1 Banking statistics as an input for euro area monetary policy conduct: the institutional framework...

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Banking statistics as an input for euro area monetary policy conduct: the institutional framework and coping

with financial innovation

Antonio Colangelo

European Central Bank, Directorate General Statistics, Monetary & Financial Statistics Division

[email protected]

mailto:[email protected]

mailto:[email protected]

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Contents0. ESCB statistics

1. Aim and scope of Monetary Financial Institutions (MFIs) balance sheet statistics

2. The statistical framework of monetary analysis

3. Coping with financial innovation:

• Securitisation

• Central counterparties

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Contents

0. ESCB statistics

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0. ESCB statistics (1)

ESCB functions:

• Define and implement monetary policy

• Conduct foreign exchange operations/hold and manage official foreign reserves

• Promote smooth operation of payments systems

• Contribute to smooth conduct of policies relating to banking supervision and stability of the financial system

– the latter is now complemented by the ECB analytical and

statistical support to the European Systemic Risk Board

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• Each country has its statistics• GDP• population• inflation • money• external balance, …

• A monetary (and economic) union is a single economic entity• common currency and monetary policy • free movement of persons, goods and services, capital flows • increasingly integrated (financial) markets

• A monetary (and economic) union needs high quality statistics to• assess the economic developments in the whole area • base its forecasts• assess the transmission of monetary policy decisions on the

economy• analyse and assess its financial stability• support the conduct of other policies (e.g. financial integration)

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Is it not possible to simply add up national data?

• Even if and when national data are– timely,

– at the same frequency and

– accurate enough…

• concepts and definitions may still diverge (following international standards which may also need to be interpreted)

• some classifications differ, e.g. intra-transactions need to be classified as “domestic” from the viewpoint of the monetary union and, thus, allocated to SNA/ESA sectors – once asymmetry-free

• institutions of the monetary union (e.g. the ECB) are residents of the union, but not of any country (even where they are located)

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Contents

0. ESCB statistics

• Aim and scope of Monetary Financial Institutions (MFIs) balance sheet statistics

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1. Aim and scope of MFI balance sheet statistics (I)ECB President Trichet at Press Conference 10 June

2010:

“… the annual growth rate of M3 was unchanged at -0.1% in April 2010. The annual growth rate of loans to the private sector increased somewhat further and turned positive, but remained weak at 0.1%. These data continue to support the assessment that the underlying pace of monetary expansion is moderate and that inflationary pressures over the medium term are contained.

The weak annual growth rate of bank loans to the private sector conceals that monthly flows have now been positive for a number of months. At the same time, these aggregate developments continue to reflect a strengthening in the annual growth of loans to households, while the growth of loans to non-financial corporations has remained negative. A lagged response of loans to non-financial corporations to economic activity is a normal feature of the business cycle.”

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Full set of information

Analysis of money

and credit based on

MFI statistics

Analysis of economic

dynamics and shocks

Governing Council takes monetary policy decisions

based on a unified overall

assessment of the risks to price stability

Primary objective of price stability

Economicanalysis

MonetarMonetaryyanalysisanalysis

Macro-economic

projections

Cross-checking

1. Aim and scope of MFI balance sheet statistics (2)

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What is money?

Any definition of money is based on three crucial aspects:

1. Identification of monetary instruments

Financial assets that for their characteristics are – to a certain degree - substitutes of currencyThe nature and characteristics of financial assets and means of payment change over time and differ across economics areas, hence the different definition of monetary instruments used across central banks.

Financial instruments also differ by their degree of “liquidity”, i.e. their degree of substitutability to banknotes in circulation, hence the definition (and monitoring) of several monetary aggregates by central banks.

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2. Definition of the money-issuing sector

Financial institutions that issue financial assets that are included in the set of monetary instruments.

Monetary Financial Institutions

3. Definition of the money-holding sector

Resident entities that hold these monetary instruments and whose money disposal is of interest for the transmission mechanism from interest rates to prices

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M3 growth

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M3 vs. credit developments

-2

0

2

4

6

8

10

12

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M3 (annual pct ) Loans to private sector (annual pct )

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Contents

0. ESCB statistics

• Aim and scope of Monetary Financial Institutions balance sheet statistics

2. The statistical framework of monetary analysis

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Monetary Financial Institutions (MFIs)

= financial institutions which together form the money-issuing sector of the euro area

= central banks

+ resident credit institutions as defined in EU law

+ other resident financial institutions whose business is

- to receive deposits and/or close substitutes for deposits from entities other than MFIs and,

- for their own account (at least in economic terms), to grant credits and/or make investments in securities (the latter group consists predominantly of money market funds)

2. The statistical framework of monetary analysis (1)

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NCBsCredit

institutions

Money Market Funds Other MFIs Total

Euro area 17+1 6334 1474 3 7828

Non participating EU Member States 10 1875 154 53 2093

EU Total 28 8209 1628 56 9921

Number of MFIs as at end-December 2010


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Statistical requirements for MFIs

– Type of data: end-period stocks and flow adjustments

– Frequency: Monthly for main balance sheet series,

Quarterly for more detailed breakdowns

– Timeliness: data reported by NCBs to ECB on

15th working day after end of reference month, and

28th working day after end of reference quarter

(NCBs decide on timeliness for national reporting)


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Breakdowns collected for balance sheet items

A. Residency of counterpart(domestic / other euro area / RoW)

B. Counterpart sector (MFIs / Government / other financial institutions / insurance corporations and pension funds/ non-financial corporations / households)

C. Instrument category (under liabilities / assets)

D. Maturity bands (original maturity, i.e. at issue, or period of notice)

E. Currency (euro / other)


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Why to collect these breakdowns?

Euro area monetary aggregates and counterparts

Euro area MFI’s lending to euro area money holding sector

– Residency of counterpart. Our focus is on the euro area

– Counterpart sectors. To separately identify:

(i) Money issuing sector = MFIs

(ii) Money holding sector = Government excl. Central Gov., other financial institutions, insurance corporations and pension funds, non-financial corporations, households

– Instruments category. To identify M3 components and counterparts

– Maturity bands. To identify short term (≤ 2 years) and

long term (>2 years) instruments


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COUNTERPARTIES ASSETS LIABILITIES

A. Domestic residents / B. Residents of the other euro area Member States MFIs Non-MFIs General government central government state government local government social security funds Other resident sectors other financial intermediaries and financial auxiliaries insurance corporations and pension funds non-financial corporations households and non-profit institutions serving households

A. Domestic residents / B. Residents of the other euro area Member States MFIs of which credit institutinos Non-MFIs General government central government state government local government social security funds Other resident sectors other financial intermediaries and financial auxiliaries insurance corporations and pension funds non-financial corporations households and non-profit institutions serving households

C. Residents of the rest of the world Banks Non-banks general government other residents

C. Residents of the rest of the world Banks Non-banks general government other residents

D. Not allocated D. Not allocated

Separately identify money issuing and money holding sectors, for the purpose of deriving monetary aggregates


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Decomposition of the annual growth rate of overnight deposits by sector

(annual flows, EUR bn)


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Decomposition of the annual growth rate of M3 by sector

(percentage point contribution)


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Decomposition of the annual growth rate of M3 by instrument



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MFI loans to households

– In addition to the breakdown by counterpart sector and original maturity (and currency)

– Breakdown by purpose of the loan:

• Consumer credit

• Loans for house purchase

• Other lending

of which: loans to sole proprietors and unincorporated partnerships

Some new requirements are included in the BSI Regulation ECB/2008/32


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Decomposition of the annual growth rate of loans to non-financial sectors



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National aggregated balance sheets of other MFIs for each of the 16 euro area Member

States

Central bank balance sheets of 16 euro area

Member States

Aggregated balance sheet of euro area other MFIs

Aggregated balance sheet of the Eurosystem

On a gross basis

On a gross basis

ECB’s own balance sheet

Aggregated balance sheet of euro area

MFIsCentral government

deposit liabilities with a monetary

character (e.g. post office accounts)

Consolidated balance sheet of euro

area MFI sector

Monetary aggregates and

counterparts

Netting of inter - MFI positions

Compilation of euro area aggregates at the ECB

Adjustment for non-euro area holdings of short-term debt

securities issued by MFIs resident in DE, IE, NL


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Definition of the euro area monetary aggregates

M1 M2 M3

Currency in circulation x x x

Overnight deposits x x x

Deposits with an agreed maturity of up to 2 years

x x

Deposits redeemable at notice of up to 3 months

x x

Repos x

MMF Share/units x

Debt securities with a maturity of up to 2 years

x

An all currency concept is being followed, i.e. instruments in foreign currency are included


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Some alternative definitions of monetary aggregates


USA M1 = currency + cheque depositsM2 = M1 plus other deposits held by households

Euro area M1 = Currency + overnight depositsM2 = M1 + s-t deposits (2 years or redeemable in 3 months)M3 = M2 + s-t securities issued by MFIs + money market mutual funds.

Japan M1 = cash + demand deposits (commercial banks only)M2 = M1 + time deposits + CDs (commercial banks only)M3 = as for M2, but covering all deposit taking institutions

Thailand M1 = Currency + on call deposits.M2 = M1 + fixed and savings depositsM3 = M2 + other funds from public e.g. promissory notes.

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Assets:

• Loans to euro area residents

• Holdings of securities other than shares issued by euro area residents

• Holdings of shares/other equity issued by other euro area residents

• External assets

• Fixed assets

• Remaining assets

Liabilities:

• Currency in circulation

• Short-term deposits of other general government/ other euro area residents

• Money market fund shares/units

• Short term debt securities issued

• Deposits of central government

• Long-term debt securities

• Long term deposits of other general government/ other euro area residents

• Capital and reserves

• External liabilities

• Remaining liabilities

• Excess of inter-MFI liabilities

M3 =

Credit + NEA – CGD – LTFL + OA


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M3 and counterparts(annual flows, EUR bn)


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Stocks, flows, indices and growth rates

• Stock data refer to the last (working or calendar) day of the period (month or quarter)

• Flows for period t calculated as difference between stock at end of period t and stock at the end of period t-1, adjusted for effects that do not arise from transactions

• Index of adjusted stocks derived from flows and used to calculate growth rates

• Growth rate over the n months ending in month t calculated by dividing the index for month t by the index for month t - n


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Derivation of flows (transactions) by the ECB

Flow at time t for any balance sheet item is given by:

Ft = Flow

Lt = Level at end of the period t

Lt-1 = Level at end of the period (t-1)

Ct = Reclassification adjustment (reported by NCBs)

Vt = Revaluation adjustment (reported by “other MFI”)

Et = Exchange rate adjustment (calculated by ECB)

Ct , Vt , Et are "non-transactions-related" factors

tttttt EVCLLF )( 1


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Seasonal adjustment

• M3 components and counterparts, as included in press release, are seasonally adjusted

• Seasonal adjustment by the ECB also includes trading-day adjustment as underlying series are end-of-month stocks

• Method is X-12-ARIMA (U.S. Bureau of Census); for internal purposes, TRAMO-SEATS (A. Maravall – Bank of Spain) is also used


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Contents0. ESCB statistics

• Aim and scope of Monetary Financial Institutions (MFIs) balance sheet statistics

• The statistical framework of monetary analysis

1. Coping with financial innovation:

• Securitisation

• Central counterparties

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(Traditional) securitisation:

An originator (e.g. a bank) pools a set of assets and sells them to a financial vehicle corporation (FVC)

The FVC issues asset-backed securities (ABS) to investors, the principal and interest of which depend on the cash flows produced by the asset pool

The ABS are typically issued in different tranches of seniority (priority in payment/loss absorption)

The FVC is usually set-up as a bankruptcy remote entity (the pool of assets is beyond the reach of the originator’s creditors)

3. Coping with financial innovation (1)

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Motives for securitisation:

Financing especially during phases of large credit expansion (rates usually lower than other sources)

Risk diversification for both originators and investors

Conversion of illiquid assets into marketable securities that can be used in the repo market (including refinancing with the Eurosystem)

Regulatory capital relief and/or capital arbitrage

Flexibility in creating investment products for a wider investor base (e.g. tranching) enhanced revenues (arbitrage, fees, etc.)

Moving of business to lighter regulated or unregulated entities (e.g. ABCP conduits)


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(Among other needs) data on securitisation are needed to get reliable interpretation of MFI credit data:


need to correct for negative financial transactions when loans are securitised and derecognised from the MFI balance sheet!

Table 2.3 of the ECB Monthly Bulletin

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-2

0

2

4

6

8

10

12

14

Jan.1999 Jan.2001 Jan.2003 Jan.2005 Jan.2007 Jan.2009 Jan.2011

Loans to the private sector Loans to the private sector adjusted for securitisation

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Previous data was insufficient:

non-harmonised definitions and compilation approaches

different availability and coverage among Member States

no sectoral detail available (NFC, household etc.)

New statistical Regulation (ECB/2008/30) to address these limitations (among others)

publication of new statistics from June 2011


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Central counterparties (CCPs):

Financial institutions acting as intermediaries between financial and money market participants – reduce counterparty risk

More and more active on the (secured) interbank market:

Bank A repo Bank Bvs.

Bank A repo CCP inverse repo Bank B


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Impact on M3 and credit:

CCPs are part of the money-holding sector; therefore:

M3 is artificially inflated (repos are part of M3)

Credit is artificially inflated (the MFI in the reverse repo records a loan to an OFI)


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New requirements under Regulation ECB/2008/32 cope with this problem:

Re pos with O FIs - S tocks, EUR bn

0

50

100

150

200

250

300

350

400

J un.2010 J ul.2010 Aug.2010 Sep.2010 Oct.2010 Nov.2010 Dec.2010 J an.2011

Gross Corrected for CCPs


Loans to O FIs - S tocks, EUR bn

800

850

900

950

1000

1050

1100

1150

J un.2010 J ul.2010 Aug.2010 Sep.2010 Oct.2010 Nov.2010 Dec.2010 J an.2011

Gross Corrected for CCPs

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References

Regulation (EC) No 25/2009 of the ECB of 19 December 2008 concerning the balance sheet of the monetary financial institutions sector (Recast) (ECB/2008/32):

http://www.ecb.europa.eu/ecb/legal/pdf/l_01520090120en00140062.pdf

Guideline of the ECB of 1 August 2007 on monetary, financial institutions and markets statistics (recast) (ECB/2007/9) and amendments:

http://www.ecb.europa.eu/ecb/legal/pdf/l_34120071227en00010232.pdf http://www.ecb.europa.eu/ecb/legal/pdf/l_05320090226en00760091.pdf http://www.ecb.europa.eu/ecb/legal/pdf/l_01620100121en00060047.pdf

Regulation (EC) No 24/2009 of the ECB of 19 December 2008 concerning statistics on the assets and liabilities of financial vehicle corporations engaged in securitisation transactions (ECB/2008/30):http://www.ecb.europa.eu/ecb/legal/pdf/l_01520090120en00010013.pdf

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Working for the ECB

Various job opportunities are available on the ECB website at:

http://www.ecb.europa.eu/ecb/jobs/html/index.en.html

The ECB Statistics Traineeship Programme is dedicated to traineeships opportunity at the Directorate General Statistics of the ECB; see: http://www.ecb.europa.eu/ecb/jobs/apply/html/index.en.html

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Further information available on

www.ecb.europa.eu

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1 Banking statistics as an input for euro area monetary policy conduct: the institutional framework...

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