1. Introduction

International Monetary Fund. Statistics Dept.

1. Introduction

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International Monetary Fund. Statistics Dept.

International Monetary Fund. Statistics Dept.
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Language:: English

Print Publication Date:: 27 Dec 2019

Keywords:: M&G; capital; loan; foreign currency; holding company; DT subsidiary; DT sector; parent corporation; FSI compiler; regulatory capital; capital range; Financial soundness indicators; Personal income; Loans; Real estate prices; Financial statements; Global; Western Hemisphere; Middle East and Central Asia; Sub-Saharan Africa; Europe; Caribbean; OFC fsis; capital definition; core FSI specific; debt service; coverage ratio; Basel III; Insurance; Nonbank financial institutions

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Abstract

1.1 This 2019 Financial Soundness Indicators Compilation Guide (Guide) provides guidance on the concepts and definitions, data sources and methods for the compilation and dissemination of financial soundness indicators (FSIs). (Table 1.1 contains the set of core and additional FSIs.)

I. Overview

1.1 This 2019 Financial Soundness Indicators Compilation Guide (Guide) provides guidance on the concepts and definitions, data sources and methods for the compilation and dissemination of financial soundness indicators (FSIs). (Table 1.1 contains the set of core and additional FSIs.)

^{Table 1.1}

Financial Soundness Indicators: The Core and Additional

Source: IMF staff. Note: DT = deposit taker; OFC = other financial corporation.

1.2 FSIs are indicators of the current financial health and soundness of the financial institutions in a country, and of their corporate and household counterparts. They include both aggregated individual institution data and indicators that are representative of the markets in which the financial institutions operate. Supervisory data are important sources for calculation of FSIs. FSIs are calculated and disseminated to support macroprudential analysis. They focus on indicators of financial soundness directly relevant for the financial sector. The reason is twofold: FSIs have traditionally been associated to financial institutions and the necessary data sources are sufficiently available. For the same reasons, this Guide gives less emphasis to non-financial corporations or other areas of the financial sector, like shadow banking.

1.3 The Guide has benefited from extensive consultations with FSI compilers and users, including (i) presentation to the IMF Board of the 2013 Board paper on the outcomes of STA consultations on revising the current list of FSIs in response to the global financial crisis, adoption of the Basel III Accord and the G-20 Data Gaps Initiative; (ii) the April 2017 Statistics Department Workshop on Financial Soundness Indicators—A Users’ Perspective; and (iii) consultations with the FSI Reference Group of experts, G-20 representatives, and Inter-Agency Group on Economic and Financial Statistics (IAG). The new Guide incorporates changes in international regulatory standards, including new capital and liquidity requirements, and provides more practical advice on compilation issues.

1.4 The Guide is more prescriptive—to facilitate the compilation and cross-country comparability of these data— and more forward looking than 2006 Financial Soundness Indicators Compilation Guide (2006 Guide) to assist users in their macrofinancial surveillance efforts for financial stability purposes.

1.5 The Guide reflects advances in the regulatory framework, most prominently embodied in the Basel III reform—including new definitions and measures of capital and new global liquidity standards. Recommendations on accounting practices have been updated to reflect new and revised International Financial Reporting Standards (IFRS). The Guide, consistent with current Basel Committee guidance, recommends that the distinction between general and specific provisions, which is a concept not included in the IFRS 9 expected loss model, should be determined in line with national supervisory standards.

II. Background

1.6 A well-functioning financial system can act as an engine of growth through the provision of efficient maturity and liquidity transformation, credit origination, and other services. However, financial intermediation is also vulnerable to liquidity risks arising from the use of short term liabilities to fund longer-term assets, and potentially inadequate capital buffers to absorb unexpected losses. If unchecked, these vulnerabilities can result in full-fledged economic crisis.

1.7 Vulnerabilities at the institution level have long been recognized, resulting in prudential standards and supervisory oversight. The IMF introduced FSIs in the late 1990s to identify emerging risks in the financial sector, at the aggregate level. The core FSIs for deposit takers were inspired by a common supervisory rating system known as CAMELS.¹ As noted in the 2006 Guide, “The long-established surveillance of individual institutions is being supplemented by the monitoring of risks to the stability of national financial systems arising from the collective behavior of individual institutions.”²

1.8 FSIs steadily became a staple of macrofinancial analysis, featuring in a number of countries’ Financial Stability Reports, and IMF surveillance work, including Article IV Consultation Reports, Global Financial Stability Reports, and Financial Sector Assessment Programs (FSAPs).

1.9 The global financial crisis exposed a number of weaknesses in the approach to identification and mitigation of financial sector risks. Insufficient attention had been devoted to aggregate risks in the financial system, and to the linkages between the real and financial sectors. In addition, large international banks were found to hold insufficient capital against their risk exposures, particularly through special purpose vehicles, securitized assets, and derivatives. Some instruments included in regulatory capital proved not to be truly loss-absorbing in the crisis, and it became clear that in some jurisdictions banks and their supervisors had paid insufficient attention to liquidity risk in the long period of benign market conditions preceding the crisis.

1.10 In sum, the crisis brought to the fore the need to strengthen financial regulation, which in turn triggered revision of the FSIs to reflect the new international standards on capital and liquidity that were more risk-based and forward looking, and to supplement the new FSIs with tail risk measures. The new FSIs are well aligned with enhanced regulatory practices that are more risk sensitive and forward looking and are supplemented with concentration and distribution measures. New FSIs expand coverage of money market funds, insurance corporations, pensions as well as the nonfinancial corporate and household sectors, potentially providing greater insights into the linkages between the financial and real sectors.

1.11 Because risks evolve, there is little doubt that future editions of FSIs will need to cover new topics such as digital financial intermediation and other emerging risks. As international consensus emerges around prudential standards and supervisory approaches to new risks, new or revised FSIs will be developed to provide relevant statistics for financial stability analysis.

III. The Structure of the Guide

1.12 The Guide is presented in four parts: the foundational blocks, including accounting principles underlying data compilation and consolidation bases— Chapters 2–6; specific guidance on how to calculate the individual FSIs and metadata reporting—Chapters 7–10; compilation and dissemination issues likely to be faced by compilers—Chapter 11; and the intersection of FSIs and macroprudential analysis—Chapter 12–13.

1.13 The Guide is provided to facilitate the compilation and dissemination of the FSIs agreed by the IMF Executive Board, the IMF/FSB G-20 Data Gaps Initiative (DGI) and the FSI Reference Group. Specifically, the content of each chapter is as follows:

IV. Foundational Blocks

1.14 Chapter 2 of the Guide describes in more detail key aspects of the System of National Accounts 2008 essential for sectoral analysis, including institutional units, residency, institutional sectors, and the financial corporation subsectors. The financial corporations subsector, together with financial instruments and markets and government regulation, comprises the financial sector. The Core FSIs focus on the deposit- taking component of the financial corporations subsector, with additional FSIs providing insights into non-DT financial corporations. The section on the payment system, which appeared in the original 2006 Guide, has been removed from the Guide due to its lesser relevance to the compilers.

1.15 Chapter 3 updates and consolidates the coverage of Basel prudential standards relevant for the compilation of FSIs. Previously, the focus was on the original Basel Capital Accord and Basel II, and the information was spread over several chapters. Now, Chapter 3 includes some of the most recent Basel Committee on Banking Supervision enhancements to the Basel II and Basel III frameworks, with a special focus on capital and liquidity standards.

1.16 Tree main contributions stand out in this chapter: an overview of the evolution of the Basel Accords from Basel I to Basel III tailored to FSI compilers; a detailed description of capital and liquidity standards relevant for the compilation of FSIs and a careful description of the aggregation of capital components under different Basel Accords.

1.17 Chapter 4 incorporates advances on accounting practices and defers for the most part to IFRS standards. The major exception is the treatment of general and specific provisions, concepts that are not found in the expected loss model of IFRS 9. Continuing the practice from the previous Guide, and in line with current Basel Committee Guidance, the Guide recommends following national supervisory practices with respect to loan classification and provisioning. The chapter defines short-term maturity as up to three months (e.g., short-term liabilities should include liabilities with remaining maturity of three months or less) addressing a confusion in the 2006 Guide which in some places defined short term maturity as one year or less.

1.18 Chapter 5 aligns the description of financial assets and liabilities with the System of National Accounts 2008. The chapter includes sectoral financial statements and memorandum series for money market funds, insurance corporations, and pension funds to guide the source data collection for the compilation of FSIs in each of these subsectors. The chapter provides guidance on a number of technical issues, generally following IFRS and Basel Committee guidance, but in some cases deferring to national supervisory standards.

1.19 The chapter on Aggregation and Consolidation of Data (Chapter 6) is more explicit about the fact that the most relevant type of consolidation for DTs will generally be the cross-border, cross-sector, domestically incorporated consolidation basis (CBCSDI). While the 2006 Guide deferred to countries on the choice of whether to include insurance subsidiaries in their consolidation exercise, this Guide recommends exclusion of insurance companies from the deposit takers for consolidation purposes, to promote cross-country comparability of data. This exclusion is in line with supervisory practices whereby banks’ insurance subsidiaries are generally not consolidated for supervisory reporting.

V. Description of Financial Soundness Indicators

1.20 Chapter 7 focuses on the core FSI for DTs and features the definition, analytical interpretation, data sources, and compilation issues for each of the core FSIs for DTs.

1.21 Chapter 8 presents the recommended “additional set” of FSIs for DTs. Many of these indicators were part of the indicators known as “encouraged indicators” of the 2006 Guide with two exceptions: the indicator Tier 1 capital to assets (leverage ratio) is now part of the core FSI for DT (Chapter 7); net open position in equity to capital has been discontinued. In addition, credit growth of private sector is now part of the “additional set” of FSIs, recognizing its role as a leading indicator in financial stability analysis.

1.22 Chapter 9, Specification of Financial Soundness Indicators for Other Financial Corporations, features FSIs for non-DT financial corporations. Many of these indicators were part of the FSIs for other sectors in the 2006 Guide. One of the main innovations in this Guide is the development of a comprehensive set of reporting requirements and FSIs for OFCs—in contrast with the focus on the reporting of total OFC assets in the 2006 Guide. OFC FSIs now include FSIs for Money Market Funds (MMFs), Insurance Corporations (ICs—separately for life and nonlife), and Pension Funds (PFs). Chapter 9 recommends that OFCs balance sheets be compiled on a residency-based basis for all OFC subsectors, except for countries with OFCs that have significant cross-border activities, for which cross-border consolidation is relevant.

1.23 Chapter 10 focuses on selected soundness indicators of non-financial corporations, households, and real estate markets. This chapter provides a compilation methodology for a revised set of indicators for NFCs to provide more information to data users on developments in debt positions and debt servicing capacity of NFCs. Changes to the FSIs for NFCs include (i) external debt to equity and foreign currency debt to equity ratios are introduced supplementing the existing total debt to equity ratio, (ii) two new indicators: total debt to GDP and earnings to interest expenses are introduced, and (iii) two indicators (net foreign exchange exposure to equity and number of applications for protection from creditors) were dropped due to limited reporting and comparability.

1.24 Chapter 10 provides a compilation methodology for a revised set of indicators for the households sector to better capture the financial health of the HH sector for macroprudential analysis and systemic risk monitoring. In addition to two existing FSIs for the HH sector (HH debt to GDP and HH debt-service and principal payments to income), the revised set of FSIs for the HH sector includes an additional indicator on the HH debt to income.

1.25 The 2006 Guide did not recommend a single approach for the real estate price indices but described a range of techniques that could be implemented based on national circumstances. The Guide explicitly recommends the compilation of FSIs for (i) residential real estate price index (residential property price index, RPPI) and (ii) commercial real estate price index (commercial property price index, CPPI). Given the increasing policy focus on monitoring residential real estate prices that has been reflected in the inclusion of RPPI in the FSI category for SDDS Plus, RPPI is now included among the core FSIs.

VI. Compilation and Dissemination Issues

1.26 Chapter 11 merges Chapters 10–12 in the 2006 Guide. The chapter shortens the discussion on strategic and managerial issues related to the data collection and compilation and provides more specific recommendations regarding the data frequency and timeliness.

VII. The Intersection of FSIs and Macroprudential Analysis

1.27 Chapter 12, “Concentration and Distribution Measures,” (CDMs) is prescriptive and provides concrete guidance for the computation of the selected FSIs for which to apply specific CDMs. The chapter also discusses ways to overcome confidentiality concerns about CDM reporting.

1.28 Chapter 13 provides a comparison between macro-prudential and micro-prudential policies. The chapter discusses the potential and existing uses of FSIs in the context of calibration of macroprudential tools as well as financial stability analysis with references to the recent macroprudential literature.

1.29 The chapter also discusses the uses of FSIs as inputs and outputs to analytical approaches (e.g., stress testing, and network analysis), their relevance to macroprudential indicators and macroprudential toolkits, and provides examples of uses of FSIs at the national macroprudential policy and financial stability analysis. Finally, Chapter 13 outlines challenges hampering an enhanced use of FSIs.

1.30 Finally, Table 1.2 presents a mapping of the 2006 to the 2019 FSIs.

^{Table 1.2}

Financial Soundness Indicators: Mapping from the 2006 Guide

Source: IMF staff. Note: IFRS = international financial reporting standards.

^¹The FSIs from the 2006 Guide not in this table have been dropped.

^{Table 1.2}

Financial Soundness Indicators: Mapping from the 2006 Guide

Core Set
Deposit Takers		Mapping from the 2006 Guide¹
Capital Adequacy	Regulatory capital to risk-weighted assets Tier 1 capital to risk-weighted assets Nonperforming loans net of provisions to capital	Basel III capital definitions introduced Basel III capital definitions introduced Follow supervisory guidance to allocate IFRS allowance for expected credit loss to specific and general provisions Clarification that the denominator is total regulatory capital (previously capital and reserves)
	Common Equity Tier 1 capital to risk-weighted assets	New FSI
	Tier 1 capital to assets	New FSI, replaces the encouraged FSI capital to assets. Jurisdictions implementing the Basel III leverage ratio to use the Basel definition of “exposure” as the denominator
Asset Quality	Nonperforming loans to total gross loans Loan concentration by economic activity Provisions to nonperforming loans	Unchanged Revised specification, ratio of lending to three largest economic sectors to total loans New FSI. Follow supervisory guidance to allocate IFRS allowance for expected credit loss to specific and general provisions
Earnings and Profitability	Return on assets Return on equity Interest margin to gross income Noninterest expenses to gross income	Unchanged Based on net income after tax figures Unchanged Unchanged
Liquidity	Liquid assets to total assets (liquid asset ratio) Liquid assets to short term liabilities Liquidity Coverage Ratio Net Stable Funding Ratio	Unchanged Unchanged New FSI, introduces Basel III liquidity definitions New FSI, introduces Basel III liquidity definitions
Sensitivity to Market Risk	Net open position in foreign exchange to capital	Unchanged
*Real Estate Markets*	Residential real estate prices	Now a core FSI specific to residential real estate prices Previously an encouraged FSI
Additional Set
*Deposit Takers*	Large exposures to capital	Now only one recommended approach to compiling the numerator, summing all exposures exceeding 10 percent of Tier 1 capital. Denominator is now Tier 1 capital rather than total capital, aligning with more recent Basel Committee guidance
	Geographical distribution of loans to total loans	Unchanged
	Gross asset position in financial derivatives to capital	Clarification that the denominator is total regulatory capital (previously capital and reserves)
	Gross liability position in financial derivatives to capital	Clarification that the denominator is total regulatory capital (previously capital and reserves)
	Trading income to total income	Unchanged
	Personnel expenses to noninterest expenses	Unchanged
	Spread between reference lending and deposit rates	Unchanged
	Spread between highest and lowest interbank rate	Unchanged
	Customer deposits to total (noninterbank) loans	Unchanged
	Foreign-currency-denominated loans to total loans	Unchanged
	Foreign-currency-denominated liabilities to total liabilities	Unchanged
	Credit growth to private sector	New FSI
*Other Financial Corporations*	Assets to total financial system assets (for total of OFCs and by subsectors)	New FSIs provide additional detail relative to the previous encouraged FSI for the other financial corporations, reported for total OFCs and subsectors.
	Assets to gross domestic product (GDP) (for total of OFCs and by subsectors)	New FSIs provides additional detail relative to the previous encouraged FSI for the other financial corporations, reported for total OFCs and subsectors.
*Money Market Funds*	Sectoral distribution of investments Maturity distribution of investments	New FSI New FSI
*Insurance Corporations*	Shareholder equity to total invested assets (life and non-life insurance)	New FSI
	Combined ratio (non-life insurance only)	New FSI
	Return on assets (life insurance only)	New FSI
	Return on equity (life and non-life insurance)	New FSI
Additional Set
		Mapping from the 2006 Guide¹
*Pension Funds*	Liquid assets to estimated pension payments in the next year Return on assets	New FSI New FSI
*Nonfinancial Corporations Sector*	Total debt to equity External debt to equity Foreign currency debt to equity Total debt to GDP Return on equity Earnings to interest and principal expenses Earnings to interest expenses	Unchanged New FSI New FSI New FSI Unchanged Unchanged New FSI
*Households*	Household debt to GDP Household debt service and principal payments to income Household debt to household disposable income	Unchanged Unchanged New FSI
*Real Estate Markets*	Commercial real estate prices Residential real estate loans to total loans Commercial real estate loans to total loans	Unchanged Unchanged Unchanged

Source: IMF staff. Note: IFRS = international financial reporting standards.

^¹The FSIs from the 2006 Guide not in this table have been dropped.

^{Table 1.2}

Financial Soundness Indicators: Mapping from the 2006 Guide

Core Set
Deposit Takers		Mapping from the 2006 Guide¹
Capital Adequacy	Regulatory capital to risk-weighted assets Tier 1 capital to risk-weighted assets Nonperforming loans net of provisions to capital	Basel III capital definitions introduced Basel III capital definitions introduced Follow supervisory guidance to allocate IFRS allowance for expected credit loss to specific and general provisions Clarification that the denominator is total regulatory capital (previously capital and reserves)
	Common Equity Tier 1 capital to risk-weighted assets	New FSI
	Tier 1 capital to assets	New FSI, replaces the encouraged FSI capital to assets. Jurisdictions implementing the Basel III leverage ratio to use the Basel definition of “exposure” as the denominator
Asset Quality	Nonperforming loans to total gross loans Loan concentration by economic activity Provisions to nonperforming loans	Unchanged Revised specification, ratio of lending to three largest economic sectors to total loans New FSI. Follow supervisory guidance to allocate IFRS allowance for expected credit loss to specific and general provisions
Earnings and Profitability	Return on assets Return on equity Interest margin to gross income Noninterest expenses to gross income	Unchanged Based on net income after tax figures Unchanged Unchanged
Liquidity	Liquid assets to total assets (liquid asset ratio) Liquid assets to short term liabilities Liquidity Coverage Ratio Net Stable Funding Ratio	Unchanged Unchanged New FSI, introduces Basel III liquidity definitions New FSI, introduces Basel III liquidity definitions
Sensitivity to Market Risk	Net open position in foreign exchange to capital	Unchanged
*Real Estate Markets*	Residential real estate prices	Now a core FSI specific to residential real estate prices Previously an encouraged FSI
Additional Set
*Deposit Takers*	Large exposures to capital	Now only one recommended approach to compiling the numerator, summing all exposures exceeding 10 percent of Tier 1 capital. Denominator is now Tier 1 capital rather than total capital, aligning with more recent Basel Committee guidance
	Geographical distribution of loans to total loans	Unchanged
	Gross asset position in financial derivatives to capital	Clarification that the denominator is total regulatory capital (previously capital and reserves)
	Gross liability position in financial derivatives to capital	Clarification that the denominator is total regulatory capital (previously capital and reserves)
	Trading income to total income	Unchanged
	Personnel expenses to noninterest expenses	Unchanged
	Spread between reference lending and deposit rates	Unchanged
	Spread between highest and lowest interbank rate	Unchanged
	Customer deposits to total (noninterbank) loans	Unchanged
	Foreign-currency-denominated loans to total loans	Unchanged
	Foreign-currency-denominated liabilities to total liabilities	Unchanged
	Credit growth to private sector	New FSI
*Other Financial Corporations*	Assets to total financial system assets (for total of OFCs and by subsectors)	New FSIs provide additional detail relative to the previous encouraged FSI for the other financial corporations, reported for total OFCs and subsectors.
	Assets to gross domestic product (GDP) (for total of OFCs and by subsectors)	New FSIs provides additional detail relative to the previous encouraged FSI for the other financial corporations, reported for total OFCs and subsectors.
*Money Market Funds*	Sectoral distribution of investments Maturity distribution of investments	New FSI New FSI
*Insurance Corporations*	Shareholder equity to total invested assets (life and non-life insurance)	New FSI
	Combined ratio (non-life insurance only)	New FSI
	Return on assets (life insurance only)	New FSI
	Return on equity (life and non-life insurance)	New FSI
Additional Set
		Mapping from the 2006 Guide¹
*Pension Funds*	Liquid assets to estimated pension payments in the next year Return on assets	New FSI New FSI
*Nonfinancial Corporations Sector*	Total debt to equity External debt to equity Foreign currency debt to equity Total debt to GDP Return on equity Earnings to interest and principal expenses Earnings to interest expenses	Unchanged New FSI New FSI New FSI Unchanged Unchanged New FSI
*Households*	Household debt to GDP Household debt service and principal payments to income Household debt to household disposable income	Unchanged Unchanged New FSI
*Real Estate Markets*	Commercial real estate prices Residential real estate loans to total loans Commercial real estate loans to total loans	Unchanged Unchanged Unchanged

Source: IMF staff. Note: IFRS = international financial reporting standards.

^¹The FSIs from the 2006 Guide not in this table have been dropped.

The acronym CAMELS stands for Capital adequacy, Asset quality, Management capability, Earnings, Liquidity, and Sensitivity to market risk.

2006 Guide, paragraph 1.6.

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Abstract

I. Overview

II. Background

III. The Structure of the Guide

IV. Foundational Blocks

V. Description of Financial Soundness Indicators

VI. Compilation and Dissemination Issues

VII. The Intersection of FSIs and Macroprudential Analysis

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