Overview of Financial Services in the 2008 SNA

1. Agenda item 6c Overview of Financial Services in the 2008 SNA Herman Smith UNSD/DESA Workshop on the Implementation of the 2008 SNA, Kiev, 29 November – 2 December 2011

2. Outline of Presentation Financial corporations sector and its subsectors Breakdown of financial corporations Output of financial services Conclusion and way forward

3. Financial corporations sector and its subsectors Financial corporations consist of all resident corporations that are principally engaged in providing financial services, including insurance and pension funding services, to other institutional units Comprise following resident institutional units All resident financial corporations (as understood in the SNA and not just restricted to legally constituted corporations), regardless of the residence of their shareholders Branches of non-resident enterprises that are engaged in financial activity in economic territory on a long-term basis All resident NPIs that are market producers of financial services

4. Financial corporations sector and its subsectors Financial services are defined in paragraph 4.98 of the 2008 SNA: The production of financial services is the result of financial intermediation, financial risk management, liquidity transformation or auxiliary financial activities 2008 SNA’s definition of financial services is more explicit than 1993 SNA’s definition to also include financial services other than financial intermediation, specifically financial risk management and liquidity transformation

5. Breakdown of financial corporations Financial intermediaries: Institutional units that incur liabilities on their own account for the purpose of acquiring financial assets by engaging in financial transactions on the market Include insurance corporations and pension funds Financial auxiliaries: Institutional units principally engaged in serving financial markets, but do not take ownership of the financial assets and liabilities that they handle Other financial corporations: Institutional units providing financial services, where most of their assets or liabilities are not available on open financial markets

6. Breakdown of financial corporations 9 subsectors Central Bank (S121) Deposit-taking corporations except the central bank (S122), Money market funds (MMFs) (S123), Non-MMF investment funds (S124), Other financial intermediaries except insurance corporations and pension funds (ICPFs) (S125), Financial auxiliaries (S126), Captive financial institutions and money lenders (S127), Insurance corporations (ICs) (S128) and Pension funds (PFs) (S129)

7. Breakdown of financial corporations Non-profit institutions (NPI) and For-profit institutions (FPI) Control Public, National private, and foreign controlled

8. Output of financial services Financial services may be paid for explicitly or implicitly Some transactions in financial assets may involve both explicit and implicit charges Four main ways in which financial services are provided and charged: Financial services provided in return for explicit charges Financial services provided in association with interest charges on loans and deposits Financial services associated with the acquisition and disposal of financial assets and liabilities in financial markets Financial services associated with insurance and pension schemes

9. Output of financial services Financial services provided in return for explicit charges Applies to many financial services Provided by many categories of financial institutions Examples: Credit card fees Fees charged for floatation of shares Fees charged to arrange mortgages, manage investment portfolios, provide tax advice, administer estates, etc

10. Output of financial services Financial services provided in association with interest charges on loans and deposits Gives rise to financial intermediation services indirectly measured (FISIM) FISIM is calculated as FISIM = (rL-rr)*YL+(rr-rD)*YD, where rL, rD, rr, YL and YD represent the lending rate, deposit rate, reference rate, loans and deposits respectively Reference rate Rate between bank interest rates on deposits and loans Should contain no service element and reflect the risk and maturity structure of deposits and loans Suitable choice – prevailing rate for inter-bank borrowing and lending

11. Output of financial services Financial services provided in association with interest charges on loans and deposits FISIM only applies to loans and deposits provided by, or deposited with, financial institutions Not necessary for financial institutions to offer deposit-taking facilities as well as make loans Examples: Financial subsidiaries of retailers Money lenders

12. Output of financial services Financial services associated with the acquisition and disposal of financial assets and liabilities in financial markets Applies to transactions in debt securities (bills and bonds), equities, investment fund shares, and foreign exchange Margin represents financial service provided Margin is calculated as the difference between the buying price (or ask price) and mid-price and the mid-price and selling price (or bid price) of the financial instrument Mid-price is the average of bid and ask price

13. Output of financial services Financial services associated with insurance and pension schemes 5 types of activities Non-life insurance Life insurance and annuities Reinsurance Social insurance schemes Standardized guarantee schemes

14. Output of financial services Financial services associated with insurance and pension schemes Non-life insurance Insurer sets level of actual premiums to be such that sum of actual premiums plus property income earned on them (premium supplements) less expected claim leaves a margin insurance can retain Margin represents output which can be computed using 3 methods Expectations approach Accounting approach Cost approach

15. Output of financial services Financial services associated with insurance and pension schemes Non-life insurance output – Expectations approach Ex-ante model Insurers consider expectation of claims and premiums and premium supplements in setting premiums Output = actual premiums earned + expected premium supplements – expected claims

16. Output of financial services Financial services associated with insurance and pension schemes Non-life insurance output – Accounting approach Output = actual premiums earned + premium supplements – adjusted claims incurred Adjusted claims incurred determined by using claims due plus changes in equalization provisions and, if necessary, changes to own funds

17. Output of financial services Financial services associated with insurance and pension schemes Non-life insurance output – Cost approach Use if data are not available to apply the expectations and accounting approaches Output is estimated as sum of costs (including intermediate costs, labor and capital inputs) plus allowance for “normal profit”

18. Output of financial services Financial services associated with insurance and pension schemes Life insurance Method to calculate output follows same general principles as for non-life insurance However, changes in technical reserves must be taken into account due to the time interval between when premiums are received and when benefits are paid Output = actual premiums earned + premium supplements – benefits due – increases (+decreases) in life insurance technical reserves If data are insufficient to use this formula, compute output using sum of costs plus allowance for “normal” profit

19. Output of financial services Financial services associated with insurance and pension schemes Reinsurance Output is calculated in a way similar to that for non-life insurance However, there is a need to account for payments peculiar to reinsurance (i.e., commissions payable to direct insurer under proportionate insurance and profit sharing in excess of loss reinsurance) Output = actual premiums earned less commissions payable + premium supplements – adjusted claims incurred and profit sharing

20. Output of financial services Financial services associated with insurance and pension schemes Social insurance schemes 4 different ways of organization Social security – provided by government Employer may organize a social security scheme for employees Employer may have insurance corporation run scheme for employer Multiemployer scheme (insurance corporation runs scheme for several employers in return for any property income and holding gains it may make in excess of what is owed to participants in the scheme) Output for each mode is calculated differently

21. Output of financial services Financial services associated with insurance and pension schemes Social insurance schemes – social security Run as part of operation of general government If separate units are distinguished, output is calculated in the same way as non-market output as sum of costs If separate units are not distinguished, output is included with the level of government at which it operates

22. Output of financial services Financial services associated with insurance and pension schemes Social insurance schemes – employer-organized schemes Output is calculated as sum of costs including an estimates for return to capital Applies even if employer establishes a segregated pension fund to manage scheme

23. Output of financial services Financial services associated with insurance and pension schemes Social insurance schemes – employers get insurance corporations to run schemes Output is value of fee charged by insurance corporation iv. Social insurance schemes – multiemployer schemes Output is measured as for life insurance policies Output is calculated as actual contributions earned plus contribution supplements minus benefits due minus increases (plus decreases) in pension entitlements.

24. Output of financial services Financial services associated with insurance and pension schemes Standardized guarantee schemes Market producer – value of output is calculated in same way as non-life insurance Non-market producer – sum of costs

25. Conclusion and Way Forward 2008 SNA has expanded the scope of financial services Financial services now include risk management and liquidity transformation, in addition to financial intermediation UNSD and ECB are currently preparing a Handbook on National Accounting on “Financial Production, Flows and Stocks in the System of National Accounts” Handbook will include a number of worked examples to illustrate how to compute output of financial services Handbook is scheduled to be completed by end-2012 A draft is available at:

26. Thank You