Appendix III. Additional Definitions of FSIs and Related Data Series
- International Monetary Fund
- Published Date:
- April 2006
1. The main text discusses the set of core and encouraged FSIs. This appendix sets out ideas that arose during the drafting of, and consultation on, the Guide for additional definitions of the FSIs and for related data series. Issues relevant for the monitoring of financial conglomerates are also discussed. Information provided in this appendix may be useful to compilers when developing FSIs for use in their own national context.
Extensions to FSIs as Specified in the Guide
2. Chapter 6 brings together the concepts and definitions set out in Part I of the Guide to explain how each FSI for deposit takers is to be calculated. Additional definitions of some FSIs were proposed during discussions on the preparation of the Guide, which are set out below. In some instances, more disaggregated data series would be needed to compile these FSIs.
3. The Guide recommends that sector-level data compiled to calculate FSI ratios include any intrasector positions in debt and financial derivatives on a gross basis (paragraph 5.49). This approach allows the interrelationships among groups in the sector, and hence potential contagion risks, to be identified. However, for FSI ratios where gross assets or liabilities are either the denominator or the numerator—for example, return on assets and the capital-to-assets ratio—they could also be calculated excluding intrasector positions in debt and financial derivatives, so that both the numerator and the denominator of the ratio exclude intrasector transactions and positions.
4. The debt-to-capital ratio is another measure of financial leverage that could be considered in addition to the capital-to-assets ratio.
Return on equity (net income to average capital)
5. Return on equity could be calculated including purchased goodwill in the denominator, which would amount to using a measure of capital and reserves closer to that used in commercial accounting.
Nonperforming loans net of provisions to capital
6. With a view to providing a broader measure of nonperforming assets, this FSI could be calculated using total debt claims in the numerator and not just loans.
7. This FSI could also be calculated for resident and nonresident borrowers separately. The approach might be relevant in the context of differing economic circumstances prevailing in the domestic and foreign markets.
8. In economies where collateral is widely used, nonperforming loans net of provisions and collateral to capital is an alternative FSI that might give a more realistic picture of the potential for losses by deposit takers than the FSI ratio, which is calculated by excluding collateral.1 Any dissemination of this ratio would need to be supplemented with detailed metadata on collateral rules in use, including the valuation approach adopted by national supervisors.
Large exposures to capital
9. The number of large exposures at various percentages of regulatory capital could be considered, such as the total number of individual large exposures above 10 percent but below 20 percent of regulatory capital, between 20 percent and 40 percent of regulatory capital, and above 40 percent of regulatory capital.
10. To identify the location of the counterparties, the number of large exposures could be divided between resident and nonresident counterparties.
11. To monitor concentrated lending by deposit takers, as peer groups or as for the sector as a whole, FSIs could be constructed that relate to the sectoral—particularly by industry—and geographic distribution of loans. Indications of a buildup of concentrated positions derived from these data could allow compilers to specify sectors and/or countries for which more detailed information might be required.
12. Other approaches to monitoring concentrated lending include (1) specifying a minimum exposure amount in nominal terms at which any search for concentrated lending by deposit takers could begin, and (2) developing a credit concentration ratio (for example, the ratio of the total exposures to the largest 20 borrowers by each bank to the total exposures of banks).
13. Some economies rely on credit registers to monitor large exposures. Through such registers, the total exposure of the deposit-taking sector (and indeed of the financial system) to each individual borrower can be measured, and reports could, for example, be generated each quarter on the exposures to the 100 largest borrowers. An identification code attributed to each borrower would allow consistency of recording. However, the exposures of the foreign branches and subsidiaries of resident deposit takers might not be covered by such registers.
Net open position in equities to capital
14. There may be analytical interest in presenting the net open position in equities by country to identify any large exposures to equity holding in particular economies.
Liquid assets to short-term liabilities
15. This FSI could be calculated using very short-term liabilities—three months or less—as the denominator. Such liabilities would be closer to the liquidity concept used for liquid assets. Moreover, this FSI could be calculated excluding short-term customer deposits from short-term liabilities; that is, excluding those short-term liabilities considered to be a more stable, less volatile form of funding. This FSI could also be calculated excluding financial derivatives positions—that is, calculating the ratio taking short-term debt only into consideration—particularly if a net derivative asset position is significantly affecting the ratio.
Nonperforming loans to total gross loans
16. To identify the sectoral concentration of NPLs, this FSI could be calculated for each sector (using the same sectors as in calculation of the sectoral distribution of loans to total loans).
Sectoral distribution of loans to total loans
17. A more disaggregated view of lending to the other financial corporations sector could be provided through dissemination of the ratios for loans to the five subsectors,2 defined in Appendix VII, the Glossary of Terms.
18. An additional possibility is to classify loans by type of borrower using the International Standard Industrial Classification of all Economic Activities (ISIC). This approach might be particularly relevant when an economy has systemically important industries, such as petroleum and agriculture. The ISIC has 17 major categories of economic activity in the resident economy and places more emphasis on the type of activity undertaken than on the economic nature of the business, which is the basis of the sector distribution described in Chapter 2. The categories and short definitions of the activities covered in each category are set out in Box A3.1 of this appendix. An alternative approach is to classify loans by type, such as retail, commercial, and industrial.
19. If this FSI is compiled on a cross-border consolidated basis to also capture loans by deposit takers’ branches and subsidiaries abroad, a complementary, but far more ambitious, approach would be to attribute loans by sector regardless of the residence of the borrower. For instance, total lending to nonfinancial entities worldwide, regardless of residence, could be compiled. In this way, exposures of deposit takers in the reporting population to similar activities worldwide could be monitored.
Box A3.1.The International Standard Industrial Classification of All Economic Activities (ISIC)
The ISIC is an industrial classification developed by the United Nations that groups establishments that have the same principal activity by industry. An establishment is defined as an enterprise, or part of an enterprise, that is situated in a single location and in which only a single productive activity is carried out or in which the principal productive activity accounts for most of the value added.
The industries identified in the ISIC are as follows:
• Agriculture, hunting, and forestry, including related service activities
• Fishing, including fish farming and service activities incidental to fishing
• Mining and quarrying, including service activities incidental to oil and gas extraction, excluding surveying
• Electricity, gas, and water supply
• Wholesale and retail trade, repair of motor vehicles, motorcycles, and personal and household goods
• Hotels and restaurants
• Transport, storage, and communications
• Financial intermediation
• Real estate, renting, and business activities—such as computer and related activities, and research and development
• Public administration
• Health and social work
• Other community, social, and personal service activities
• Private households with employed persons
• Extraterritorial organizations and bodies
Residential and commercial real estate loans to total loans
20. To identify the residence of the counterparty, these FSIs could be compiled for real estate lending to residents and to nonresidents separately.
Geographical distribution of loans to total loans
21. In the case where loans to nonresidents are significant, when compiling data on a cross-border consolidated basis, such loans to nonresidents could be categorized as either (1) local currency loans of the foreign branch or subsidiary in the local economy or (2) other loans. The risks arising from lending funded primarily from local deposits are considered to be different from those arising in the context of cross-border lending.
22. This FSI could be expanded to a geographic distribution of deposit takers’ total debt claims on nonresidents; that is, covering claims defined in paragraph 4.61 (lines 17 to 19, and 22 of Table 4.1).
Foreign-currency-denominated loans to total loans
23. Various disaggregations of the data in the numerator could be considered: by resident/nonresident, by sector, by major currencies (for example, U.S. dollar, yen, and euro), and by maturity (remaining maturity measure). Loans to nonresidents in foreign currency could be categorized as either (1) local currency loans of the foreign branch or foreign subsidiary in the local economy or (2) other foreign currency loans. This FSI could also be calculated using total debt claims and not just loans.
Foreign-currency-denominated liabilities to total liabilities
24. To identify the residence of the counterparties, the data in the numerator could be categorized as either liabilities to residents or liabilities to nonresidents. Liabilities to nonresidents in foreign currency could be categorized as either (1) local currency liabilities of the foreign branch or foreign subsidiary in the local economy or (2) other foreign currency liabilities.
25. This FSI could be calculated excluding financial derivatives positions—that is, including only debt positions—particularly if a net financial derivative asset position (foreign currency and/or total position) significantly affects the FSI ratio. In addition, short-term (remaining maturity) foreign-currency-denominated liabilities could be compared with total liabilities.
Interest margin to gross income
26. Since a major source of gross income of deposit takers typically comes from interest income, interest margin to total assets could be compiled in addition to the return on assets.
Noninterest expenses to gross income
27. The ratio noninterest expense to interest margin could be calculated to assess whether interest income covers noninterest expenses.
Other Financial Corporations
Assets to total financial system assets
28. To identify the relative importance of other financial corporations among financial corporations, this FSI could be calculated by including in the denominator only those financial assets owned by other financial corporations, deposit takers, and the central bank. Financial assets are defined in paragraph 4.38.
Total debt to equity
29. This FSI could be calculated by excluding from the numerator debt owed to other nonfinancial corporations. The resulting FSI would indicate the amounts owed to other sectors as a percentage of capital and reserves in the nonfinancial sector. In addition, the ratio could be calculated using the narrow measure of capital and reserves (line 31(i) of Table 4.3 defined in paragraph 4.114) as the denominator.
30. This FSI could be extended to include liquid assets along with capital and reserves in the denominator, as such assets are available to meet liabilities.
31. It could be useful to identify the type of activity undertaken by those nonfinancial corporate borrowers that have high debt-to-equity ratios to discover whether corporate indebtedness is concentrated in sectors that are particularly vulnerable to shifts in economic activity. Corporate activities could be classified using the ISIC (see Box A3.1).
Return on equity
32. This FSI could be calculated using the narrow measure of capital and reserves (line 31(i) of Table 4.3, defined in paragraph 4.114) as the denominator. Another approach would be to calculate the return on equity by including purchased goodwill in the denominator; that is, using a measure of capital and reserves closer to that used in commercial accounting.
33. As with the previous indicator on corporate leverage, monitoring could also be undertaken at the subsector level, using the ISIC (see Box A3.1).
34. As for deposit takers, information on the return on equity could be supplemented with information on the return on assets.
35. This FSI could be defined to include interest only (see line 38 of Table A3.4), as this is the standard ratio often reported in corporate press releases and corporate sector databases.
36. This FSI could be calculated by excluding interest receivable from other nonfinancial corporations (line 33 of Table 4.3) from the numerator and debt-service payments to other nonfinancial corporations (see line 39 of Table A3.4) from the denominator. The resulting FSI would provide a measure of debt-service coverage of nonfinancial corporations to other sectors.
37. Payments on operating leases could be included in the denominator, as such payments can be significant, and the items leased can be important for ongoing operations.
Net foreign exchange exposure to equity
38. This FSI could be calculated using the narrow measure of capital and reserves (line 31(i) of Table 4.3, defined in paragraph 4.114) as the denominator.
Debt to GDP
39. Debt to total assets might be compiled to provide an overall measure of the balance sheet position of households.
Financial Market FSIs
Spread between reference lending and deposit rates
40. As other forms of lending become more important, an SLDR could be calculated that covers total debt claims and liabilities.
Measuring resilience in securities markets
41. Resilience and depth of markets can be measured by the Hui-Heubel Ratio (HHR). This ratio relates the volume of trades as a proportion of the outstanding stock of the given instrument to their impact on prices. Thus, the larger the volume of trades relative to the percentage price change—that is, the lower the HHR—the more resilient and deep the market is. The HHR is specified as follows:
|where Pmax||=||highest price over the period|
|Pmin||=||lowest price over the period|
|V||=||total value traded over the period|
|S||=||average number of instruments outstanding during the period|
|=||average daily closing price of the instrument during the period.|
42. Subject to data availability, the ratio could be calculated on a daily basis for a benchmark domestic government or central bank debt security to capture very short-term price movements. Alternatively, it could be calculated as the average of five-day period measures in a specified period of time (such as three months) to smooth volatility.
43. If there is a lack of data, the numerator in the HHR can be measured as the percentage change in the price of the asset over the period chosen. Other measures of trading volume could also be used, such as the number of securities traded.
44. Table A3.1 below provides an example of how the HHR can be calculated for a benchmark security over a three-month period. The highest and lowest daily prices observed in each week are shown in the first two columns. The value of securities traded and the number of securities outstanding are shown in the next two columns, and the average closing price of the instrument is shown in the fifth column. The HHR, calculated on a weekly basis, is shown in the last column; the monthly average HHR is also shown in that column. The average HHR for the month shown in Table A3.1 indicates that the resilience and depth of the market improved over the three-month period; the HHR declined from 0.9 in month 1 to 0.6 in month 3.
For instance, for week 1 of month 1, the HHR is calculated as follows:
[(10 – 8) / 8] / [120,000 / (30,000 × 8.6)] = 0.25 / 0.465 = 0.5.
For instance, for week 1 of month 1, the HHR is calculated as follows:
[(10 – 8) / 8] / [120,000 / (30,000 × 8.6)] = 0.25 / 0.465 = 0.5.
Stock market indices
45. As equities can serve as collateral for deposit takers’ loans and can constitute a significant element of their assets, a representative stock market index could be monitored.
Additional Data Series
46. In developing the sectoral financial accounts for calculating FSIs, several additional data series could be considered. These series are provided below as elaborations of the tables in Chapter 4.
47. Realized gains and losses on financial instruments could be distinguished from unrealized gains and losses. (This series and those below are set out in Table A3.2, which is a continuation of Table 4.1.)
|53.||Duration of assets|
|54.||Duration of liabilities|
|55.||Realized gains and losses on financial instruments|
|56.||Total gains and losses on the sale of fixed assets|
|57.||Very short-term deposits|
|58.||Gross new deposits during the period|
|59.||Gross withdrawal of deposits during the period|
|60.||Shares and other equity investments in deposit takers in the reporting population|
|(ii)||Other deposit takers|
|61.||Net liabilities of branches of foreign deposit takers to their parents2|
|62.||Gross loans to the public sector|
|63.||Domestic government securities owned (market value)|
|64.||Sectoral distribution of nonperforming loans|
|65.||Percentage of replacement loans in total loans|
|66.||Other nonperforming assets|
|67.||Loan loss reserves|
|68.||Specific provisions against total debt claims|
|69.||Shortfall in provisions under the revised Basel Capital Accord|
|71.||Arrears of deposit takers|
|72.||Assets transferred to special purpose entities|
|75.||Assets managed but not owned by deposit takers|
This table is a continuation of Table 4.1.
For domestic consolidated data only, if branches of foreign deposit takers are located in the economy. Gross liabilities could also be identified.
This table is a continuation of Table 4.1.
For domestic consolidated data only, if branches of foreign deposit takers are located in the economy. Gross liabilities could also be identified.
48. Very short-term deposits (one month or less on a remaining maturity basis) are those very liquid liabilities that customers can convert into cash or foreign currencies at very short notice. These liabilities can be compared with total deposits to assess the liquidity of deposit takers.
49. Gross new deposits during the period and gross withdrawal of deposits during the period provide information on the turnover of deposits.
50. Shares and other equity investments in deposit takers in the reporting population are the balance sheet value of such investments in associates (including reverse equity investments by associates) and other deposit takers that are also in the reporting population. These data are excluded from shares and other equity investments (assets) as well as from capital and reserves at the sector level (see Box 5.1). Such information indicates ownership links within the sector.
51. Net liabilities of branches of foreign deposit takers to their parents provide information on the funding of branches from their parents in the domestic consolidated data. Typically, such branches are funded by interbank deposits from their parent rather than having their own capital—their capital requirements being indistinguishable from that of the parent deposit taker. Some host countries require resident branches of foreign banks to have “donation” capital as a sign of the bank’s commitment to the country and to help equalize competitive conditions between these branches and domestically incorporated deposit takers. Amounts of donation capital could be separately identified. However, in practice, donation capital might be in a form that can be moved abroad quickly. Data for such a series might be available from those responsible for compiling data on foreign direct investment.
52. Gross loans to the public sector are those made to the general government, the central bank, and entities that are public corporations (see paragraph 2.19). Information on lending to the public sector is identified in the BIS’s consolidated IBS data.
53. Domestic government securities owned (market value) provides an indication of the importance of domestic government securities in the deposit-taking sector’s balance sheet.
55. The percentage of replacement (restructured) loans within gross loans (line 18(i) in Table 4.1) is a measure that helps in assessing the credit quality of a loan portfolio. Replacement loans are defined in paragraph 4.86.
56. Using the same criteria as for loans, the value of other nonperforming assets, including securities, could be identified; a rising level might suggest increased financial system vulnerability.
57. Loan loss reserves are the outstanding amount of reserves intended to absorb potential but unidentified losses arising from the deposit takers’ loan portfolio. Additions, or reductions, to the amount of loan loss reserves (other than any net write-offs) are made through the general loan loss provisions included in the income and expense account. The size of such reserves in relation to nonperforming loans can be an indication of the adequacy of provisioning policy.
58. Specific provisions against total debt claims provides an indication of the adequacy of provisions vis-à-vis a broader measure of assets at risk than the ratio of specific provisions to loans.
59. As described in Chapter 4 (paragraph 4.71), using the IRB approach under the revised Basel Capital Accord, any shortfall in provisions for expected losses would be deducted 50 percent from Tier 1 and 50 percent from Tier 2 capital. If there are significant shortfalls in such provisioning, the nonperforming loans net of specific provisions-to-capital ratio (measured using total regulatory capital) will be affected (see paragraph 6.24). This series monitors the extent of underprovisioning against expected losses.
60. Arrears are amounts past due for payment on loans or other assets. Arrears can arise through the late payment of principal and/or interest on debt instruments as well as through the failure to meet the terms of other types of transactions, such as for goods and services provided. This statistic provides the actual amounts owed to deposit takers that have not been paid or written off. If time-series data are disseminated, this statistic provides the user with an indication of any difficulties on the asset side of the balance sheet and their development over time, irrespective of valuation or provisioning policies. If arrears are significant, distinguishing them by different types of instrument—loans and securities in particular—might be useful. Principal and interest arrears could also be identified separately.
61. Arrears of deposit takers are arrears on deposit takers’ own liabilities. Rising amounts might suggest increased financial system vulnerability.
62. Assets transferred to special purpose entities are those assets that are still outstanding and that the originating deposit-taker has removed from its balance sheet by transferring them to an SPE or, as it is often called, a Special Purpose Vehicle (SPV). A change of ownership should have occurred before assets are removed from a deposit taker’s balance sheet.
63. To highlight potential vulnerabilities, disaggregating the data in this item between those assets transferred to SPEs where a clean break has occurred and those where such a break has not occurred might be considered. Such a distinction is made in the revised Basel Capital Accord to help determine capital adequacy requirements. A clean break is defined as arising when (1) the transferred assets have been legally isolated from the transferring institution (transferor), and (2) the transferor does not maintain effective or indirect control over the transferred assets. A transferor is deemed to have maintained effective control over the transferred assets if it is able to repurchase the assets from the transferee to realize their benefits and is obligated to retain the risk of the assets. The retention of servicing rights to the asset does not necessarily constitute indirect control.
64. Guarantees are contingent liabilities arising from an irrevocable obligation to pay a third-party beneficiary when another party, such as a client of the guarantor, fails to perform some contractual obligation. Guarantees represent a potential liability for deposit takers. They include loan and other payment guarantees, letters of credit, and performance bonds. These are described in Chapter 3 (paragraphs 3.14 and 3.15). The intention of this item is to be consistent with the definition of guarantees used in the BIS’s IBS data and so should include contingent liabilities of deposit takers as protection sellers of credit derivatives—that is, payments that would need to be made in the event of a default of the credit on which the derivative is written. If the guarantee data include such information on credit derivatives, it is suggested that they be separately identified and that separate data on deposit takers’ purchases of protection through credit derivatives also be collected. Such information would allow the net and gross positions on protection bought and sold through credit derivatives to be identified. Guarantees (and credit derivatives) should be valued in terms of the maximum potential loss—that is, assuming 100 percent of the amount guaranteed (protected) will need to be paid.3 A resident/ nonresident disaggregation is useful to allow reconciliation with the BIS’s IBS data.
65. Credit commitments irrevocably oblige a deposit taker to extend credit and hence could affect its liquidity position. They include lines of credit, other types of loan commitments, NIFs, and commitments to purchase securities (under NIFs, for example). These are described in Chapter 3 (paragraphs 3.16 and 3.17). The intention is to be consistent with the definition of credit commitments used in the BIS’s IBS data. Credit commitments should be valued in terms of the maximum amount that could be advanced under the commitment. A resident/nonresident disaggregation is useful to allow reconciliation with the BIS’s IBS data.
66. Assets managed but not owned by deposit takers. These assets represent a form of savings by other sectors that supplements savings captured in the deposit takers’ information.
67. Duration measures the weighted average life of assets and liabilities, with the weights being the present value of each cash flow as a percentage of the value of the assets or liabilities. In other words, duration adjusts maturity to take account of the size and timing of payments between the current period and maturity, or (for floating-rate instruments) between the current period and the date of the next repricing (see paragraphs 3.51 to 3.56)
68. Duration is intended to identify the sensitivity of the value of deposit takers’ portfolios of financial assets and liabilities to changes in interest rates.4 The greater the duration, the greater is the risk of loss/gain of value, with the corresponding impact on capital, if interest rates rise/fall. Duration is measured for tradable debt assets and liabilities, that is, those debt instruments for which the expectation is that they are valued at market or fair value. If there is a lack of data, duration might be compiled only for domestic currency debt instruments, or for debt instruments denominated in other units of account if the debt instruments are not denominated in the domestic currency.5
69. Appendix VI provides detail on measuring duration at the sector level and also introduces “gap” analysis, which is an alternative approach to assessing interest rate risk of a portfolio of assets and liabilities.
Other Financial Corporations
70. As in the case of deposit takers, the memorandum series shares and other equity investments in other financial corporations in the reporting population provide information on the ownership links within the sector. (This series and those below are set out in Table A3.3, which is a continuation of Table 4.2.)
|21.||Shares and other equity investments in other financial corporations in the reporting population|
|(ii) Other other financial corporations|
|22.||Nonperforming loans owned by special asset management companies|
|23.||Assets managed but not owned by other financial corporations|
71. Nonperforming loans owned by special asset management companies is the nominal value of the loans owned by those entities that are usually created by the authorities for the purpose of managing NPLs and recovering assets. Even though the NPLs have been sold by deposit takers to the special asset management companies, these loans still exist in the economy, and the cost of their resolution may be considerable. Without monitoring these loans, the amount of NPLs in the financial system would be underestimated. However, caution should be exercised in interpreting these data, as it is also important to know the institutional arrangements under which NPLs are transferred and whether the value of the assets transferred are covered by the value of collateral (see also paragraph 6.22).
72. Assets managed but not owned by other financial corporations. These are assets managed by fund managers and other similar financial corporations. These assets represent a form of savings by other sectors that supplements savings captured in the deposit takers’ information.
73. Debt-service interest payments are defined in Chapter 4; interest payments are those periodic payments that meet interest costs arising from the use of another entity’s funds. The use of this series in calculating the debt service coverage ratio was described earlier in this appendix. (This series and those below are set out in Table A3.4, which is a continuation of Table 4.3.)
|38.||Debt-service interest payments|
|39.||Debt-service receipts (interest and principal) from other nonfinancial corporations|
|40.||Shares and other equity investments in nonfinancial corporations in the reporting population|
|(ii) Other nonfinancial corporations|
|41.||Liquid assets (core measure)|
|42.||Liquid assets (broad measure)|
74. Debt-service receipts from other nonfinancial corporations6 are a subset of the total debt-service payments (line 35 of Table 4.3); with these two series, both intrasector debt-service payments and those to other sectors can be identified. The use of this series in calculating the debt-service coverage ratio was described earlier in this appendix. Separately identifying interest allows the debt-service coverage ratio calculated using interest only in the numerator to also be calculated excluding intrasector interest payments.
75. As with deposit takers and other financial corporations, shares and other equity investments in other nonfinancial corporations in the reporting population provide information on the ownership links within the sector.
76. For nonfinancial corporations, the core and broad measures of liquid assets are defined as for deposit takers; however, for nonfinancial corporations, deposits at deposit takers available on demand or within three months or less are included in the core measure, whereas such deposits are excluded for deposit takers because they are intrasectoral claims.
77. Variable-rate debt is the total value of debt instruments on which interest costs are linked to a reference index, such as London Interbank Offered Rate (LIBOR); the price of a specific commodity; or the price of a specific financial instrument that normally changes over time in a continuous manner in response to market pressures. All other debt instruments should be classified as fixed-rate instruments. When the value of the principal is indexed, the change in value resulting from indexation—periodically and at maturity—is classified as interest. Therefore, if principal only is indexed, such debt is to be classified as variable-rate debt regardless of whether interest is fixed or variable, provided the reference index meets the criterion above: that is, it normally changes over time in a continuous manner in response to market pressures. An attribution of debt by type of interest provides an indication of the exposure of nonfinancial corporations to interest rate movements. Nonetheless, interest rate derivative contracts, which are widely employed, can modify these risk characteristics. Thus, information on the notional amounts of such contracts and whether they receive fixed or variable-rate interest flows would also be useful.
78. In many economies, financial conglomerates are important to domestic markets. Financial conglomerates are defined in the Guide as enterprises that have controlling interest in a range of entities that straddle the different types of financial activity described above. This could include bank holding companies. In other words, a holding company might own a deposit taker and an insurance company, and/or other entities. The Guide recommends that data be presented separately for each financial sector (deposit takers, other financial corporations, and so forth) because the nature of their financial activities differs; nonetheless, if financial conglomerates are significant within the economy,7 subject to national confidentiality commitments, compilers could disseminate the information specified below:
- Names of large financial conglomerates.
- The value of assets owned on a basis that allows the information to be disaggregated by type of financial activity in which the conglomerate is involved, for example, deposit takers, insurance corporations, and security dealers.
- The balance sheet value of equity investments of non-deposit-taking conglomerate entities (resident and nonresident) in deposit takers in the reporting population. Such data would highlight cross-sector ownership patterns of conglomerate entities with relation to the deposit-taking sector.
- Return on equity and capital-to-assets ratios for the largest conglomerates.
In addition to or instead of collateral, account could be taken of credit risk transfer instruments. However, at the time of writing there is little to no experience with measuring the credit risk offset at the sector level arising from the use of these instruments.
These subsectors are insurance and pension funds, security dealers, investment funds, other financial intermediaries, and financial auxiliaries.
Valuing at the maximum potential loss has an obvious limitation: there is no information on the likelihood of the contingency occurring. However, calculating the likelihood of losses can be difficult, and international standards are still evolving.
Duration is “accurate” for only small changes in interest rates, because duration itself changes as interest rates change. Convexity, which is the second derivative of an asset’s price, indicates how duration changes in response to changes in interest rates and permits a more accurate estimate of interest rate sensitivity.
Foreign-currency-linked instruments should be classified as foreign currency instruments, if changes in their value arise primarily through changes in foreign interest rates and exchange rates rather than domestic interest rates.
It is proposed that receipts from, rather than payments to, other nonfinancial corporations be presented, given that if tradable bonds are issued, the payer might not know the identification of the creditor. But, of course, debt-service receipts from the creditor perspective are debt-service payments from the debtor perspective.
What is meant by “significant” can differ depending on country circumstances. Nonetheless, while it may be difficult to measure, a conglomerate might be considered “significant” if it either owns one of the top five (or about the top five) entities in any of the types of financial activities mentioned in Chapters 6 or 7 or, in broad terms, has a total value of assets (calculated on an aggregate basis) greater than any of the top five entities (or about the top five entities) in any of the types of financial activities in which the conglomerate is involved.