Nonfinancial assets

5.33 Nonfinancial assets are all economic assets other than financial assets. Nonfinancial assets provide benefits to their owners but do not represent claims on other institutional units. It is expected that balance sheets of DTs and OFCs show a small proportion of nonfinancial assets within the total.²³ Nonfinancial assets are further discussed when presenting the sectoral balance sheet for NFCs (paragraph 5.141).

5.34 Some nonfinancial assets of DTs might be goods and real estate property acquired in the process of collecting impaired loans. These are not part of the fixed and other nonfinancial assets used in the normal conduct of their business, but assets that will be sold to (totally or partially) recover the outstanding loans.

Financial assets and liabilities

5.35 Financial assets are a subset of economic assets that are financial instruments. Most financial assets are financial claims arising from contractual relationships created when one institutional unit provides funds or other resources to another.²⁴ These contracts are the basis of creditor/debtor relationships through which asset owners acquire unconditional claims on economic resources of other institutional units. When a financial claim is created, a liability of equal value is simultaneously incurred by the debtor as the counterpart to the financial asset.

5.36 The identification and presentation of the different types of financial assets and liabilities can vary depending on analytical needs and national accounting practices. In the list of FSI ratios, the primary focus is on instruments by functional type, such as loans, debt securities, or derivatives. Thus, in the Guide, the primary classifications of financial assets and liabilities are currency and deposits, loans, debt securities, equity and investment fund shares (assets), financial derivatives, and other assets/liabilities.

5.37 Currency consists of notes and coins that are of fixed nominal values and are issued or authorized by central banks or governments. Currency is divided into domestic currency and foreign currency. Domestic currency is the legal tender in the economy and is issued by the central bank (or government) of that economy or of the common currency area to which the economy belongs. Foreign currency represents claims on nonresident central banks or governments. Gold and commemorative coins that are not in circulation as legal tender are classified as nonfinancial assets rather than as currency.

5.38 Deposits are standard, non-negotiable contracts open to the public at large that represent the placements of funds available for later withdrawal. They include all claims on the central bank, government units, and some OFCs, that are represented by evidence of deposit. Claims of one DT on another are excluded from deposits and are instead recorded as interbank loans (paragraph 5.47). Deposits comprise transferable and nontransferable deposits. Transferable deposits comprise all deposits that are (1) exchangeable for banknotes and coins on demand at par and without penalty or restriction; and (2) directly usable for making third-party payments by check, draft, giro order, direct debit/credit, or other direct payment facility.²⁵ Nontransferable deposits comprise deposits that cannot be used for third-party payments or have restrictions on the number or size of such third-party payment. Most common nontransferable deposits include, among others: (1) sight deposits that permit immediate cash withdrawals but are not useable for direct third-party payments; (2) savings deposits, which pay interest but cannot be used for direct payments to third-parties;²⁶ (3) fixed-term deposits, which can have maturities ranging from a month to a few years; (4) non-negotiable certificates of deposits; (5) repayable margin payments in cash related to different financial contracts, such as financial derivatives; and (6) repurchase agreements that resemble a deposit where the DT is the cash-taker.²⁷

5.39 Volatility of deposits refers to the likelihood that depositors will, at short notice, withdraw funds in response to a perceived weakness in an individual DT or in the banking system. Determining such likelihood in advance is difficult, but typically the key factors taken into account are the type of depositor, the existence of insurance coverage, and the maturity of the deposits (remaining maturity). Experience suggests that some types of depositors are less likely to move their funds than others.²⁸ Additionally, deposits covered by credible insurance schemes are more likely to be a stable form of funding for DTs than those not covered. Also, deposits with a long-remaining maturity are likely to be more stable, although the lower the penalties for withdrawal, the less relevant this factor is in determining the likelihood of withdrawal.

5.40 Customer deposits are usually considered to be a more stable type of deposit and can be employed to fund long-term lending. This series is required to calculate the ratio of customer deposits to loans, an additional FSI. The Guide recommends that the type of depositor be the primary factor in defining customer deposits, because of both its relevance and its general applicability. Thus, customer deposits include all deposits placed by residents or nonresidents, except those placed by (resident and nonresident) financial corporations, central governments, and central banks. The depositors in the excluded sectors are more likely to monitor DTs’ financial information, are less likely to be covered by deposit insurance, and perhaps have a fiduciary responsibility to safeguard their assets. They are, therefore, more prone than other depositors to shifting deposits as risks increase. Perhaps because of deposit insurance, household depositors tend to be less aware of the risks, while commercial depositors may have other relationships with banks that make them more reluctant than institutional investors to move funds. Provided it can be determined that the penalties for withdrawal are high, customer deposits could also include those from the excluded sectors that have a remaining maturity of more than one year.²⁹,³⁰

5.41 Loans are financial assets that are (1) created when a creditor lends funds directly to a debtor, and (2) evidenced by documents that are not negotiable.³¹ Collateral, in the form of either a financial asset (e.g., security) or nonfinancial asset (e.g., land and building), may be provided under a loan transaction, though it is not an essential feature. Loans collateralized by real estate should be separately identified to assist in financial stability analysis. The loan category includes commercial loans, overdrafts, installment loans, hire-purchase credit, loans to finance trade credit, financial leases, and repurchase agreements.³² Undrawn lines of credit are not recognized as an asset, and therefore not as loans, because they are only potential claims. Accounts receivable/payable, which are treated as a separate category of financial assets, are excluded from loans. To meet the requirements of the FSI list, loans to other DTs (resident and nonresident) are distinguished in Table 5.1 from other loans as interbank loans (line 18.i.i), which are attributed by sector on a residency basis, as defined in Chapter 2.

5.42 Loans that have become negotiable are to be reclassified from loans to debt securities. For such reclassification, there needs to be firm evidence of secondary market trading, including the existence of market makers, and frequent quotations of the instruments, such as provided by bid-ofer spreads. A transfer or one-time sale of a loan, for example, to a special purpose vehicle for securitization, would not normally constitute a basis for reclassifying the loan as a security.

5.43 Two forms of loans require further discussion. A finance lease is a contract under which the lessor— the financial corporation providing the financing— as the legal owner of an asset, conveys substantially all the risks and rewards of ownership of the asset to the lessee, who becomes the economic owner of the asset. Under a finance lease, the lessor recognizes assets held under a finance lease as a receivable at an amount equal to the net investment in the lease. Payments under a finance lease are treated not as rentals on the asset but as finance income over the lease term of a finance lease, based on a pattern reflecting a constant periodic rate of return on the net investment.³³

5.44 A securities repurchase agreement (repo) is an arrangement involving the provision of securities in exchange for cash with a commitment to repurchase the same or similar securities at a fixed price either on a specified future date or with an “open” maturity.³⁴ Repos convey the legal ownership of the securities to the cash provider, which entitles the cash provider to sell the securities to a third party (on-selling). Despite conveyance of the legal ownership to the cash provider, the economic ownership is retained by the cash taker (i.e., the securities provider), as the cash taker retains the market risk and ownership benefits, other than the right of sale, including holding gains or losses and interest income on the securities. Because of these features, repurchase agreements should be recorded as loans collateralized by the securities underlying the agreement.³⁵ The securities should remain on the balance sheet of the cash taker and a new financial asset (i.e., a loan) should be recorded as an asset of the cash provider offsetting the reduction in cash and a liability, offsetting the cash received, of the cash taker. Although repurchase agreements are usually classified as loans, those resembling a standard deposit, where the client of the DTs is the cash-provider, should be classified as deposits. If securities acquired under a repo or securities-lending arrangement are sold to third parties, the security taker should record on the balance sheet a liability equal to the current market value of the security that was sold (short position).³⁶

5.45 A gold swap, under which gold is exchanged for other assets (usually foreign exchange), is similar in nature to a repo and is to be recorded as a collateralized loan.

5.46 Securities lending is similar to a repo. Ownership of the security is transferred to the borrower with the execution of an agreement to return it. The lender earns a fee for the transaction and typically takes collateral in the form of other securities, or less commonly, cash or other instruments. If the securitytaker provides cash as collateral, then the arrangement is treated in the same way as a repo, with the securities involved remaining on the balance sheet of the security provider. In the more typical case of non-cash collateral being provided, the ownership of both the securities lent and collateral provided changes hands; the borrowed securities are recorded on the balance sheet of the borrower, and the securities provided as collateral are recorded on the balance sheet of the lender.

5.47 Interbank loans are loans granted to other DTs, usually with a short-term maturity. For the compilation of the FSI Customers Deposits to Total Loans, and to monitor interbank exposures, interbank loans should be identified separately from other loans because their behavior often differs from that of loans with non-DT entities, and because they can be a channel for transmission of stress between banks.

5.48 Specific loan loss provisions are the outstanding amount of provisions made against the value of individual non-performing loans, collectively assessed groups of loans, and non-performing loans to other DTs (see also paragraph 5.27) in accordance with requirements specified by the DT supervisory authority. ^{37 38}, ³⁹ In some economies, provisions are constituted against nonperforming and performing loans, without the possibility of separately identifying them. For such cases, the Guide defers to the national legal framework for provisioning, which should be documented in the metadata. The Guide recommends reporting specific loan loss provisions as a negative asset item, netting from total gross loans (line 18.ii in Table 5.1).

5.49 Debt securities are negotiable financial instruments serving as evidence that units have obligations to settle by means of providing cash, a financial instrument, or some other item of economic value, and give the holder an unconditional right to receive interest and/or principal payments. They include bills, bonds and debentures, commercial paper, negotiable certificates of deposit, asset-backed securities, loans that have become de facto negotiable, preferred stocks or shares that pay a fixed income but do not provide for participation in the residual value of the corporation, bankers’ acceptances, and similar instruments normally traded in the financial markets.⁴⁰ Some corporate bonds are convertible into shares of the same corporation at the option of the bondholder; if the conversion option is traded separately, then it is recorded as a separate asset and classified as a financial derivative.

5.50 Common types of debt securities are those sold on: (1) a coupon basis, stipulating that periodic interest, or coupon, payments will be made during the life of the instrument and that the principal will be repaid at maturity; (2) an amortized basis, stipulating that interest and principal payments will be made in installments during the life of the instrument; (3) a discount, or zero coupon, basis, whereby a security is issued at a price that is less than the face (or par) value of the security, and all interest and principal are paid at maturity; or (4) an indexed basis, which ties the amount of interest or principal payment to a reference index, such as a price index or an exchange rate index, or to the price of a commodity (e.g., gold). The Guide defers to IFRS regarding the accrual of interest and the related asset classification and measurement of all types of debt securities.

5.51 Table 5.1, line 19, includes all the above instruments under the heading of debt securities. However, it is recognized that national practices might separately identify certain types of instruments, such as mortgage-backed securities, government securities, and securities considered to be of a liquid nature.

5.52 Equity comprises all instruments and records acknowledging claims on the residual value of a corporation after the claims of all creditors have been met. Ownership of equity in legal entities is usually evidenced by shares, stocks, participations, depository receipts, or similar documents.⁴¹ Shares and stocks have the same meaning. Participating preferred shares are those that provide for participation in the residual value on the dissolution of an incorporated enterprise; such shares are also equity securities, whether or not the income is fixed or determined according to a formula.⁴² Buybacks by a DT of its own equity securities reduce the number of equity securities outstanding.

5.53 Equity assets include equity investments in associates, unconsolidated subsidiaries, and reverse equity investments, as well as other equity investments in DTs. In the context of domestic data, equity assets include any share capital provided to foreign branches.

5.54 Investment fund shares comprise shares or units of all kinds issued by money market funds (MMFs) and non-MMF investment funds, which are collective investment schemes that raise funds from the public. The fundamental difference between them is that MMFs typically invest in low-risk liquid money market instruments with a residual maturity of less than one year, are often transferable, and are often regarded as close substitutes for deposits. Non-MMFs investment funds typically invest in longer-term financial assets and possibly real estate. MMF and non-MMF investment fund shares or units represent a claim on a proportion of the value of an established investment fund.

5.55 Financial derivatives are financial instruments that are linked to another specific financial instrument, indicator, or commodity, and through which specific financial risks (e.g., interest rate risk, foreign exchange risk, equity and commodity price risk, and credit risk) can be traded in their own right in financial markets. The value of a financial derivative depends on the price of the underlying item: the reference price. The reference price may relate to a commodity, a financial asset, an interest rate, an exchange rate, another derivative, or a spread between two prices. The derivative contract may also refer to an index or a basket of prices. Unlike debt instruments, no principal amount is advanced that has to be repaid, and no investment income accrues. Financial derivatives are used for several purposes, including risk management, hedging, arbitrage between markets, and speculation.

5.56 There are two broad types of financial derivatives: forward-type contracts and options. A major difference between a forward contract and an option is that, whereas either party to a forward is a potential debtor, the buyer of an option acquires an asset and the option’s writer incurs a liability. Option contracts can expire without worth; options are exercised only if settling a contract is advantageous for the option’s holder.

5.57 A forward-type contract (forward) is an unconditional contract by which two parties agree to exchange a specific quantity of an underlying item (financial or real) at an agreed-upon contract price (the strike price) on a specified date. Forward-type contracts include forwards, futures, and swaps. Forward rate agreements and forward foreign exchange contracts are common types of forward-type contracts. A swap contract involves the counterparties exchanging, in accordance with prearranged terms, cash flows based on the reference prices of the underlying items.⁴³ Swap contracts classified as forward-type contracts include currency swaps, interest rate swaps, cross-currency interest rate swaps, and equity swaps.

5.58 Futures are forward-type contracts traded on organized exchanges, while forward contracts are bought and sold in over-the-counter (OTC) trading conducted directly between the parties, although clearing may occur through a central counterparty. For futures, the exchanges facilitate trading by determining the standardized terms and conditions of the contract, acting as the counterparty to all trades, and requiring margins to be deposited and paid to mitigate against risk.

5.59 At the inception of a forward-type contract, risk exposures of equal market value are exchanged, so a contract typically has zero value at inception. As time passes, market rates change, and the price of the underlying item changes and the market value of the forward contract will change (although it may be restored to zero by periodic settlements during its life). The classification of a forward-type contract may change between asset and liability positions.

5.60 An off-market swap has a nonzero value at inception as a result of having reference rates priced differently from current market values (i.e., “off-the-market”). The economic nature of an off-market swap is equivalent to a combination of a loan and an onmarket financial derivative. Therefore, off-market swaps should be recorded as two stock positions in the sectoral balance sheets—a loan and an on-market financial derivative.

5.61 In an option contract (option), the purchaser acquires from the seller a right to buy or sell, depending on whether the option is a call (a contract to buy) or a put (a contract to sell) a specified underlying item at a strike price on or before a specified date. The purchaser of an option pays a premium to the writer of the option. Throughout the life of the contract, the writer of the option has a liability and the buyer an asset, although the option can expire worthless; the option will be exercised only if settling the contract is advantageous for the purchaser.

5.62 Options can be contrasted with forward-type contracts in that: (1) at inception, a premium is paid for an option representing a non-zero value for the contract, unlike a forward-type contract where there is usually no up-front payment and the derivative contract begins with a zero value reflecting the mutual net exchange of claims and obligations between the parties to the forward contract; (2) during the life of an option contract, the buyer is always the creditor and the writer is always the debtor; whereas for a forward-type contract, either party can be creditor or debtor, and it may change during the life of the contract; and (3) at maturity, redemption is determined by the buyer of the option, whereas it is unconditional for a forward-type contract.

5.63 Employee stock options are options to buy the equity of a company, offered to employees of the company as a form of remuneration and as an incentive to perform their duties in the best interests of the corporation’s shareholders. This Guide recommends treatment of employee stock options as an increase in equity with an offsetting debit comprising the fair value of the stock option at the date the options are exercised.⁴⁴

5.64 If an instrument such as a security or a loan contains an embedded derivative that is inseparable from the underlying instrument, valuation and classifciation varies for assets and liabilities.⁴⁵ For financial liabilities, an embedded derivative is accounted for separately from the host contract as a derivative (FVTPL) if it is not closely related to the host contract in terms of economic risk and characteristics. Examples are bonds that are convertible into shares and securities with options for repayment of principal in currencies that differ from those in which the securities were issued. For financial assets, if the host is an asset that falls within the scope of IFRS 9, there is no bifurcation and the embedded instrument is measured in its entirety in accordance with IFRS 9. If the host does not fall within the scope of IFRS 9, the derivative is accounted for separately from the host (FVTPL).

5.65 Financial derivative contracts are usually settled by net payments of cash rather than by the delivery of the underlying items. Exchange-traded contracts, such as commodity futures, are often settled before maturity. Cash settlement is a logical consequence of the use of financial derivatives to trade risks independently of the ownership of underlying items. Some financial derivative contracts—particularly those involving foreign currency—are, however, settled by delivery of the underlying items. Once a financial derivative reaches its settlement date, any unpaid overdue amount is reclassified as accounts receivable/payable, as its value is fixed, and thus the nature of the claim becomes debt. Gross market values for financial derivative assets and liabilities should be recorded on the balance sheet, and any valuation gains and losses should be recorded in the income and expense statement.

5.66 Other financial assets (or other liabilities from the debtor perspective) cover prepayments of insurance premiums and miscellaneous other items due to be received or paid. Miscellaneous other items receivable or payable include accrued but unpaid taxes, dividends (including dividends declared but not yet payable), purchases and sales of securities, rent, wages and salaries, social contributions, social benefits, and similar payments.

5.67 Trade credit and advances are mostly relevant to NFCs and separately identified as asset and liability items in their balance sheets. For other sectors, it is included in other financial assets and liabilities, but will generally not be relevant to the DT sector. Trade credit and advances are claims (or obligations) that arise from the sale (or purchase) of goods and services for which payment is not yet due. They consist of (1) trade credit extended directly by the suppliers of goods and services to their customers, and (2) advances for work that is in progress (or is yet to be undertaken) and prepayment by customers for goods and services not yet provided. Trade credit does not include loans, debt securities, or other liabilities that are issued to finance trade credit. So, trade-related loans provided by a third party, such as a DT, to an exporter or importer are not included in this category but are included under loans. If significant allowances are made against these assets, particularly trade credit, compilers are encouraged to separately identify these allowances.⁴⁶

5.68 General provisions for losses on financial assets and other provisions are presented in the Guide as liability items and classified as a separate component (line 30 in Table 5.1), although they are “internal accounts” to reflect losses on certain assets rather than liabilities to creditors. The Guide defers to national supervisory standards for the allocation of allowances for ECL to general and specific provisions. When specific and general provisions are created, they are included in the income and expense statement as an expense (see paragraph 5.27). The counterpart for the created specific provisions reduces the net value of the relevant asset on the balance sheet, while the counterpart for the created general provisions shows as a liability item in the balance sheet.

5.69 Debt is defined as the outstanding amount of those actual current and non-contingent liabilities that require payment of principal or interest by the debtor at some point(s) in the future. Thus, for DTs, debt comprises those financial liabilities that are deposits, loans, debt securities, and other liabilities.

5.70 Capital and reserves is defined as the equity interest of the owners in an enterprise and is the difference between total assets and liabilities. It represents the amount available to absorb unidentified losses.

5.71 In the Guide, total capital and reserves include the following:

• a. Funds contributed by owners comprise the total amount from the initial and any subsequent issuance of shares, stocks, or other forms of ownership. This item is valued as the nominal amount of proceeds from the initial and subsequent issuances. It is not revalued.

• b. Retained earnings reflect all previous years’ after-tax profits that have not been distributed to shareholders or appropriated as general or special reserves. This item is also valued at the nominal amount of earnings that have been retained and is not revalued.

• c. Current year result represents the accumulation of profit or loss since the beginning of the business year.

• d. General and special reserves are reserves that reflect appropriations from retained earnings.⁴⁷

5.72 Under consolidated reporting at group level, when the parent has less than full ownership of a subsidiary, the capital and reserves attributable to minority shareholders in the subsidiary are included in capital and reserves, because the focus of FSIs is on the total capital and reserves of the DTs in the reporting population.

Supervisory-based series

5.74 These are series to be directly sourced from supervisory information because the definitions conform to supervisory guidance. For supervisory-based series, the Guide relies on the definitions and concepts of the BCBS as implemented by national authorities. Due to the many elements of national discretion in the various Basel standards and many jurisdictions’ adoption of definitions and requirements that vary in areas aside from national discretion in the relevant Basel standard, compilers will rely on national supervisory standards for these series, and should therefore document in the metadata the exercise of national discretion as well as any elements that vary from the relevant Basel standard.

5.75 Chapter 3, which describes the regulatory framework for DTs, provides detail with respect to the elements of regulatory capital, the calculation of risk-weighted assets, and liquidity ratios. This section focuses on their most relevant features. The BCBS has developed specific definitions of regulatory capital to be used as numerators in regulatory capital adequacy ratios (see paragraph 3.24 and 3.25). The definitions extend beyond purely capital and reserve account items identified on the balance sheet, to include several specified types of subordinated debt instruments and reserves. Banks are expected to have total regulatory capital of at least 8 percent of risk-weighted assets, with specific minimums for its components. Based on the Basel regulatory framework, regulatory capital consists of three components.

5.76 Tier 1 capital under Basel I and Basel II comprises equity capital and freely available disclosed reserves (see paragraph 3.26). Tier 1 capital should already reflect the corresponding supervisory deductions, such as goodwill (see paragraph 5.80). Regarding total capital, supervisory deductions cover investments in unconsolidated banking and financial subsidiaries and, at the discretion of national authorities, investment in capital of other banks and financial institutions.⁴⁸

5.77 Under Basel III, Tier 1 capital is split into two components: (1) Common equity tier 1 (CET1) capital, and (2) Additional tier 1 (AT1) capital (see paragraphs 3.27 and 3.28). Both components of Tier 1 are measured net of supervisory deductions. CET1 capital consists predominantly of common shares, retained earnings, and accumulated other comprehensive income and other disclosed reserves. AT 1 capital consists of instruments that are subordinated, have fully discretionary non-cumulative dividends or coupons, and have neither a maturity date nor an incentive to redeem.

5.78 Tier 2 capital under Basel I and II consists of financial instruments and reserves that are available to absorb losses, but might not be permanent and have uncertain values, might entail costs if sold, or which otherwise lack the full lossabsorption capacity of Tier 1 capital items (see paragraphs 3.29 and 3.30). The balance of Tier 2 capital should reflect the corresponding supervisory deductions. Tier 2 capital and subordinated debt cannot exceed 100 percent and 50 percent, respectively, of Tier 1 capital. The composition of Tier 2 capital was modified under Basel III, in order to strengthen the loss absorption capacity of banks (see paragraph 3.30).

5.79 Tier 3 capital was introduced in the 1996 amendment to Basel I (see paragraph 3.6). At the discretion of national authorities, it can be used solely to support market risk. It consists of medium-term subordinated debt and is limited to 250 percent of the bank’s Tier 1 capital. Tier 3 capital is eliminated under Basel III.

5.80 Supervisory deductions cover goodwill (see next paragraph) and all other intangibles, as a deduction from Tier 1 capital (CET1 in Basel III). With regard to total regulatory capital, supervisory deductions cover investments in unconsolidated banking and financial subsidiaries and, at the discretion of national authorities, investment in capital of other banks and financial institutions, and other specified types of asset. The data reported in Supervisory deductions (line 38 of Table 5.1) is the amount, if any, not already deducted from the components of regulatory capital Tier 1 (CET1 and AT1) and Tier 2, in accordance with paragraphs 5.76 to 5.78.

5.81 Goodwill is defined as the excess of the fair (paid) value for a business entity over the book value of the acquired net assets. Accounting standard setters consider goodwill to be an asset. However, goodwill is an intangible asset, and as such not available to absorb losses.⁴⁹

5.82 Risk-weighted assets arise from the application to all on and off-balance-sheet assets of specified risk weights in Basel I and the Standardized approaches in Basel II and III, and an approved methodology for risk modeling of specified assets in the internal-ratings-based approaches of Basel II (see paragraphs 3.32–3.36). Assets are weighted by factors representing their credit riskiness and potential for default. Through the use of credit conversion factors, the credit risk of off-balance-sheet exposures, such as credit line commitments and letters of credit that serve as financial guarantees, is also taken into account in determining regulatory capital requirements. The calculation of risk-weighted assets evolved from fixed coefficients for credit risk in Basel I to basic and more sophisticated methods of measuring credit, market, and operational risks in Basel II and III.

5.83 The measure of total regulatory capital will differ from the measure of capital and reserves in the sectoral balance sheet of Table 5.1. In this context, some general statements can be made:

• a. Both regulatory capital and the sectoral balance sheet measure of capital cover paid-in capital, reserves (both disclosed and undisclosed), valuation adjustments, retained earnings, and current year result. However, the amounts posted to reserves can differ due to different accounting approaches and regulatory frameworks, such as the treatment of gains or losses on financial instruments.

• b. The regulatory measure of capital can include general provisions (up to 1.25 or 0.6 percent of risk-weighted assets, in the standardized or advanced approaches, respectively). As discussed in Chapter 4, the concept of general provisions is not included in the IFRS 9 ECL model. In line with the BCBS transitional guidance on IFRS 9, compilers should rely on national supervisory standards for the identification of specific and general provisions. Specific provisions should be obtained from supervisory data as a memorandum item.

• c. Goodwill is deducted from the regulatory measure of capital, while in the sectoral balance sheet, it is recorded as intangible assets and, therefore, implicitly included in the total measure of capital and reserves.

• d. The regulatory measure covers certain debt instruments, such as subordinated debt, which are classified as liabilities in the sectoral balance sheet measure.

• e. At the sector level, only intragroup equity investments (between units within the same group) are excluded from the sectoral balance sheet measure. That means equity investments in DTs that are not within the same group are included in balance sheet capital. As noted earlier, at national discretion, investments in unrelated DTs may or may not be deducted from regulatory capital calculations.

• f. Non-DTs may be consolidated for the calculation of regulatory capital (or investments in such entities deducted from regulatory capital), but this is not preferred for the calculation of the sectoral balance sheet measure.

5.84 Off-balance-sheet exposures include contractual financial arrangements that are often referred to as contingencies and are not defined as financial assets or liabilities. These arrangements comprise commitments (including liquidity facilities), unconditionally cancellable commitments, direct credit substitutes, acceptances, stand-by letters of credit, trade letters of credit, failed transactions, and unsettled securities. Off-balance-sheet items are a source of potentially significant leverage.

5.85 High-quality liquid assets is a supervisory concept defined in Basel III as those unencumbered assets that can be converted easily and immediately into cash at little or no loss of value. The Basel III text sets out specific market-related characteristics and operational requirements that high-quality liquid assets should possess or satisfy.

5.86 Total net cash outflows is a supervisory concept defined in Basel III as the total expected cash outflows minus total expected cash inflows in the specified stress scenario for the subsequent 30 calendar days.⁵⁰

5.87 Stable funding is a supervisory concept defined in Basel III as the portion of those types and amounts of equity and liability financing expected to be reliable sources of funds over a one-year time horizon under conditions of extended stress.

5.88 Large exposures are defined as the sum of all exposure values of a DT to a counterparty or to a group of connected counterparties, if it is equal to or above 10 percent of the DT’s eligible capital base.⁵¹ Specific principles are outlined for the measurement of exposure values. Off-balance-sheet exposures should be converted into credit exposure equivalents through the use of credit conversion factors.

Series that provide a further analysis of the balance sheet

5.89 In order to calculate some core and additional FSIs, there is a need for a number of series that are subtotals of the balance sheet line items and that provide for further analysis of the balance sheet.

5.90 Liquid assets are those assets that are readily available to an entity to meet a demand for cash. While it may be possible to raise funds through borrowing, conditions in the market may not always be favorable, and experience has shown the necessity for DTs to maintain a prudent level of liquid assets. For a financial asset to be classified as a liquid asset, the holder must have the reasonable certainty that it can be converted into cash with speed and without significant loss under normal business conditions. The financial assets included in this item go beyond the supervisory definition of high-quality liquid assets.

5.91 Whether an instrument is considered liquid or not depends on judgment and is influenced by market conditions. For example, cash, transferable deposits, and deposits that permit immediate cash withdrawals are typically liquid and are included in liquid assets, while non-traded instruments with a long time until maturity are not. Other deposits provide certainty of value but may not be readily convertible into cash because of restrictions on withdrawals prior to maturity. Conversely, tradable securities, particularly those issued by the government or the central bank, might be readily converted into cash through sale on the secondary market, but their realizable value depends on the market price at the time of sale.

5.92 In the Guide, liquid assets comprise (1) currency; (2) deposits and other financial assets that are available either on demand or within three months or less; and (3) securities that are traded in liquid markets (including repo markets) that can be readily converted into cash, with insignifcant risk of change in value under normal business conditions. Typically, securities issued by the government or the central bank in their own currency meet the criteria to be classified as liquid assets, and in a number of markets high credit-quality private securities, including those issued by financial institutions, may also meet the criteria.

5.93 Short-term liabilities are the short-term element of DTs’ debt liabilities (line 28 in Table 5.1) and the net (short-term, if possible) market value of financial derivatives positions (liabilities (line 29) less assets (line 21) in Table 5.1). The definition includes short-term liabilities to other DTs in the reporting population. Consistent with the definition of liquid assets, short-term liabilities could be withdrawn either on demand or within three months or less. Preferably, “short term” should be defined on a remaining maturity basis, although original maturity can be used as a (more limited) alternative.

5.94 Nonperforming loans (NPLs) are defined as those loans for which (1) payments of interest or principal are past due by 90 days or more; or (2) interest payments equal to 90 days or more have been capitalized (reinvested into the principal amount), refinanced, or rolled over (payment delayed by agreement); or (3) evidence exists to reclassify them as nonperforming even in the absence of a 90-day past due payment, such as when the debtor fles for bankruptcy. The amount of loans recorded as nonperforming should be the gross value of the loan as recorded on the balance sheet, not just the overdue amount.

5.95 Once a loan is classified as nonperforming, it (and/or any replacement loans) should remain classified as such until payments are received, or the principal is written-off on this or subsequent loans that replace the original. It is recognized that some national supervisory practices might be stricter in that loans are classified as nonperforming until payments are received for specified periods of time, for example, until three consecutive payments have been made.

5.96 Replacement loans include loans arising from rescheduling or refinancing the original loan(s) (restructured loans) and loans provided to make payments on the original loan. While these loans may be granted on easier than normal commercial terms, provided the terms and conditions of the replacement loan are complied with by the debtor, and subject to national supervisory guidance, the loan is no longer classified as an NPL.

5.97 Residential real estate loans are those loans that are collateralized by residential real estate. Residential real estate includes houses, apartments and other dwellings (e.g., houseboats and mobile homes), and any associated land intended for occupancy by individual HHs.

5.98 Commercial real estate loans are those loans that are collateralized by commercial real estate, as well as loans to construction companies and loans to companies active in the development of real estate (including those companies involved in the development of multi-household dwellings). Commercial real estate includes buildings, structures, and associated land used by enterprises for retail, wholesale, manufacturing, or other such purposes.

5.99 The counter parties to Total gross loans can be broken down into the different institutional sectors of the economy, and nonresidents, as defined in Chapter 2. This classification follows primarily the sectoral classification of the SNA: (1) deposit-taking corporations except the central bank (DTs in the Guide); central bank; the seven subsectors of the financial corporations sector that are not DTs (subsumed in the Guide as OFCs), general government, NFCs, and other domestic sectors (HHs and NPISHs), plus non- residents.⁵², ⁵³

5.100 The geographic distribution of loans refers to an attribution of loans on the basis of the residence of the immediate counterpart—that is, the country of residence of the debtor. While country circumstances will differ, a regional classification of lending is encouraged, with perhaps additional detail on lending to residents of other countries that may be of particular relevance, such as neighboring countries. The regional grouping is based on the IMF’s World Economic Outlook classification.

5.101 For DTs, foreign currency loans and foreign currency liabilities are those assets and liabilities that are denominated in a currency other than the domestic currency, and those that are denominated in domestic currency but with the amounts to be paid linked to a foreign currency (foreign currency linked). By convention, those loans, and liabilities that are denominated in a foreign currency but with the amounts to be paid linked to a domestic currency (domestic currency linked) are also included in foreign currency loans and liabilities. For related financial derivative liabilities, it is recommended that the net fair value position (liabilities less assets) be included in the foreign currency liability measure rather than the gross liability position, because of the market practice of creating offsetting contracts, and the possibility of a forward-type instrument switching from an asset to a liability position and vice versa from one period to the next.

5.102 The net open position in foreign currency for on-balance-sheet items and the total net open position in foreign currency are calculated by summing the net position for each foreign currency into a single unit of account (the reporting currency). The calculation is described in more detail in Chapter 7 (paragraphs 7.77–7.83).

5.103 Credit to the private sector includes gross loans extended by DTs to the private nonfinancial sector, plus debt securities issued by private NFCs and held by DTs. The data should be compiled on a domestic consolidated basis. The private sector comprises private NFCs, HHs, and NPISHs. An alternative source for compiling this underlying series is the standardized report form (for other depository corporations) used for transmitting monetary data to the IMF for publication in International Financial Statistics, which many economies report to the IMF Statistics Department on a monthly basis.

Income and expense

5.110 Premiums earned constitute, together with investment income, the main source of revenue for ICs. It constitutes all premiums received and receivable (after the deduction of any taxes or other duties levied on direct insurance premiums) to cover all types of insurance services, which are recognized as income during the reporting period. Premiums earned (line 1 in Table 5.3) should be reported net of reinsurance ceded (line 1.ii in Table 5.3) and including transfer of premium reserves from other insurers (line 1.iii in Table 5.3).

5.111 Claims incurred are financial obligations of the insurers with respect to the beneficiary, concerning the risks realized by events during the period, as defined by the policy. They include both gross claims paid during the period plus changes in reserves for claims outstanding and the transfer of premium reserves to other companies, typically reinsurers. They are presented on a net basis, subtracting the reinsurers’ share of gross claims.

5.112 Another expense item for ICs is the net change in technical reserves needed to provide for future claims for unearned premiums, life insurance, outstanding claims, and other types of technical reserves.

5.113 Other operating income includes all income not due to premiums or investments, such as income from commissions or rents received on real estate holdings.

5.114 Other operating expenses include personnel costs, underwriting expenses, depreciation of nonfinancial assets, and any other operating costs not related to claims or investments.

5.115 Investment income corresponds to the income earned from holdings of financial (debt securities, equity, investment fund shares, etc.) and nonfinancial (property) assets, associated with both unit-linked and non-unit-linked products. It is presented on a net basis, subtracting the interest cost on liabilities, such as loans received, the costs of managing own property, and the income on unit-linked products that is passed on to policyholders. For nonunit-linked (non-participating) insurance, all risk and income of the investments are borne by the ICs; while the investment income of unit-linked (participating) insurance is passed-through to policy holders, who bear risk and income of the investments.

5.116 Gains and losses on revaluation of financial assets are those arising during the period under review. Similar to the investment income, it is necessary to distinguish gains and losses on revaluations of those financial assets allocated to non-unit-linked (non-participating) insurance (appropriated by the ICs) from those allocated to unit-linked insurance (participating—appropriated by policy holders).

5.117 The calculation of net income before and after taxes is similar to the one performed for DTs, although with a presentation adapted to the need of ICs. Relevant items here are the net income from insurance activity (premiums less claims less net change in technical reserves), net operating income, and the net income on own investments.

5.118 Total other comprehensive income (or loss) that would be reported in an IFRS Statement of Comprehensive Income should be included in line 13.

Balance sheet

5.119 Beyond the different categories of the sectoral balance sheet already described for DTs, some items need to be highlighted for the case of ICs.

5.120 Nonfinancial assets include both property for own use and also property held for investment purposes, generally real estate. Investments in real estate may be channeled through real estate investment funds, and not only through direct investment. In such cases, the claims on real estate investment funds are classified as equity and investment fund shares.

5.121 Reinsurance claims on the asset side record the reinsurance claims recoverable from reinsurers, and the claims on other insurers for reinsurance sold for which premiums have not yet been paid. On the liability side, insurance, pensions, and standardized guarantee schemes comprise reserves created to cover: (1) life insurance and annuities entitlements, which are assets of HHs; (2) non-life insurance payable for claims not yet settled, or not yet presented; (3) prepayment of non-life insurance premiums not yet used; (4) pension fund reserves, in cases where ICs offer pension schemes; and (5) any other technical reserve.

5.122 As in the case of DTs, capital and reserves represents the equity interest of ICs’ owners and is calculated as the difference between total assets and total liabilities.

Income and expense

5.124 Investment income represents the main source of income for PFs. It is composed of interest income on financial instruments, other types of income on financial instruments (e.g., capital gains on equity), and income from investments in property (real estate). It also includes the net change in the fair value of investments of PFs. In the case of defined benefit schemes, PFs bear all gains and losses of their investments, since their liabilities to beneficiaries are determined by the defined benefit. In the case of defined contribution schemes, PFs pass through the gains and losses of the investment to the pension beneficiaries, who are entitled to future payments based on the return of their contributions.

5.125 Investment expenses are mainly constituted by expenses for managing investments and taxation of the return on investments.

5.126 Net actuarial gains/losses are part of the PFs’ net income. They measure gains or losses arising from differences between the long-term estimates and the actual events, or changes in actuarial assumptions, during the reporting period. Gains or losses on actuarial liabilities can occur because long-term assumptions (e.g., mortality, salary increases, and retirement rates) were not met. Usually, actuarial assumptions are subject to legal constraints and regulatory/supervisory approval.

5.127 Total other comprehensive income (or loss) that would be reported in an IFRS Statement of Comprehensive Income should be included in line 10.

Balance sheet

5.128 As for the case of ICs, PFs hold nonfinancial assets for own use, but also for investment purposes, mainly real estate.

5.129 The main liability of PFs are financial claims that both existing and future pensioners hold against PFs to pay pensions. These are the net equity of households in pension funds reserves. These reserves show the extent of financial claims both existing and future pensioners hold against the PF to pay pensions. Beyond pensions, some schemes may have other related liabilities, such as for health benefits, which are included under entitlements to non-pension benefits. For pragmatic reasons, liabilities for non-pension entitlements may be included with those for pension entitlements. PF entitlements are measured as the present value of the amounts expected to be paid out based on actuarial assumptions. The reserves created for pension benefits can be distinguished between reserves for: (1) defined contribution plans, (2) defined benefit plans, and (3) hybrid schemes.⁵⁴

5.130 The difference between total assets and total non-pension-related liabilities constitute the net total assets of a PF.

5.131 The difference between the net total assets of a PF and its pension fund reserves is recorded as the net worth of the PF, which can be positive (net assets larger than pension reserves) or negative (net assets below pension reserves).

Memorandum series

5.132 Liquid assets of PFs comprise: (1) currency; (2) deposits and other financial assets that are available either on demand or within one year or less; and (3) securities that are traded in liquid markets. The Guide recommends the compilation of liquid assets on a remaining maturity basis, although original maturity may be an alternative.

5.133 Estimated pension payments in the next 12 months are the sum of the actuarially expected payments to beneficiaries by PFs during the next year.