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1st Meeting Eurostat Task Force Luxembourg October 4-5 2010 Susan Kluth and Derick Cullen

Financial Intermediation Services Indirectly Measured (FISIM) and the Consumer Price Index (CPI):The Australian Experience. 1st Meeting Eurostat Task Force Luxembourg October 4-5 2010 Susan Kluth and Derick Cullen. Contents. FISIM in ABS Macroeconomic Statistics

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1st Meeting Eurostat Task Force Luxembourg October 4-5 2010 Susan Kluth and Derick Cullen

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  1. Financial Intermediation Services Indirectly Measured (FISIM) and the Consumer Price Index (CPI):The Australian Experience 1st Meeting Eurostat Task Force Luxembourg October 4-5 2010 Susan Kluth and Derick Cullen

  2. Contents • FISIM in ABS Macroeconomic Statistics • Data & Methods in deriving FISIM for CPI • Concepts, Scope and Policy Issues • Methods Issues • Cost of Funds • Problem Areas • Conclusion • Contacts

  3. FISIM in ABS Macroeconomic Statistics • In national accounts and balance of payments since 1998 • reviewed in 2009 • 2008SNA / BPM6 • global financial crisis • In Quarterly CPI since 2005 • experimental from 2000 • reviewed 2010 • historical review (16th Series) • global financial crisis

  4. SNA: FISIM and Interest

  5. Data & Methods in deriving FISIM for CPI • Data source • Derivation • Reference rates • Weighting • Impacts

  6. Data and Method of Calculating FISIM in CPI Sample product i Derive constant price balance Bi * CPIt/CPI0 Calculate average interest rate (yield) on each type of account Yi Calculate difference between product yield and reference rate Yi - RR (loans) RR -Yi (deposits) Multiply by indexed balance to determine interest margin on product Mi = (Yi - RR)*Bi * CPIt/CPI0 (loans) Mi = ( RR-Yi)*Bi * CPIt/CPI0 (deposits) calculate a price index for each product based on the margin movements and then aggregate the product indexes P= Sum Pi Data source is special report to ABS of balance and price data for retail products

  7. Yields and Reference Rates

  8. Impact on CPI Weight in CPI is significant ~ 4% of expenditure, dependent on how FISIM calculated

  9. Conceptual and Policy Issues • SNA, BPM and ILO Prices Manual: FISIM part of household consumption • ILO manual • FISIM is Monetary Final Expenditure • indirect measurement not an issue • part of ref aggregate #1 (outlays CPI) • part of ref aggregate # 2 (acquistions CPI) • Australia does acquistions CPI • "Investment related" expenditures

  10. Policy Feedback:CPI FISIM and Cash Rate answer is disclosure, not omission

  11. Methods Issues • Sampling • Aggregation and Predictability • Weighting Procedures • Institutional Indexes and Reference Rates • Data Quality and Sensitivity • Inertia

  12. Sampling Issues

  13. Predictability:Index Replication

  14. Aggregation: Compositional Change

  15. Weighting Procedures

  16. Other Issues • Institutional Indexes and Reference Rates • institutional reference rates perform better • Data Quality and Sensitivity • hypersensitive • large balances • small margins • large weights • weighting • Inertia • not of large concern

  17. Cost of Wholesale Funds • Rationale • in GFC spreads of bank wholesale funding to cash / deposits / goverment bonds widened • loan rates increased • but not a margin increase • Cost of Funds with single reference rate • according to standards • Cost of Funds with Multiple reference rates • analogy to retail margins: sales less cost of goods sold • cost of goods different for deposits and loans

  18. Bank Funding Ratios

  19. Cost of Funds: Single Reference Rates

  20. Cost of Funds: Single Reference Rate Outcomes

  21. Cost of Funds: Multiple Reference Rates

  22. Cost of Funds: Multiple Reference Rate Outcomes

  23. Problem Areas • Fixed Rate Products • Cost of Funds and Hedging • Fair Values • Securitisation • Interpretation of FISIM Statistics

  24. Fixed Rate Products Options... (a) reference rates tailored to fixed rate characteristics (debtor approach) (b) adjust balances to account for current yields (creditor approach)

  25. Adjusting Fixed Rate Product Yields

  26. Fixed rate adjustment: one bank

  27. Fixed rate adjustment: next bank

  28. Other Problem Areas • Hedging and measuring cost of funds • SNA, derivatives and "income" • Fair value changes for loans • scope for FISIM • impact of write-offs/write backs on margin policy • Treatment of securitised loans • sale to vehicle: cost of funds for FISIM • look through: relevance of deposits

  29. Interpretability: Nominal and Volume Indexes

  30. Interpretability: Nominal and Volumes with cost of funds

  31. Conclusions: FISIM in CPI • conceptual criticisms not valid • hypersensitivity • data quality and methods • incremental improvements possible • significant conceptual and methods issues • fixed rate products, hedging, fair values, reference rates • solutions seem to indicate "more data" • Predictability and Interpretability • detailed data and methods disclosures

  32. Questions? • Contacts • susie.kluth@abs.gov.au • d.cullen@abs.gov.au

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