level, an adjustment should be made so that interest does accrue on nonperforming claims on other deposit takers in the reporting population (paragraphs 5.55 to 5.57).

43. Gross income includes both net interest income and other gross income. Among other gross income items, the Guide encourages the inclusion of realized and unrealized gains and losses arising during each period on all financial instruments (financial assets and liabilities, in domestic and foreign currencies) valued at market or fair value in the balance sheet, excluding equity in associates, subsidiaries, and any reverse equity investments (paragraph 4.22). Moreover, at the sector level, a number of adjustments are specified to eliminate the impact of intrasector transactions on sectoral gross income. These are the elimination of the following income items arising from positions and transactions with other deposit takers in the reporting population: fees and commissions receivable; the investing deposit taker’s prorated share of the earnings of associate deposit takers, dividends receivable from other deposit takers, other income receivable from other deposit takers, and gains and losses on deposit takers’ ownership of equities of other deposit takers. A description of these adjustments is provided in Chapter 5, starting at paragraph 5.53 and in Box 5.1.

44. Gains and losses on the sale of an associate or subsidiary (and disinvestment, of a reverse investment) are excluded from gross income (paragraph 5.92).

Sources of data

45. Domestically controlled, cross-border consolidated data: Consolidated data for net interest income and gross income should be available from supervisory sources, but the extent to which they meet the definitions in the Guide could depend on national commercial accounting practice. It is likely that there will be a need for the sector-wide adjustments set out above (see Table 11.4 and paragraph 11.51). The available information may need to be aggregated to calculate both the numerator and denominator.

46. Domestic consolidated data: From national accounts-based sources, data on deposit takers’ net interest income should be available—Table 11.9 identifies the relevant line items in the 1993 SNA accounts—although to make adjustments for the nonaccrual of interest on nonperforming loans, additional data may be needed. For gross income data, there may be a need for additional information to include within gross income those items classified as income items in the Guide but not in the national accounts (see Table 11.1), and also to make the sectorwide adjustments described above (see Table 11.2).

Noninterest expenses to gross income

Definition

47. This FSI measures the size of administrative expenses to gross income. The FSI is calculated by using noninterest expenses (line 6 in Table 4.1) as the numerator and gross income (line 5) as the denominator. Noninterest expenses are defined in paragraph 4.30 and gross income in paragraph 4.20. This FSI is defined in paragraphs 6.73 and 6.74.

Issues for compilers

48. Noninterest expenses cover all expenses other than interest expenses. Provisions are not included in noninterest expenses but are separately identified in the sectoral income and expense statement (line 7). To derive the sector-wide total, all noninterest expenses paid to other deposit takers are deducted (see Table 11.2). These comprise fees and commissions payable and other expenses payable. Moreover, no goodwill is amortized in the income and expense statement (paragraph 4.110).

49. Regarding gross income, issues for compilers are discussed in the interest margin to gross income summary.

Sources of data

50. Domestically controlled, cross-border consolidated data: The data for noninterest expenses and gross income available to supervisory sources may depend on national commercial accounting practice. Nonetheless, it is likely that there will be a need for the sector-wide adjustments set out above (see Table 11.4 and paragraph 11.51). Regarding gross income, sources of data are discussed in the interest margin to gross income summary. The available information may need to be aggregated to calculate both the numerator and the denominator of this FSI.

51. Domestic consolidated data: From national accounts-based sources, data on deposit takers’ noninterest expenses should be available—Table 11.9 identifies the relevant line items in the 1993 SNA accounts. The sector-wide adjustments for noninterest expenses need to be considered (see Table 11.2). Regarding gross income, sources of data are discussed in the interest margin to gross income summary.

Liquid assets to total assets (liquid asset ratio)

Definition

52. This FSI provides an indication of the liquidity available to meet expected and unexpected demands for cash. It is calculated by using the core measure of liquid assets (line 39 in Table 4.1) as the numerator and total assets (line 14) as the denominator. This ratio can also be calculated using the broad measure of liquid assets (line 40). Liquid assets are defined in paragraphs 4.78 to 4.81, and nonfinancial and financial assets (total assets) are defined in paragraphs 4.37 and 4.38. The FSI is defined in paragraphs 6.45 and 6.46.

Issues for compilers

53. Assessing the extent to which an asset is liquid or not involves judgment and, particularly for securities, depends on the liquidity of secondary markets. The Guide distinguishes between core and broad liquid assets.

54. Core liquid assets comprise currency and deposits and other financial assets that are available either on demand or within three months or less, but deposit takers’ deposits (and other nontraded claims) with other deposit takers in the reporting population are excluded.

55. Broad liquid assets include those in the core measure plus securities that are traded in liquid markets (including repo markets) that can be readily converted into cash with insignificant risk of change in value under normal business conditions. Such securities include those issued by the government and/or the central bank in their own currency and high credit-quality private securities—both debt and equity securities. For instance, if a financial instrument is eligible under normal business conditions for repurchase operations at the central bank, then it can be classified as a liquid asset. Private sector securities of less than investment grade should be excluded from liquid assets.

56. The issues for compilers for total assets are the same as in the return on assets summary.

Sources of data

57. Domestically controlled, cross-border consolidated data: Data on liquidity should be available from supervisory sources. The BCBS (2000b) stresses the need for good liquidity management by banks, including the need for effective measurement processes. The extent to which national approaches to measuring liquidity meet the concepts in the Guide would require consideration. In particular, for sector-wide total liquid assets, deposit takers’ nontraded claims on other deposit takers in the reporting population need to be deducted before aggregation. The available information may need to be aggregated to calculate both the numerator and denominator of this FSI.

58. Domestic consolidated data: While monetary statistics provide some data, such as deposits at the central bank, the liquid-asset concepts developed in the Guide are not covered in national accounts-based data, and additional data may need to be requested. Some approximation of the core measure might be available from the 1993 SNA’s full sequence of accounts, and this is discussed in more detail in Appendix IV under the entry for liquid assets.

Liquid assets to short-term liabilities

Definition

59. This FSI is intended to capture the liquidity mismatch of assets and liabilities, and provides an indication of the extent to which deposit takers could meet the short-term withdrawal of funds without facing liquidity problems. This FSI is calculated by using the core measure of liquid assets (line 39 in Table 4.1) as the numerator and the short-term liabilities (line 41) as the denominator. This ratio can also be calculated by taking the broad measure of liquid assets (line 40). Liquid assets are defined in paragraphs 4.78 to 4.81, and short-term liabilities are defined in paragraph 4.83. The FSI is defined in paragraphs 6.47 to 6.48.

Issues for compilers

60. Short-term liabilities are the short-term element of deposit takers’ debt liabilities (line 28) plus the net (short-term, if possible) market value of the financial derivatives position (liabilities (line 29) less assets (line 21)); it excludes such liabilities to other deposit takers in the reporting population. Preferably, “short term” should be defined on a remaining maturity basis, but original maturity is an alternative (defined in paragraphs 3.49 and 3.50).

61. It is recommended that the net (short-term) market value position (liabilities less assets) of financial derivative liabilities be included rather than the gross liability position because of the market practice of creating offsetting contracts and the possibility of forward-type instruments switching between asset and liability positions from one period to the next. Moreover, because of the potential importance to deposit takers of financial derivatives in their liquidity analysis, the Guide provides a table (Table 6.4) that could be used to provide information on the expected cash flows underlying financial derivatives and from the settlement of foreign currency spot positions. The FSI could also be calculated excluding financial derivative positions—that is, calculating the ratio using short-term debt only—particularly if a net financial derivative asset position were significantly affecting the ratio.

62. The issues for compilers for liquid assets are the same as in the liquid assets to total assets summary.

Sources of data

63. Domestically controlled, cross-border consolidated data: Data on short-term liabilities on a remaining maturity basis might be available from supervisory sources. The extent to which the data meet the concepts in the Guide, particularly with regard to financial derivatives, would require consideration. Sources of data on liquid assets are discussed in the liquid assets to total assets summary.

64. Domestic consolidated data: Data on short-term liabilities for all debt instruments are generally not available in national accounts-based data on a remaining maturity basis, but they are often available on an original maturity basis. The IMF (2003b) outlines the presentation of remaining maturity data for banks, on an external debt basis only. Any data should exclude short-term liabilities among deposit takers in the reporting population that are part of the same group. Data on financial derivatives positions are available in national accounts-based data (see Box 11.1) but not on a short term basis. Data sources on liquid assets are discussed in the liquid assets to total assets summary.

Net open position in foreign exchange to capital

Definition

65. This FSI is intended to show deposit takers’ exposure to exchange rate risk compared with capital. A deposit taker’s open position in foreign exchange should be calculated by summing the foreign currency positions into a single unit of account as the numerator. Capital is the denominator. The FSI is defined in paragraphs 6.31 to 6.38. These paragraphs provide a detailed explanation as to how to measure the net open position in foreign exchange.

Issues for compilers

66. The guidance in the Guide for measuring the net open position in foreign exchange is based on that recommended by the BCBS. Therefore, deposit takers’ net open position is the sum of the net position in on-balance-sheet foreign currency debt instruments; net notional positions in financial derivatives; on-balance-sheet holdings of foreign currency equity assets; net future foreign currency income and expenses not yet accrued but already fully hedged; foreign currency guarantees and similar instruments that are certain to be called and are likely to be irrecoverable; and, depending on the national commercial accounting practice, any other item representing a profit/loss in foreign currencies of the foreign currency positions set out in a single unit of account. The Guide describes the sum of the first three items listed above as the “net open position in foreign exchange for on-balance-sheet items.”

67. Included among foreign exchange instruments for this FSI are foreign-currency-linked instruments: that is, instruments where the amounts payable are linked to a foreign currency, although the payments are made in domestic currency (paragraph 3.46).

68. Regarding capital, issues for compilers are discussed in the return on equity summary.

Sources of data

69. Domestically controlled, cross-border consolidated data: Data on the net open position in foreign exchange are likely to be available from supervisory sources because of the supervisory interest in banks’ exposure to foreign currency. The extent to which the national approach to measuring the net open position meets the concepts in the Guide would require consideration. Regarding capital, sources of data are discussed in the nonperforming loans net of provisions to capital summary.

70. Domestic consolidated data: The net open position in foreign exchange is not available from national accounts-based data but might be obtained from supervisory sources or could be additionally requested (see Table 11.1). Regarding capital, sources of data are discussed in the nonperforming loans net of provisions to capital summary.

Encouraged FSIs

Deposit Takers

Capital to assets

Definition

71. This is the ratio of capital to total assets, without the latter being risk weighted. It measures the extent to which assets are funded by other than own funds and is a measure of the capital adequacy of the deposit-taking sector. The FSI is calculated by using capital as the numerator and assets (line 14 in Table 4.1) as the denominator. Total assets (nonfinancial and financial assets) are defined in paragraphs 4.37 to 4.38. The FSI is defined in paragraphs 6.20 and 6.21.

Issues for compilers and sources of data

72. Regarding capital, issues for compilers, including the definitions of capital, are discussed in the return on equity summary, and sources of data are discussed in the nonperforming loans net of provisions to capital summary.

73. Regarding total assets, issues for compilers and sources of data are discussed in the return on assets summary.

Large exposures to capital

Definition

74. This FSI is intended to identify vulnerabilities arising from the concentration of credit risk. The Guide sets out three approaches to defining this FSI at the sector level:

  • The total number of large exposures of deposit takers that are identified under the national supervisory regime (line 38 in Table 4.1).

  • Total exposure of the five largest deposit takers (or about five, depending on national circumstances) to the five largest, by asset size, resident entities (including all branches and subsidiaries) in both the other financial corporations sector and nonfinancial corporations sector, in addition to the exposure to the general government (line 51), as a percentage of the five largest deposit takers’ capital.

  • Total exposures of deposit takers to affiliated entities and connected counterparties (line 52) as a percentage of capital.

75. The FSI is defined in paragraphs 6.27 to 6.30.

Issues for compilers

76. From a supervisory point of view, large exposures are defined as one or more credit exposures to the same individual or group that exceed a certain percentage of regulatory capital, such as 10 percent. It is intended to be applicable at the level of the individual deposit taker. The number of large exposures of deposit takers is that identified under the national supervisory regime (see paragraph 4.76).

77. However, at the sector level, lending by the largest deposit takers to the largest entities in other sectors, such as the other financial corporations and nonfinancial corporations sectors, could have systemic consequences in the event of failure of the largest entities in the economy (paragraph 4.94). Moreover, experience has shown the potential significance of connected lending (paragraph 4.95).

78. Indications of a buildup of concentrated positions within sectoral or geographic distribution data could allow compilers to identify sectors and/or countries for which more detailed information might be required.

79. Regarding capital, issues for compilers are discussed in the return on equity summary.

Sources of data

80. Domestically controlled, cross-border consolidated data: Data on large exposures should be available from supervisory sources. The BCBS (1991) stresses the need for a satisfactory regime for the measurement and control of large exposures, including the need for appropriate levels of large exposure limits (to capital), with special attention paid to connected lending. Moreover, the BCBS (1991) notes the need to closely monitor risks arising from exposures to particular sectors and/or geographic areas. The extent to which national approaches to measuring large exposures meet the concepts in the Guide would require consideration. Regarding capital, data sources are discussed in the nonperforming loans net of provisions to capital summary.

81. Domestic consolidated data: Data on large exposures are not available from national accounts-based data but might be obtained from supervisory sources or additionally requested (see Table 11.1). Regarding capital, sources of data are discussed in the nonperforming loans net of provisions to capital summary.

Geographical distribution of loans to total loans

Definition

82. This FSI provides information on the geographic distribution of gross loans, by region. It allows the monitoring of credit risk arising from exposures to a group of countries. The approach by which claims are distributed geographically is defined in paragraph 3.36, and gross loans (line 18(i) of Table 4.1) are defined in paragraphs 4.45 to 4.48. The FSI is defined in paragraphs 6.63 and 6.64. The suggested regional classification follows that used in the IMF’s World Economic Outlook and is illustrated in Table 12.1.

Issues for compilers

83. Lending is classified geographically on the basis of the residence of the domestic reporting entity. Therefore, lending by any foreign branches and/or deposit-taking subsidiaries of the reporting entity to residents of the local economy in which they are located is classified as lending to nonresidents and allocated to the appropriate region of the world, while lending to residents of the economy for which the FSI data are being compiled is classified as lending to the domestic economy. If lending to any sub-region or countries is particularly significant, further disaggregation—and identification of the country or subregion—is encouraged.

84. Regarding total loans, issues for compilers are the same as in the nonperforming loans to total gross loans summary.

Sources of data

85. Domestically controlled, cross-border consolidated data: Supervisory sources might have available information on the geographic distribution of loans (see the sources of data entry in the large exposures to capital summary). The data prepared for BIS’s consolidated international banking statistics can be used. Otherwise, additional data might be requested. Regarding total loans, the sources of data are the same as described in the nonperforming loans to total gross loans summary.

86. Domestic consolidated data: Information on the geographic distribution of loans might not be available from national accounts or supervisory sources, but the BIS’s locational international banking statistics are a source for those countries that compile these BIS data. Otherwise, additional data might be requested. Any lending among deposit takers in the reporting population that are part of the same group should be excluded, but loans to deposit-taking branches and subsidiaries abroad are included in the data as lending to nonresidents. Regarding total loans, sources of data are the same as in the nonperforming loans to total gross loans summary.

Gross asset and liability positions in financial derivatives to capital

Definition

87. These FSIs are intended to provide an indication of the exposure of deposit takers’ financial derivative positions relative to capital. There are two FSIs under this heading. The first is calculated by using the market value of financial derivative assets (line 21 in Table 4.1) as the numerator, and the second is calculated by using the market value of financial derivative liabilities (line 29) as the numerator. Both FSIs use capital as the denominator. Financial derivatives are defined in paragraphs 4.56 to 4.58. The FSIs are defined in paragraphs 6.39 and 6.40.

Issues for compilers

88. The coverage of financial derivatives includes forwards (including swaps) and options.

89. Regarding capital, issues for compilers, including the definitions of capital, are discussed in the return on equity summary.

Sources of data

90. Domestically controlled, cross-border consolidated data: Data on the market value position of financial derivative assets and liabilities should be available from supervisory sources. Regarding capital, sources of data are discussed in the nonperforming loans net of provisions to capital summary.

91. Domestic consolidated data: The gross asset and liability positions in financial derivatives can be obtained from national accounts-based data (monetary and financial statistics), in the sectoral balance sheet. However, national accounts data are not on a consolidated basis, and any data should exclude financial derivatives positions among deposit takers in the reporting population that are part of the same group. Therefore, additional data might need to be separately requested (see Table 11.3). Regarding capital, sources of data are discussed in the nonperforming loans net of provisions to capital summary.

Trading income to total income

Definition

92. This FSI is intended to capture the share of deposit takers’ income from financial market activities, including currency trading. This FSI is calculated by using gains or losses on financial instruments (line 4(ii) of Table 4.1) as the numerator and gross income (line 5) as the denominator. Gains and losses on financial instruments are defined in paragraphs 4.22 to 4.27, and gross income is defined in paragraph 4.20. The FSI is defined in paragraphs 6.71 and 6.72.

Issues for compilers

93. Compilers should be aware that the Guide encourages the inclusion of realized and unrealized gains and losses arising during each period on all financial instruments (financial assets and liabilities, in domestic and foreign currencies) valued at market or fair value in the balance sheet, excluding equity in associates, subsidiaries, and any reverse equity investments (paragraph 4.22). Traditionally, in deposit takers’ accounts this item has covered gains and losses recorded on assets and liabilities held for a short period as deposit takers seek to take advantage of short-term fluctuations in market prices. The Guide’s reasoning for its approach is set out in paragraph 4.24. The Guide acknowledges that the proposed coverage of gains and losses may not be feasible in the short run and that data collection systems may need to be developed.

94. Moreover, at the sector level, gains and losses on deposit takers’ ownership of equities of other deposit takers in the reporting population should be deducted (paragraph 5.69).

95. Regarding gross income, issues for compilers are discussed in the interest margin to gross income summary.

Sources of data

96. Domestically controlled, cross-border consolidated data: Data on gains and losses on financial instruments should be available to supervisory sources, but the extent to which they meet the definitions in the Guide could depend on national commercial accounting practice. It is likely that there will be a need for the sector-wide adjustments set out above (see Table 11.4). Regarding gross income, sources of data are discussed in the interest margin to gross income summary. The available information may need to be aggregated to calculate both the numerator and the denominator for this FSI.

97. Domestic consolidated data: Data on gains and losses on financial instruments could be available from the revaluation account of the 1993 SNA, but at the present time collection of these data is relatively limited, and thus additional data may need to be separately requested (Table 11.1). If revaluation data are used, data on gains and losses on sales of subsidiaries and associates need to be excluded (see Table 11.1). It is likely that the need for the sector-wide adjustments set out above will require consideration (see Table 11.2). Regarding gross income, sources of data are discussed in the interest margin to gross income summary.

Personnel expenses to noninterest expenses

Definition

98. This FSI compares personnel costs with total noninterest costs. It is calculated by using personnel costs (line 6(i) in Table 4.1) as the numerator and noninterest expenses (line 6 of Table 4.1) as the denominator. Personnel costs and noninterest expenses are defined in paragraphs 4.30 and 4.31. The FSI is defined in paragraphs 6.75 and 6.76.

Issues for compilers

99. No recommendations are made at this time regarding the possible inclusion of stock options. Methodological work on the treatment of stock options is ongoing.

100. Regarding noninterest costs, issues for compilers are discussed in the noninterest expenses to gross income summary.

Sources of data

101. Domestically controlled, cross-border consolidated data: The data for personnel costs available to supervisory sources may depend on national commercial accounting practice. National practice will also determine the extent to which the data meet the definitions in the Guide. Regarding noninterest costs, sources of data are discussed in the noninterest expenses to gross income summary. The available information may need to be aggregated to calculate both the numerator and the denominator for this FSI.

102. Domestic consolidated data: Data on personnel costs should be available from national accounts-based sources—Table 11.9 identifies the relevant line items in the 1993 SNA. See also the entry for personnel costs including wage and salaries in Appendix IV. Regarding noninterest costs, sources of data are discussed in the noninterest expenses to gross income summary.

Spread between reference lending and deposit rates

Definition

103. This FSI is the difference (expressed in basis points) between the weighted average loan rate and the weighted average deposit rate, excluding rates on loans and deposits between deposit takers. To measure the spread, the Guide recommends at a minimum the calculation of the weighted average of all lending and deposit interest rates (excluding intrasector loans and deposits) during a reference period in the portfolio of resident deposit takers. The interest rate spread could also be calculated on a domestically controlled, cross-border consolidated basis, thus providing an indication of overall profitability but combining activity in different markets. The FSI is defined in paragraphs 8.5 to 8.10.

Issues for compilers

104. A method of calculating the weighted average lending rate is to divide the accrued amount of interest income on loans reported by deposit takers for a given period (numerator) by the average position of loans (denominator) for the same period. The weighted average deposit rate can be computed by dividing interest expense on deposits (numerator) by the average position of deposits (denominator) for the same period. Positions should be averaged using the most frequent observations available.

105. Contracted interest rates (that is, price data) can also be used to calculate weighted average interest rates for a given reference period, using the loan amounts as weights. Chapter 8 discusses these approaches and considers the merits of using endand average-period interest rates and of calculating interest rates on outstanding and new business. The treatment of interest on nonperforming loans and on lending at officially prescribed rates is also discussed in Chapter 8.

Sources of data

106. For the first method mentioned above, data on accrued amounts of interest on loans and deposits should be readily available from the accounting systems of deposit takers, while typically data on deposit takers’ positions in loans and deposits are regularly reported to central banks in balance sheet reports required for the compilation of monetary statistics.

107. Compiling information on contracted interest rates by type of loan and deposit may require that separate information be requested.

Spread between highest and lowest interbank rate

Definition

108. This FSI measures the spread between the highest and lowest interbank rates charged to deposit takers in the domestic interbank market. It is defined in paragraphs 8.21 to 8.24.

Issues for compilers

109. There can be limitations with this indicator. The framework through which central banks provide liquidity to money markets influences the overall liquidity of these markets, while one outlier can change the value of the indicator substantially. In addition, a perceived increase in risk might also be reflected in informal limits on the quantities (rather than the price) of funds that a deposit taker could borrow in the interbank market. While the agreed FSI is a spread, there might also be analytical interest in the dissemination of the highest and lowest interest rates so that they can be compared with other rates in the financial markets.

Sources of data

110. The source of these data is usually interbank dealers or brokers. The data might be available to supervisory authorities or the statistical departments of central banks.

Customer deposits to total (noninterbank) loans

Definition

111. This FSI is a measure of liquidity, in that it compares a stable deposit base with gross loans (excluding interbank activity). The FSI is calculated by using customer deposits (line 24(i) in Table 4.1) as the numerator and noninterbank loans (line 18(i.ii)) as the denominator. Customer deposits are defined in paragraphs 4.42 to 4.44, and loans are defined in paragraphs 4.45 to 4.48. The FSI is defined in paragraphs 6.50 and 6.51.

Issues for compilers

112. Assessing the extent to which a deposit is stable involves judgment, although experience suggests that some types of depositors are less likely to move their funds than others in response to a perceived weakness in an individual deposit taker or in the banking system. The key factors that can be taken into account are the type of depositor, the extent to which deposits are covered by credible insurance schemes, and remaining maturity.

113. The Guide recommends that the type of depositor be the primary factor in defining customer deposits, both because of its relevance and general applicability. Thus, customer deposits include all deposits (resident or nonresident) except those placed by other deposit takers and other financial corporations (resident or nonresident).

114. However, it is recognized that there can be variations to this approach. Large nonfinancial corporations might well manage their liquidity similarly to other financial corporations, and, thus, compilers might wish to exclude these deposits from the measure of customer deposits. Alternatively, customer deposits could also include those that have a remaining maturity of more than one year, regardless of the sector of the depositor.

115. In another approach, customer deposits could be determined by type of deposit—that is, deposits known for their “stability,” such as demand deposits, small-scale savings, time deposits, and/or those covered by a (credible) deposit insurance scheme.

116. Regarding total loans, issues for compilers are discussed in the nonperforming loans to total gross loans summary. Additionally, loans to other deposit takers in the reporting population are excluded from this measure of loans.

Sources of data

117. Domestically controlled, cross-border consolidated data: Supervisory sources might provide information that allows the compilation of a measure of customer deposits consistent with the approach of the Guide. Regarding total loans, sources of data are the same as in the nonperforming loans to total gross loans summary, while loans to other deposit takers in the reporting population should be available to supervisors.

118. Domestic consolidated data: Data on customer deposits based on the sector approach and data on interbank loans are available from monetary and financial statistics sources (subject to ensuring the appropriate sectoral coverage, see paragraph 2.4). Regarding total loans, data sources are discussed in the nonperforming loans to total gross loans summary.

Foreign-currency-denominated loans to total loans

Definition

119. This FSI measures the relative size of foreign currency loans within gross loans. It is calculated by using the foreign currency and foreign-currency-linked part of gross loans (line 46 in Table 4.1) to residents and nonresidents as the numerator, and gross loans (line 18(i)) as the denominator. Foreign currency loans are defined in paragraph 4.90. Loans are defined in paragraphs 4.45 to 4.48. For cross-border consolidated data, the determination of what is and what is not a foreign currency is determined by the residence of the parent entity of that specific consolidated group. The FSI is defined in paragraphs 6.65 and 6.66.

Issues for compilers

120. In the Guide, domestic currency is that which is legal tender in the economy and issued by the monetary authority for that economy or the common currency area. Any currencies that do not meet this definition are foreign currencies to that economy (paragraph 3.45).

121. The currency composition of assets (and liabilities) is primarily determined by the characteristics of future payment(s). Foreign currency instruments are those payable in a currency other than the domestic currency. A subcategory of foreign currency instruments are domestic-currency-linked instruments that are payable in a foreign currency but with the amounts to be paid linked to the domestic currency. Foreign-currency-linked instruments are those payable in domestic currency but with the amounts to be paid linked to a foreign currency. Foreign-currency-linked loans are included in the numerator, as movements in the domestic exchange rate will affect their value in domestic currency terms (paragraph 3.46).

122. In the special case where an economy uses as its only legal tender a foreign currency, this FSI could be compiled excluding borrowing in, and linked to, that foreign currency.

123. The most appropriate exchange rate to be used for conversion of a position into the unit of account is the market (spot) exchange rate prevailing on the reference date to which the position relates. The midpoint between buying and selling rates is preferred (paragraph 3.48).

Sources of data

124. Domestically controlled, cross-border consolidated data: Data on foreign-currency-denominated and foreign-currency-linked loans might be available from supervisory sources because of the supervisory interest in banks’ exposure to foreign currency. If such data are not available, they may need to be additionally requested. Regarding total loans, the sources of data are the same as described in the nonperforming loans to total gross loans summary. The available information may need to be aggregated to calculate both the numerator and the denominator of the FSI.

125. Domestic consolidated data: While some national accounts-based sources, in particular the monetary and financial statistics, may include data on foreign currency assets, data on foreign-currency-denominated and foreign-currency-linked loans may need to be additionally requested (see Table 11.1). If the data source is on an institutional unit basis, then foreign-currency-denominated and foreign-currency-linked loans among deposit takers in the reporting population that are part of the same group should be excluded. Regarding total loans, sources of data are the same as in the nonperforming loans to total gross loans summary.

Foreign-currency-denominated liabilities to total liabilities

Definition

126. This FSI measures the relative importance of foreign currency funding within total liabilities. The level of this ratio should be viewed along with the previous FSI: foreign-currency-denominated loans to total loans. The FSI is calculated using the foreign currency liabilities (line 47 in Table 4.1) as the numerator and total debt (line 28) plus financial derivative liabilities (line 29) less financial derivative assets (line 21) as the denominator. Foreign currency liabilities are defined in paragraph 4.90, while total debt is defined in paragraph 4.61, and financial derivatives are defined in paragraphs 4.56 to 4.58. The FSI is defined in paragraphs 6.67 and 6.68.

Issues for compilers

127. The definitions of foreign currency, foreign-currency-denominated and foreign-currency-linked instruments, as well as exchange rate conversion, are the same as those set out in the issues for compilers in the foreign-currency-denominated loans to total loans summary.

128. For total liabilities, it is recommended that the net market value position (liabilities less assets) of financial derivatives be included, rather than the gross liability position, because of the market practice of creating offsetting contracts and the possibility of forward-type instruments switching between asset and liability positions from one period to the next.

129. In the special case where an economy uses as its only legal tender a foreign currency, this ratio could be compiled excluding positions in, and linked to, this currency.

Sources of data

130. Domestically controlled, cross-border consolidated data: Data on foreign currency and total liabilities might well be available from supervisory sources. The extent to which the data meet the concepts in the Guide, particularly with regard to financial derivatives, would require consideration. The available information may need to be aggregated to calculate both the numerator and the denominator of this FSI.

131. Domestic consolidated data: While some national accounts-based sources, in particular the monetary and financial statistics and external debt data, may include data on foreign currency liabilities, data on foreign-currency-denominated and foreign-currency-linked liabilities may need to be additionally requested (see Table 11.1). Data on total liabilities should be available from national accounts sources, such as monetary and financial statistics (see paragraph 2.4). If the data are compiled on an institutional unit basis, then foreign-currency-denominated and foreign-currency-linked loans among deposit takers in the reporting population that are part of the same group should be deducted.

Net open position in equities to capital

Definition

132. This FSI is intended to identify deposit takers’ equity risk exposure compared with capital. It is calculated by using a deposit takers’ open position in equities (line 48 in Table 4.1) as the numerator and capital as the denominator. The FSI is defined in paragraphs 6.41 to 6.44. These paragraphs provide a detailed explanation as to how to measure the net open position in equities.

Issues for compilers

133. The guidance in the Guide for measuring the net open position in equity is based on that recommended by the BCBS. Therefore, deposit takers’ net open position (positive if a long position is held and negative if a short position is held) is the sum of on-balance-sheet holdings of equities and notional positions in equity derivatives.

134. The long and short positions in the market must be calculated on a market-value basis. Own equity issued by the deposit taker is excluded from the calculation, as is equity held in associates and unconsolidated subsidiaries (as well as reverse equity investments).

135. The notional positions in equity derivatives comprise the notional positions for futures and forward contracts relating to individual equities, futures relating to stock indices, equity swaps, and the market value of equity positions underlying options.

136. Regarding capital, issues for compilers, including the definitions of capital, are discussed in the return on equity summary.

Sources of data

137. Domestically controlled, cross-border consolidated data: Data on the net open position in equities are likely to be available from supervisory sources. The extent to which national approaches to measuring the net open position meet the concepts in the Guide would require consideration. Regarding capital, sources of data are discussed in the nonperforming loans net of provisions to capital summary.

138. Domestic consolidated data: The net open position in equities is not available from national accounts-based data but might be obtained from supervisory sources or additionally requested (see Table 11.1). Regarding capital, sources of data are discussed in the nonperforming loans net of provisions to capital summary.

Other Financial Corporations

Assets to total financial system assets

Definition

139. This FSI measures the relative importance of other financial corporations within the domestic financial system. The numerator is other financial corporations’ financial assets (line 3 in Table 4.2) and the denominator is total financial system assets. The latter is the total of financial assets owned by deposit takers (line 16, Table 4.1), other financial corporations, nonfinancial corporations (line 17, Table 4.3), households (line 11, Table 4.4), the general government, and the central bank. Financial assets are defined in paragraph 4.38. The FSI is defined in paragraph 7.6.

Issues for compilers

140. For total financial system assets, the coverage includes all entities resident in the domestic economy. Moreover, the Guide recommends that for each corporate sector—deposit takers, other financial corporations, and nonfinancial corporations—data be compiled on a consolidated basis; therefore, claims on other resident entities classified in the same sector should be eliminated. Cross-sector claims should not be eliminated.

141. For completeness, financial assets of NPISHs (see paragraph 2.17) could also be included within total financial system assets, but in many instances these might be relatively insignificant.

Sources of data

142. Domestic consolidated data: Data for total financial assets of other financial corporations and of the other sectors in the economy can be drawn from national accounts-based data, subject to the adjustments needed to exclude intragroup claims (see Tables 11.3, 11.5, and 11.7). To be able to make the adjustments, additional data might need to be requested.

143. Domestically controlled, cross-border consolidated data: For the larger entities, data might be drawn from published corporate financial statements and aggregated to derive the numerator of the FSI. However, the extent to which the resulting data would be consistent with the concepts in the Guide would require consideration.

Assets to gross domestic product

Definition

144. This FSI measures the importance of other financial corporations compared with the size of the economy. Other financial corporations’ financial assets (line 3 in Table 4.2) is the numerator and GDP is the denominator. Financial assets are defined in paragraph 4.38. The FSI is defined in paragraph 7.7.

Issues for compilers

145. For other financial corporations’ assets, issues for compilers are the same as in the other financial corporations’ assets to total financial system assets summary.

Sources of data

146. GDP data are available from the national accounts sources.

147. For other financial corporations’ assets, sources of data are the same as in the other financial corporations’ assets to total financial system assets summary. For this indicator, data are compiled on a domestic consolidated basis only.

Nonfinancial Corporations

Total debt to equity

Definition

148. This FSI is a measure of corporate leverage—the extent to which activities are financed out of own funds. The FSI is calculated by using debt (line 29 in Table 4.3) as the numerator and capital and reserves (line 31 of Table 4.3) as the denominator. Debt is defined in paragraph 4.61, and capital and reserves are defined in paragraph 4.62. The FSI is defined in paragraphs 7.10 and 7.11.

Issues for compilers

149. Debt claims among nonfinancial corporations in the reporting population that are part of the same group should be excluded.

150. Equity investments in associates and unconsolidated subsidiaries (and reverse investments) are to be recorded in the investor’s balance sheet (see paragraph 3.33) on the basis of the investor’s proportionate share in the capital and reserves of the associate and unconsolidated subsidiary, and not using the market value of the traded equity.

151. In measuring sector-wide capital, all intrasector equity investments are deducted from the overall capital in the sector so that capital and reserves held within the sector are not double counted (see Box 5.2). Moreover, in line with the approach for deposit takers, goodwill is deducted.

Sources of data

152. Domestic consolidated data: Nonfinancial corporations’ debt and capital can be drawn from national accounts-based data. However, additional data may be needed to make the adjustments noted above in the issues for compilers (see Tables 11.6 and 11.7).

153. Cross-border consolidated data: For the larger entities, data might be drawn from published corporate financial statements and aggregated to get both the numerator and the denominator of the FSI. However, the extent to which the resulting data would be consistent with the concepts in the Guide would require consideration, and there may be a need to make sector-wide adjustments.

Return on equity

Definition

154. This FSI is commonly used to capture nonfinancial corporations’ efficiency in using their capital. It is calculated by using EBIT (line 34 in Table 4.3) as the numerator and average value of capital and reserves (line 31) over the same period as the denominator. At a minimum, the denominator can be calculated by taking the average of the beginning- and end-period positions (for example, at the beginning and the end of the month), but compilers are encouraged to use the most frequent observations available in calculating the average. EBIT is defined in paragraph 4.116 (and see also 4.100 to 4.104). Capital and reserves are defined in paragraph 4.62. The FSI is defined in paragraphs 7.12 to 7.14.

Issues for compilers

155. As with deposit takers, income is calculated on a basis closer to commercial accounting and supervisory approaches than to national accounting. Therefore, the Guide encourages the inclusion of realized and unrealized gains and losses arising during each period on all financial instruments (financial assets and liabilities, in domestic and foreign currencies) valued at market or fair value in the balance sheet, excluding equity in associates, subsidiaries, reverse equity investments (paragraph 4.22), and gains and losses from the sales of fixed assets, which are measured as the difference between the sale value and the balance sheet value at the previous end period.

156. Sector-wide adjustments are also specified to prevent intrasectoral income from affecting the EBIT measure. Notably, dividends received and the parent’s share of an associate’s retained earnings (and similarly, arising from a reverse equity investment, an associate’s share of a parent’s retained earnings) are to be deducted from other income (net). Also excluded are any gains and losses on equity holdings in other nonfinancial corporations and sales of fixed assets to other nonfinancial corporations included in other income (net). Since goodwill is not classified as an asset, it is not amortized in the income account (see paragraph 4.110).

157. Because data are on a consolidated basis, transactions and positions among nonfinancial corporations in the reporting population that are part of the same group are excluded.

158. Regarding capital, issues for compilers, including the definitions of capital, are discussed in the total debt to equity summary.

Sources of data

159. Domestic consolidated data: Data can be drawn from national accounts-based data. However, additional data may be needed to make the adjustments noted above in the issues for compilers (see Tables 11.6 and 11.7).

160. Cross-border consolidated data: For the larger entities, data might be drawn from published corporate financial statements and aggregated to get both the numerator and the denominator in this FSI. The concept of earnings before tax and interest is one used in the analysis of corporate accounts. However, the extent to which the resulting data would be consistent with the concepts in the Guide would require consideration, and there may be a need to make sector-wide adjustments.

Earnings to interest and principal expenses

Definition

161. This FSI measures nonfinancial corporations’ capacity to cover their debt-service payments (interest and principal). It serves as an indicator of the risk that a firm may not be able to make the required payments on its debts. The FSI is calculated by using earnings (net income) before interest and tax (EBIT) (line 34 in Table 4.3) plus interest receivable from other nonfinancial corporations (line 33) as the numerator and debt-service payments (line 35) over the same period as the denominator. EBIT is defined in paragraph 4.116, interest receivable from other nonfinancial corporations is defined in paragraph 4.115, and debt-service payments are defined in paragraph 4.117. The FSI is defined in paragraphs 7.15 and 7.16.

Issues for compilers

162. The denominator, debt-service payments, includes payments to other nonfinancial corporations (excluding payments among nonfinancial corporations in the reporting population that are part of the same group). The numerator includes interest payments receivable (excluding those among nonfinancial corporations in the reporting population that are part of the same group) from other nonfinancial corporations. Therefore, the denominator and numerator have the same coverage.

163. Regarding EBIT, issues for compilers are discussed in the return on equity summary.

Sources of data

164. Domestic consolidated data: While the external debt statistics methodology requires collection of data on debt-service payments on external debt, it is likely that additional data on debt-service payments may need to be separately requested, including on payments among nonfinancial corporations in the reporting population that are part of the same group (see Tables 11.6 and 11.7).

165. Cross-border consolidated data: For the larger entities, data might be drawn from published corporate financial statements and aggregated to calculate both the numerator and the denominator in this FSI. Debt service coverage (particularly interest coverage) is a concept used in the analysis of corporate accounts. However, the extent to which the resulting data would be consistent with the concepts in the Guide would require consideration, and there may be a need to make sector-wide adjustments.

Net foreign exchange exposure to equity

Definition

166. This FSI measures nonfinancial corporations’ exposure to foreign currency risk compared with their capital. The larger the exposure to foreign currency risk, the greater the stress on the financial soundness of nonfinancial corporations from a significant currency depreciation and, as a consequence, the greater the stress on deposit takers. Nonfinancial corporations’ net foreign exchange exposure for on-balance-sheet items (line 36 in Table 4.3) is the numerator, and capital and reserves (line 31) is the denominator. The open position should be calculated as described for deposit takers in paragraphs 6.32 and 6.33. The FSI is defined in paragraphs 7.17 to 7.19.

Issues for compilers

167. The net foreign exchange position is to be measured using the same methodology as that described for deposit takers in the net open position in foreign exchange to capital summary.

168. Given the potential difficulty in compiling data on off-balance-sheet foreign currency exposures, the Guide encourages at least an initial focus on the corporate net foreign exchange exposure for on-balance-sheet items, but the FSI could also be calculated using total corporate net foreign exchange exposure (line 37) as the numerator.

169. Regarding capital, issues for compilers, including the definitions of capital, are discussed in the total debt to equity summary.

Sources of data

170. Domestic consolidated data: It is likely that additional data on the corporate net foreign exchange exposure may need to be separately requested, as it is not available from national accounts sources (see Table 11.6). Regarding capital, data sources are discussed in the total debt to equity summary.

171. Cross-border consolidated data: For the larger entities, data on the corporate net foreign exchange exposure might be available from published corporate financial statements for the larger firms and aggregated to get both the numerator and denominator, but the extent to which the resulting data would be consistent with the concepts in the Guide would require consideration. Regarding capital, data sources are discussed in the total debt to equity summary.

Number of applications for protection from creditors

Definition

172. This FSI is a measure of bankruptcy trends, but it is influenced by the quality and nature of bankruptcy and related legislation. It is a simple numerical addition of those nonfinancial corporations that have filed for protection from bankruptcy during the period. The FSI is defined in paragraph 7.20.

Issues for compilers

173. For sector-wide data, the data provided should be the total number of nonfinancial corporations resident in the economy that have filed for protection in a particular period. Filings by foreign subsidiaries of resident entities should not be included.

Sources of data

174. These data might be available from the national statistical office or the Department/Ministry of Commerce/Industry.

Households

Household debt to GDP

Definition

175. This FSI measures the overall level of household indebtedness (commonly related to consumer loans and mortgages) as a share of GDP. This FSI is calculated by taking household debt (line 20 in Table 4.4) as the numerator and GDP as the denominator. Debt is defined in paragraph 4.61. The FSI is defined in paragraphs 7.23 and 7.24.

Issues for compilers

176. The data for household debt comprise debt incurred by resident households of the economy only.

Sources of data

177. Domestic data: Information on household debt and GDP should be available from national accounts sources (see paragraph 11.15).

Household debt service and principal payments to income

Definition

178. This FSI measures the capacity of households to cover their debt payments (interest and principal). It is calculated by using household debt-service payments (line 24 in Table 4.4) as the numerator and gross disposable income (line 6) over the same period as the denominator. Household debt-service payments are defined in paragraph 4.122 (see also 4.117), and gross disposable income is defined in paragraph 4.120. The FSI is defined in paragraphs 7.25 and 7.26.

Issues for compilers

179. Obtaining data on the household sector is difficult. Coordination with the agency compiling data on the household sector for inclusion in national accounts statistics is essential.

Sources of data

180. Domestic data: Information on household disposable income should be available from national accounts sources. However, data on debt-service payments might not be available from national accounts sources, so additional data may need to be separately requested (see paragraph 11.16).

Market Liquidity

Average bid-ask spread in the securities market

Definition

181. This FSI is the difference between the prices at which market participants are willing to buy (bid) and sell (ask) assets; it is a measure of market tight-ness—the relative cost of engaging in a transaction irrespective of the absolute level of the market price of the items being sold. It is calculated as the difference between the best (highest) bid and the best (lowest) ask price in the market, expressed as a percentage of the midpoint of the buy and sell price of an asset—a benchmark domestic government or central bank debt security in the first instance. Bid-ask spreads tend to be narrower in more liquid and efficient markets. The FSI is defined in paragraphs 8.27 and 8.44 to 8.46.

Issues for compilers

182. Because of the link between market-based liquidity indicators and the indicator on deposit takers’ liquid assets, bid-ask spreads should be compiled, at a minimum, for financial instruments included in the wider measure of liquid assets. The natural starting point is to compile indicators (1) for domestic government or central bank bills that are used by the national authorities to influence liquidity conditions in their domestic economy, and (2) for corporate securities if they are included in the definition of liquid assets.

183. Similarly, the tightness of the local foreign exchange markets may also be relevant if foreign-exchange-denominated securities qualify as liquid assets.

184. The quantities of securities that can be traded at the best bid price and at the best ask price, respectively, provide important information for interpreting the bid-ask spread, and the Guide encourages the dissemination of this information along with the bid-ask spread (paragraph 8.47).

185. The bid-ask spread should be compiled on a daily basis or, at a minimum, on a weekly basis. The frequency of price observations can be on a tick-by-tick basis, but preferably at least two quotes per day should be taken (for example at 10:30 a.m. and at 2:30 p.m.). If price observations are taken on a less than hourly basis, care is needed to avoid biases related to systematic volatility of intraday price quotes (paragraph 8.48).

186. The Guide provides other advice, on how to calculate the spread if the bid and ask quotes are in terms of yield rather than in terms of price (paragraph 8.46 and Box 8.1), and provides an additional way of calculating the bid-ask spread that takes into account the quantity of securities that can be traded at the quoted prices (paragraph 8.49).

Sources of data

187. Major exchanges located in the domestic economy can be used as a source of data for compiling bid-ask spreads. Other sources can include dealer associations, central banks, and commercial databases, although compilers who approach a commercial database vendor will need to make their own judgments about whether the product being offered meets their needs. Coverage of all market makers, the likely primary source of the information, may not be necessary. It is recommended that the top five market makers or at least those accounting for a minimum of 75 percent of market turnover should be covered. Automated electronic market making can also be covered.

Average daily turnover ratio in the securities market

Definition

188. This FSI is the ratio of average daily trades to the outstanding stock of securities; it is a measure of market depth—the ability of a market to absorb large trade volumes without a significant impact on market prices. It is calculated as the number of securities bought and sold during a trading period divided by the average number of securities outstanding at the beginning and the end of the trading period. The volume of all trades executed during official trading hours of the markets should be captured. The Guide recommends that turnover be calculated in the first instance for a benchmark domestic government or central bank debt security. The FSI is defined in paragraph 8.39.

Issues for compilers

189. As regards other types of securities to cover and the periodicity of compilation, the same considerations apply as described in the issues for compilers in the average bid-ask spread in the securities market summary.

190. There is a lack of data on foreign exchange market turnover outside of the triennial central bank survey of foreign exchange (and derivative market activity) conducted by the BIS.

Sources of data

191. Sources of data are the same as described in the average bid-ask spread in the securities market summary.

Real Estate Markets

Real estate prices

Definition

192. This FSI covers residential and commercial real estate price indices separately. Currently, there is limited international experience in constructing representative real estate price indices, reflecting the difficulty of the task: real estate markets are heterogeneous, both within and across countries, and illiquid. Therefore, the Guide describes a range of techniques whose application can be based on local needs, conditions, and resources rather than recommending a single set of indices or compilation methods. The need to prepare inventories of residential and commercial properties to provide a baseline for compilation of price indices is noted (paragraph 9.12).

193. The Guide discusses two major methods for constructing real estate price indices: the Laspeyres real estate price index (see paragraphs 9.20 to 9.24) and the hedonic or quality-adjusted regression price index (see paragraphs 9.25 and 9.26). Among other price measures discussed are average price (unit value) indices (paragraphs 9.16 and 9.17) and liquidity-adjusted price indices (paragraph 9.27).

Issues for compilers

194. The Laspeyres index calculates the weighted average change in prices over a period for a fixed basket of real estate in some base period. The hedonic regression price index derives the price series for a standard real estate unit by regressing and removing the price influence of multiple specific quality factors that affect actual sales prices. However, hedonic approaches can be complex and expensive in terms of data demands and require professional knowledge of compiling such measures.

195. The Guide also describes the “unit-value index” which, although not a price index, is probably the most widely available price measure for real estate and sometimes provides useful information about large changes in prices. However, this index can be seriously biased by a few transactions with extreme values, changes in the mix of transactions, or changes in the quality of the units being sold (paragraphs 9.16 and 9.17).

196. Commercial real estate has specific features that can influence the task of compilation, including the great diversity of types of commercial real estate, which may be specialized because of the specific business of the occupant. On the other hand, the commercialized nature of the product permits many properties to be characterized as a commodity, consisting of a square footage of commercial space (see paragraphs 9.28 to 9.31).

Sources of data

197. Transactions data for real estate may be available from official registries of such information. These registries are responsible for recording the transfers of property ownership in their locality; when ownership changes hands, they update their records. Another source of transactions data is real estate agents, who bring together buyers and sellers of real estate. Data from these two sources may assist in the construction of a price index, particularly if the data are available over time for real estate of a similar or common type. Financial institutions active in lending to the real estate market may also be a source of information.

Residential real estate loans to total loans

Definition

198. This FSI is intended to identify deposit takers’ exposure to the residential real estate sector, with the focus on household borrowers. It is calculated by using residential real estate loans as the numerator (line 43 in Table 4.1) and gross loans (line 18(i)) as the denominator. Residential real estate loans are defined in paragraph 4.88, and loans are defined in paragraphs 4.45 to 4.48. The FSI is defined in paragraphs 6.58 to 6.60.

Issues for compilers

199. For the compilation of this FSI, the consistent application by deposit takers of a definition of residential real estate is central: houses, apartments, and other dwellings (such as houseboats and mobile homes), and any associated land intended for occupancy by individual households.

200. Household borrowing collateralized by real estate can be used as the numerator (line 25 in Table 4.4). While not all real estate lending to households is collateralized by residential real estate, it is often the prevailing practice.

201. Regarding total loans, issues for compilers are the same as in the nonperforming loans to total gross loans summary.

Sources of data

202. Domestically controlled, cross-border consolidated data: Data on residential real estate loans may need to be additionally requested if they are not available from supervisory sources. The available information may need to be aggregated. Regarding total loans, the sources of data are the same as in the nonperforming loans to total gross loans summary.

203. Domestic consolidated data: Residential real estate loans may be available from monetary and financial statistics sources that provide an industrial classification of lending by type of economic activity (Box A3.1 in Appendix III). Otherwise, additional data may need to be separately requested (see Table 11.1). Regarding total loans, the sources of data are the same as in the nonperforming loans to total gross loans summary.

Commercial real estate loans to total loans

Definition

204. This FSI measures banks’ exposure to the commercial real estate market. It is calculated by using as the numerator loans collateralized by commercial real estate, loans to construction companies, and loans to companies active in the development of real estate (line 44 of Table 4.1), and by using gross loans (line 18(i)) as the denominator. Commercial real estate loans are defined in paragraph 4.88, and loans are defined in paragraphs 4.45 to 4.48. The FSI is defined in paragraphs 6.61 and 6.62.

Issues for compilers

205. As with residential real estate loans, the consistent application by deposit takers of a definition of what constitutes commercial real estate lending is central. Commercial real estate lending among deposit takers in the reporting population that are part of the same group is deducted.

206. Regarding total loans, issues for compilers are the same as in the nonperforming loans to total gross loans summary.

Sources of data

207. Domestically controlled, cross-border consolidated data: Data on commercial real estate loans may need to be additionally requested if they are not available from supervisory sources. The available information may need to be aggregated. Regarding total loans, sources of data are the same as in the nonperforming loans to total gross loans summary.

208. Domestic consolidated data: Commercial real estate loans may be available from monetary and financial statistics sources that provide an industrial classification of lending by type of economic activity (Box A3.1 in Appendix III). If so, lending among resident deposit takers that are part of the same group should be deducted. Otherwise, additional data may need to be separately requested (see Table 11.1). Regarding total loans, sources of data are the same as in the nonperforming loans to total gross loans summary.

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