Maturity structure

Task Force FISIM October 2010

Eric CabooterNational Bank of Belgium / Institute of National Accounts

The problem (a)Actual interest rate =

a) pure cost of borrowing (= reference rate) +b) risk premium +c) intermediation service

Risk assumption risk premium : • credit default risk : spreads in interest rates due to

different credit risk profiles

• term risk : spreads in interest rates due to different maturities; banks assess expected developments of short term rates for deposits in comparison with long term rates -and periods- for loans 2

The problem (b)

Current practice : FISIM = b + cQuestion : are the "matching benefits" to financial intermediaries resulting from the transformation of short-term deposits into long-term loans output of financial intermediation?

If not : exclude the risk premium related to transformation from FISIM (by using maturity-matched reference rates)

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SNA 2008

SNA 2008 has two subsidiary considerations on the reference rate :degree to which the level of risk of the bank’s portfolio of

assets and liabilities should be reflecteddegree to which residual maturities of the asset and

liabilities groups to which the reference rate is applied should be reflected

ESA in line with SNA 2008

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Opinions in the context of the ESA revision

Recent discussion• Most Member States want to stick to one reference rate

(methodological + practical reasons)• ECB alternative : eliminate term premium and credit

default risk ← academic discussion : Wang/Basu/Inklaar...

Previous discussion• FISIM test period 1995-1998: use of ref.rate according to

maturity ("method 3") was dropped, for practical and methodological reasons

• No discussion since then5

Pro single reference rate= contra maturity-matched reference rates

Natural rate of capital (pure cost of money), represented by a single risk free reference rate

Risk management is a productive serviceIntermediation of funds (characterized by liquidity transformation and risk management/risk mitigation)

BEA (US) (Reinsdorf, Fixler, Villones)

• Liquidity provision is a service, requiring labour and capital inputs

• Rationale for >1 ref.rate is based on irrelevant comparison of characteristics of loans and deposits with credit market instruments 6

Pro multiple reference ratesAvoid counter intuitive results

Financial crisis (due to risk taking) generates an increase in FISIM; risk based returns are no value added

ECB (Colangelo, Mink, Keuning)

• Avoid inconsistency in national accounts (value added is not invariant to the way of financing an enterprise)

• Developments in banking: increase of credit risk transfer instruments used by banks (asset-backed securities, credit default swaps, interest rate swaps..)

Destatis (Eichmann)

Risk assumption does not require the use of labour and assets, and a productive service only requires the input of capital and labour FISIM output should not reflect the credit risk and term premium.

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Considerations/questions (a)

• Is the idea of a "pure component of interest" / "natural rate of capital" sufficient to conclude that the remainder part of interest should be considered as the service component?

• International fora never provided great support for introducing several reference rates according to maturity.

• Is the argument of the "matching benefits" still relevant in de present situation of financial innovation and new developments in banking?

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Considerations/questions (b)

• The introduction of maturity-matched reference rates necessitates a breakdown by maturity of the stocks of loans and deposits and the corresponding interest (eventually combined with a breakdown according to currency).

Is this a significant increase in workload in comparison with other alternatives?

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Considerations/questions (c)• What exactly do we understand under the terms (financial)

risk management, risk assumption, risk assessment, risk taking?

• Is risk assumption not a kind of risk management, and is management not an activity resulting in output?

• Is liquidity transformation (funding long-term loans with short-term deposits) not a core business of banking, requiring labour and other inputs in a "bundled" way? If yes, why should the "matching benefits" not be part of the output of financial intermediaries?

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Considerations/questions (d)

• The treatment of risk is the main problem : which part of the total risk eventually does not belong to FISIM?

• The term risk and credit default risk do not necessarily need the same treatment.

Discussion on risk: cf also:Fixler & Zieschang, 2010, Deconstructing FISIM. Should Financial Risk Affect GDP?,

IARIW11