Luci Ellis Head of Financial Stability Department Reserve Bank of Australia

1. How complete and how comparable are data on non-financial corporates, household sector balance sheets, and housing markets across countries? Luci EllisHead of Financial Stability Department Reserve Bank of Australia

2. Context • Current crisis unusually triggered by US household sector • Arrears rates rose and prices fell sharply, before macro slowdown or credit tightening • Other financial/banking crises triggered by excesses in nonfinancial corporates (CRE, LBO) • But many observers pre-crisis thought US households less vulnerable than those elsewhere • What information didn’t they know, that could have stopped them being led astray?

3. Encouraged FSIs in IMF Guide • Nonfinancial corporations sector • Total debt to equity • Return on equity • Earnings to interest and principal expenses • Net foreign exchange exposure to equity • Number of applications for protection from creditors • Households • Household debt to GDP • Household debt service and principal payments to income Source: IMF Financial Soundness Indicators Compilation Guide 2006.

4. General Principles for Constructing Suitable Indicators • Relevant:provides an informative reading on vulnerabilities and build-ups of imbalances • Based on evidence:grounded in both theory and empirical evidence • Risk-oriented:focussed on tail risks and tails of distributions, not just averages

5. Assessing the Size of Changes in Macro-financial Indicators • Macro ratios covered by existing SNA etc • Financial accounts, income, business assets? • But financial stability is about tail risks: distribution matters (leverage, interest burden etc) • Housing: LTVs etc • Corporates: listed firms’ disclosures • Limited international comparability: surveys, different disclosure regimes, proprietary data

6. Measuring Housing Prices • Stock versus transactions • And inclusion of appraisals in transactions • Quality adjustment • Repeat-sales, hedonics, stratification • Coverage of sample • Cities, whole country, particular dwelling or buyer type? • Source of data • Land titles records, lender, real estate agent

7. Assessing Extent of Vulnerabilities • Aggregate ratios often used • But these can lead us badly astray • Don’t capture tail of distribution • Ratios of aggregates are not ratio of average

9. Assessing Extent of Vulnerabilities • Aggregate ratios often used • But these can lead us badly astray • Don’t capture tail of distribution • Ratios of aggregates are not ratio of average • Need theoretical and analytical grounding • e.g. aggregate debt-income ratios not constant if long-run average inflation or credit constraints change • Institutions matter (eg penalties for default) • Market segment matters (owners or landlords?) • Measuring (sustainable) lending standards

10. Assessing the Extent of the Damage • How badly have things gone wrong? • What implications for macroeconomy / financial system? • Different measures • NPLs, impaired assets, arrears, foreclosures • Model effect on consumption, investment, financial sector’s loan losses, etc

13. Concluding Remarks • FSIs (or other rules of thumb) are not a substitute for human analysis • Macro indicators alone can lead us astray • Institutional details matter • Be aware of distribution across agents • “Soft signals” might be informative • Especially the existence of practices unique to that country