1 1. Update of the Monetary and Financial Statistics Manual and the MFS Compilation Guide (MFSMCG 2016) 2. Framework for Monetary and Financial Statistics (MFSMCG 2016) Seminar on the Implementation of the International Statistical Standards in the Financial Statistics of Eurasian Economic Union (EAEU) Dilijan, Armenia May 31－June 3, 2016

2 Overview of PresentationMFS Methodology Revision The MFSMCG Chapters MFSMCG — Important Revisions Implementation of the MFSMCG

3 MFS Methodology Revision: BackgroundMain reasons for the revision: Align with the new 2008 SNA and BPM6 Address issues identified since the publication of the MFS Manual (MFSM) in 2000 and the MFS Compilation Guide in 2008, drawing from the accrued experience Reflect developments in the financial corporations sector and financial markets

4 MFS Methodology Revision: Process Agreeing on the FrameworkThe revision process has started in 2011 An Annotated Outline* and Issues Paper* were released to the members of the Experts Group for comments in November 2011. An Experts Group Meeting in February 2012 with representatives from about 30 countries and 10 international or regional organizations A Discussion Note* before the meeting, and Summary of Main Conclusions* after the meeting. Agreed to combine MFS Manual and Compilation Guide (MFSMCG), Thus a single document (MFSMCG) will replace the current MFSM and MFS Compilation Guide—merging + updates + new developments The prepublication version of the MFSMCG was posted on the IMF website in March 2016: * Available at

5 The MFSMCG Chapters IntroductionFramework for Monetary and Financial Statistics Institutional Units and Sectors Classification of Financial Assets Stocks, Flows, and Accounting Rules Money, Liquidity, Credit, and Debt Compilation, Source Data, and Dissemination of Monetary Statistics Financial Statistics

6 MFSMCG: important RevisionsDefinition of money (broad money) proposed and concepts of money issuing, money holding and money neutral subsectors explained Changes in institutional sectors stemming from the 2008 SNA (mostly related to subsectoring of the financial corporations sector) Changes in the classification of financial assets based on the 2008 SNA changes (name changes and other changes) and more elaboration on borderline cases Some minor changes in the valuation of financial assets/liabilities based on the clarification of concepts in the 2008 SNA (nominal value, book value) A greater focus on the other financial corporations subsector More elaboration on credit, debt, and liquidity aggregates

7 Important Revisions—Definition of Broad MoneyBenchmark definition of money (broad money)—financial instruments issued by money-issuing sectors and held by money holding sectors that are: media of exchange, and close substitutes for the media of exchange because they can be converted into the media of exchange at short notice without incurring a significant loss on the amount initially invested. Financial assets must be both liquid and a reliable store of value to be included in broad money. The counterparts to money help to explain credit flows, and the composition of the Depository Corporations Survey can provide an insight into the factors affecting the supply of broad money.

8 Important Revisions—Financial Instruments, Sectors, and OFCsChanges in classification of financial instruments based on the SNA (name changes) and elaboration on borderline cases Changes in institutional sectors stemming from the 2008 SNA (mostly related to subsectoring of the financial corporations sector—nine subsectors against five in 1993 SNA) A greater focus on the other financial corporations subsector: Non-MMF investment funds Other financial intermediaries except insurance corporations and pension funds Financial auxiliaries Captive financial institutions and money lenders Insurance corporations Pension funds

9 Important Revisions—Special Cases of SectoringCaptive financial institutions and money lenders— institutional units providing financial services other than insurance where most of either their assets or liabilities are not transacted on open financial markets. (¶ of the MFSMCG) Includes entities transacting within only a limited group of units or subsidiaries of the same holding corporation, or entities that extend loans from own funds provided by only one sponsor. Special Purpose Entities (SPEs). If treated as separate institutional units, allocated to sectors based on their principal activity, unless they fall into one of these four categories: (1) captive financial institutions, (2) artificial subsidiaries of corporations (not a separate institutional unit), (3) special purpose units of general government (general government) (¶ of the MFSMCG) Money market funds issue shares to the public and use funds primarily for purchasing money market instruments, shares of other MMFs, bank deposits, or debt securities with residual maturity of less than one year Public might treat them as a form of money –equivalent to monetary deposits in ODCs Certain degree of capital certainty (reliable store of value) Ability to withdraw funds immediately or on short notice For some MMFs, checking privileges or payment drafts to third parties As a result, MMFs are sectored as ODCs. If an investment fund does not fulfill the first two conditions above, it is classified as an OFC. Multi-government SPEs are special purpose vehicles created by a group of countries, in order to borrow on the international markets with the aim to provide financial assistance to its members. The liabilities of such multi-government SPEs are guaranteed by the governments that created them. Provided that these kind of entities are separately legally established and do not meet the definition of an international institution, they are classified as separate institutional units in the financial corporations' sector as captive financial institutions or financial auxiliaries. They are not an integral part of one general government as they are nonresident to all but one member

10 Important Revisions—Special Cases of Sectoring (Concluded)Holding companies that only hold financial assets and do not exercise management activity: captive financial institutions. (¶ 3.30 and 3.182) Sovereign Wealth Funds: a separate institutional unit of OFC sector or part of Central Government (¶ ) Central Clearing Counterparties: other financial intermediaries (¶ 3.157) The establishment of an Sovereign Wealth Fund raises the issue of whether it is a separate institutional unit of the OFC subsector or part of the general government. As with SPEs, the decision will depend on whether the SWF actively manages its portfolio and provides financial services on a market basis to government; or simply acts as a passive holder of the government’s assets. Central clearing counterparties (CCPs) provide clearing and settlement of market transactions in securities and derivatives.. CCPs are financial corporations, either financial intermediaries—but not money issuers as they do not collect deposits from money holding sectors—or financial auxiliaries serving commercial banks. CCPs should, therefore, be sectored as “other financial corporations

11 Important Revisions—Financial InstrumentsThree sub-categories added to financial instruments: Investment fund shares/units added to Equity Pension entitlements and standardized guarantee schemes added to Insurance Employee Stock Options added to Derivatives Name changes: Securities other than shares → Debt securities Shares and other equities → Equity and investment fund shares Insurance technical reserves → Insurance, pensions, and standardized guarantee schemes Financial derivatives → Financial derivatives and employee stock options New annexes (Annex ) on examples of debt securities issued through securitization, IMF Accounts, and Islamic Financial Instruments.

12 Important Revisions—Valuation of Financial AssetsClassification Valuation method1 Monetary gold (central bank) SDRs (central bank) Currency Deposits Debt securities Loans Equity and investment fund shares Insurance, pension and standardized guarantee schemes Financial derivatives and employee stock options Other accounts receivable/payable Market value Nominal/face value2 (in currency of denomination) Nominal value (in currency of denomination) Market or fair value Nominal value (in currency of denomination) Market or fair value (asset); book value (liability) Market or fair value3 Nominal value4 1 All foreign-currency-denominated assets and liabilities are converted to national currency units at market exchange rates. 2 Nominal and face value are the same in this case. 3 Except for prepayments of insurance premiums which are recorded on a nominal basis. 4 Except for provisions under other accounts payable which are recorded at book value. The valuation principles, which, with minor exceptions noted below, are the same as those in the 2008 SNA. For monetary statistics, it is recommended that equity and investment fund shares on the asset side of the balance sheet are valued at market prices, and that components of equity and investment fund shares on the liability side be valued at book values. This valuation approach for components of equity and investment fund shares is not applicable in the 2008 SNA, because that system does not disaggregate equity and investment fund shares by component. The MFSMCG also recommends that supplementary data on the market value of equity and investment fund shares liabilities are collected as memorandum items in the sectoral balance sheets. The valuation of deposits and loans in the MFCMCG, as well as in the 2008 SNA and BPM6, is an exception to the market or fair value principle. Deposits and loans are valued at nominal value—that is the amount of the creditor’s outstanding claims (equal to the debtor’s obligation) without adjustment for expected losses and which comprise the outstanding amount including    accrued interest (i.e., interest accrued but not yet due for payment).

13 Important Revisions—Credit, Debt, and LiquidityMore elaboration on credit, debt, and liquidity aggregates Measures of credit have the same three dimensions as monetary aggregates: the financial instruments included, the issuing sectors (lenders) the holding sectors (borrowers). Liquidity aggregates include, in addition to broad money liabilities, other liabilities that are also liquid, but that do not meet all other characteristics of broad money. The coverage of liquidity aggregates is much broader

14 Important Revisions—SDR AllocationsThe 2008 SNA recognized the change in treatment of SDR allocation already adopted in MFS. SDR allocations are considered transactions and not OCVA. SDR allocations are treated as foreign liabilities.

15 Implementation of the MFSMCGTransition will start once the updated methodology is finalized in 2016 Monetary statistics and existing financial statistics will remain on 1993 basis until the transition starts Transition will include: Revision of SRFs in STA’s systems Revision of data collection and IFS publication procedures Technical assistance and training to countries, regional groups Outreach to countries on implementing the revised methodology, including SRFs Special emphasis on coverage of OFCs Dates for the changes in SRFs and IFS have not been set yet; A strategy of implementation is being finalized.

16 Framework for Monetary and Financial Statistics

17 Outline Sources of statistical methodology for monetary and financial statistics (MFS), key concepts, organization and presentation. Institutional Units and Sectors Characteristics and classification of Financial Instruments Stock, Flows and Accounting Rules Characteristics and valuation of Financial Derivatives Compilation Framework for Monetary Statistics and Standardized Report Forms Money, Liquidity, Credit and Debt Central Bank and Monetary Authorities Accounts Financial Statistics Balance Sheet approach matrix Financial Statistics: Compilation Guidance

18 Sources of Statistical MethodologyThe prepublication version of the MFSMCG was posted on the IMF website in March (http://www.imf.org/en/data/MonStat) Other macroeconomic statistical systems Systems of National Accounts (2008 SNA) Balance of Payments Manual, 6th edition, 2009 (BPM6) Government Finance Statistics Manual 2014 (GFSM 2014—pre-publication) Some special topics Financial Soundness Indicators Compilation Guide (2006)—revision is under way Consumer Price Index Manual (2004) International Reserves and Foreign Currency Liquidity: Guidelines for a Data Template (2001) External Debt Statistics: Guide for Compilers and Users (2003) Data Dissemination: GDDS, SDDS, SDDS Plus

19 MFS Key Concepts Monetary and financial statistics, as defined in the MFSM Comprehensive stock and flow data Monetary statistics Nonfinancial and financial assets and liabilities of financial corporations Financial statistics Financial assets and liabilities of the entire economy Broader definitions of monetary and financial statistics would include data on Security prices and yields Stock price indices Loan and deposit rates Exchange rates, etc.

20 MFS Organization and PresentationMonetary statistics Sectoral balance sheets of financial corporations subsectors Surveys of financial corporations sector and its subsectors Financial statistics System of National Accounts 2008 Financial Account (records transactions) Other Changes in Volume of Assets Account (records effects of exceptional events) Revaluation Account (records value changes arising from price and exchange rate movements) Detailed flow-of-funds and related stock data As described in MFSM and 2008 SNA The central bank is a subsector of the financial corporations sector that performs some or all of the central bank functions. The central bank functions typically include the following: Currency issuance Banker to government and fiscal agent Regulation and supervision of financial corporations International reserves management Banker to financial corporations (especially, ODCs) Monetary policy formulation and implementation.

21 Institutional Units and Economic Sectors: Building BlocksAll macroeconomic statistics use the same core concepts: Units are aggregated into sectors Economic territory and residency Financial instruments Stocks, Flows, and Accounting rules (a later lecture) Same concepts in BPM6, 2008 SNA, GFSM and MFSMCG ensure consistency

22 Sectors of the Economy The SNA divides the economy into major sectors that play different economic roles. All institutional units are classified into sectors based on the economic characteristics. Classification is based on primary activity. Financial corporations – financial intermediation function General government Nonfinancial corporations Households Nonprofit institutions serving households (NPISHs) Rest of World – Not a sector of the economy = all units outside the economic territory of the country Financial corporations – financial intermediation function General government Central government State and local government Social security funds (separate or included in other categories) Nonfinancial corporations Public nonfinancial corporations Other nonfinancial corporations Households Nonprofit institutions serving households (NPISHs) Rest of World – Not a sector of the economy = all units outside the economic territory of the country MFSM terminology “Other resident sectors” combines two SNA sectors—households and NPISHs “Other nonfinancial corporations” combines national private nonfinancial corporations and foreign-controlled nonfinancial corporations

23 Financial Corporations SubsectorsThe Financial corporations sector includes units engaged in financial intermediation as their primary activity. Different subsectors are defined. Financial Corporations Sector has three subsectors Central bank Other depository corporations (ODCs) Deposit taking corporations MMFs Other financial corporations (OFCs) Non-MMF investment funds Other financial intermediaries except insurance corporations and pension funds Insurance corporations Pension Funds Financial auxiliaries Captive financial institutions and money lenders Definition of broad money is a key concept for defining other depository corporations MFSMCG terminology: “Depository corporations” (DC) combines the central bank and other depository corporations 2008 SNA has a different classification, which will be introduced later.

24 MFSMCG: Important RevisionsDefinition of money (broad money) proposed and concepts of money issuing, money holding and money neutral subsectors explained Changes in institutional sectors stemming from the 2008 SNA (mostly related to subsectoring of the financial corporations sector) Changes in the classification of financial assets based on the SNA changes (name changes and other changes) and more elaboration on borderline cases Some minor changes in the valuation of financial assets/liabilities based on the clarification of concepts in the 2008 SNA (nominal value, book value) A greater focus on the other financial corporations subsector More elaboration on credit, debt, and liquidity aggregates

25 Financial Instruments: Key ConceptsFinancial assets and liabilities Other financial instruments Not all financial instruments are financial assets: Financial instruments that are contingent or conditional upon the occurrence of uncertain future events are not financial assets lines of credit loan commitments The “financial assets boundary” separates financial assets and liabilities that are included on statistical balance sheets from other financial instruments that are off-balance-sheet.

26 Financial Assets - DefinitionOver which ownership rights are enforced, individually or collectively, by institutional units From which economic benefits can be derived by holding or using the assets over a period of time Most financial assets are financial claims arising from contractual relationships in which one institutional unit provides funds to another Exception is gold bullion included in monetary gold Most financial assets are financial claims arising from contractual relationships entered into when one institutional unit provides funds to another. These contracts are the basis of creditor/debtor relationships through which asset owners acquire unconditional claims on the economic resources of other institutional units. The creditor/debtor relationship imparts asset and liability dimensions to a financial instrument. Deposits, securities, and loans are financial assets for which unconditional debtor/creditor relationships exist. Financial assets may also be created through the incurrence of trade debt or more specialized forms of financial contracting. Also considered as financial asset, despite the absence of a corresponding liability, is monetary gold.

27 Financial Assets: Classification The draft MFSMCG and 2008 SNA2008 SNA/MFSMCG 1993 SNA Monetary gold and SDRs Currency and deposits Debt securities Securities other than shares Loans Equity and investment fund shares Shares and other equities Insurance, pension, and standardized guarantee schemes Insurance technical reserves Financial derivatives and employee stock options Financial derivatives Other accounts receivable/payable

28 Financial Assets: More Detailed CategoriesDomestic and foreign currency Deposits(related to the monetary properties of instruments) Transferable and other Denominated in domestic and in foreign currency Included or excluded from broad money? Debt Securities Negotiable instruments serving as evidence of debt Type of debt securities: bills, bonds and notes; negotiable certificates of deposits; commercial papers; asset-backed securities; nonparticipating preferred stocks; bankers acceptances; and trade bills Embedded derivatives Loans special cases Mention that broad money is a key concept particular to the financial system in each country.

29 Financial Assets: More Detailed Categories (continued)Equity and investment fund shares (liabilities) Funds contributed by owners Retained earnings Current year result General and special reserves Valuation adjustment Insurance, Pension and Standardized Guarantee Schemes Five type of reserves applicable to insurance, pension, and standardized guarantee schemes. Other accounts Receivable/Payable Trade credit and advances Other accounts

30 Stocks, Flows, and Accounting Rules: Key ConceptsFinancial stocks and flows Stocks Transactions Revaluations Other changes in the volume of assets (OCVA) Accounting rules Valuation of financial instruments Time of recording Aggregation, consolidation and netting Definitions Aggregation Consolidation Netting Basic principles Aggregate basic data classified by Financial asset/liability Debtor/creditor sector Consolidate data for use in macroeconomic analysis Within a financial corporation subsector Across financial corporation subsectors

31 Financial Stocks and FlowsOpening/closing stock: Value of the outstanding stock of a financial instrument at the beginning/end of an accounting period Flows Transactions Revaluations OCVA Interactions between institutional units through mutual agreement or law, and involve exchange of value or transfer Changes in the value of a financial instrument due to changes in: Market price Exchange rate Other changes in the volume of assets (more in the next slides) The framework used by SNA and MFSMCG is also an integrated system in which changes in stocks of financial assets and liabilities fully account for all flows recorded between periods, which arise from economic actions or changes that occur within a given period of time. The framework divides the recorded flows into separate components for transactions, revaluations, and other changes in the volume of assets (OCVA).

32 Financial Stocks and Flows: OCVAPhysical loss Write-downs and write-offs are not the same: Write-downs of value are recorded as revaluation Write-offs indicate disappearance of assets, therefore OCVA Loan recoveries OCVA entry as reversing the earlier provision or write off OCVA contra-entry: increases equity Unilateral abandonment of a claim: OCVA But debt forgiveness is not an OCVA: transaction Changes in sector or instrument classification e.g. loans becoming negotiable: reclassify to securities De- and monetization of gold Classification errors from previous periods are not OCVA: previous periods should be corrected Opening stock refers to the value of the outstanding stock of a category of financial assets or liabilities at the beginning of an accounting period. Transactions Economic flows that are an interaction between institutional units by mutual agreement or an action within an institutional unit that is analytically useful to treat like a transaction, often because the unit is operating in two different capacities. Revaluations are financial flows arising from changes in: (1) the prices of financial assets and liabilities and/or (2) the exchange rates that affect the domestic currency values of assets and liabilities denominated in foreign currency.

33 Valuation of Financial Instrument in MFSClassification Valuation method Monetary gold (central bank) Market value SDR (central bank) Market value Currency Nominal / face value Deposits Nominal value Debt securities Market or fair value Loans Nominal value Equity and investment fund shares Asset: market or fair value Liability: book value Insurance, pension and Market or fair value standardized guarantee schemes Financial derivatives Market or fair value and employee stock options Other accounts receivable/payable Nominal value Financial asset classifications and valuation rules In contrast to the classification and valuation scheme for the financial assets and liabilities in the monetary statistics shown the slide, the IFRSs have a separate set of classifications that specify the rules for financial asset revaluation on the basis of an enterprise’s motivations for acquiring the financial assets, either for trading or for holding to maturity. To obtain source data for the monetary and financial statistics, some components of the data based on IFRS or national financial reporting standards need to be adjusted as follows: Debt securities valued at amortized cost need to be restated at market or fair value for the monetary and financial statistics. Equity shares valued at amortized cost need to be restated at market or fair value. Loans and deposits valued at market or fair value in accordance with the IFRSs’ provisions, need to be restated at nominal value, and a contra-entry (amounting to the positive or negative difference between the nominal value and the fair value of the loan) would need to be recorded, either in retained earnings or valuation adjustment.

34 Accrual Recording – Follows Change of Economic Ownership PrincipleAll macroeconomic statistics use accrual recording Records flows and stocks at the time economic value is created, transformed, exchanged, transferred, or extinguished May not correspond with time of payment (cash accounting) Two parties to a transaction should, in principle, record it simultaneously (symmetric recording) The MFSMCG, in harmonization with the 2008 SNA, recommends recording transactions at the time of the change in ownership of a financial asset, which may not necessarily correspond with time of payment. Changes in ownership of a financial asset is evidenced when all rights, obligations, and risks are discharged. Therefore, in principle, the two parties to a transaction should record it simultaneously. This simultaneous recording by all parties involved in the transaction ensure the balance of overall system.

35 Aggregation, Consolidation and NettingAggregation - sums up: Summing of stock or flows across institutional units or financial instruments Sectoral balance sheets (e.g., ODCs) are aggregated across units within the sector This preserve data on claims between units within a sector Consolidation - eliminates: Eliminates stocks and flows between a group of institutional units when grouped (e.g., into sectors) Sectoral balance sheets are consolidated to obtain surveys Note Exception: no consolidation of equity Note Units report on a consolidated basis across all resident offices of the institutional unit The MFSMCG discusses the concepts of aggregation, consolidation, and netting and their application for compiling monetary and financial statistics. Aggregation refers to the summing of stock or flow data across all institutional units within a sector or subsector, or all assets or liabilities within a particular category. Aggregation of data across the institutional units within a sector or subsector preserves the data on claims and liabilities between the units in that sector or subsector. For example, for sectors and subsectors, financial assets and liabilities are aggregated into major categories—loans classified by debtor sectors and deposits classified by creditor sectors. Similarly, monetary and credits aggregates are the sum of major financial assets or liabilities across various sectors Sectoral balance sheets—the underlying data sets for the monetary statistics described in Chapter 7—should be compiled as aggregated data of institutional units in the same subsector of FCs sector. Consolidation eliminates stocks and flows between institutional units, which are grouped into the same sector or subsector. Consolidation entails the “canceling out” of stocks and flows that arise from financial claims and corresponding liabilities between the institutional units within the financial sector or subsector covered by a particular survey.

36 Characteristics and Valuation of Financial DerivativesA financial instrument that is linked to another specific financial instrument, indicator, or commodity, and through which specific financial risks can be traded in their own right in financial markets Value derives from the price of the underlying instrument No principal amount is advanced Enable trading of risks Interest rate Currency value or fluctuation Equity price Commodity price Credit To qualify as a financial derivative, it must be possible to demonstrate that the contract has value Market value or fair value methods

37 MFS Compilation FrameworkEach unit reports Central bank aggregates into subsectors Central bank (and the IMF) compile and publish surveys Balance sheet data (based on accounting standards) Sectoral Balance Sheets (Standard Report Forms): 1SR for CB 2SR for ODC 4SR for OFC 1SG for CB 2SG for ODC 4SG for OFC 3SG for DC 5SG for all FC MFSMCG March 2013 – release chapters and appendices as they become available to the Experts Group members for comments Transition will start once the updated methodology is finalized in early 2014 Monetary statistics and existing financial statistics will remain on 1993 basis until the transition starts Transition will include Revision of SRFs in STA’s systems Revision of data collection and IFS publication procedures Technical assistance and training to countries, regional groups Outreach to countries on implementing the revised methodology, including SRFs Special emphasis on coverage of OFCs Dates for the changes in SRFs and IFS have not been set yet Map accounting to statistical data Reorganize into analytical presentations

38 International StandardsSource Data for MFS International Standards National Standards International Financial Reporting Standards (IFRS) Issued by International Accounting Standards Board (IASB): Framework for Financial Statements presentation International Accounting Standards (IAS) Implementation Guidance National accounting standards Chart of accounts list all accounts in: General ledger Subsidiary ledgers Trial balance Not standardized across countries Standardized only to a certain degree within countries (in some countries only within an individual subsector) The source data for monetary and financial statistics are FC’s accounting and regulatory records which may be directly usable, or the data may need to be adjusted for conformity with the accounting and valuation rules for the monetary and financial statistics, as described in Chapter 5. The MFSMCG uses market price as the primary concept of valuation of transactions, other flows, and stocks. It recognizes that market price quotations are not available for financial assets not traded or infrequently traded in secondary markets. It is, therefore, necessary to estimate market-equivalent values for such financial assets. The MFSMCG refers to estimates of market-equivalent values as fair values. Chapter 5 describes the valuation principles, which, with minor exceptions noted below, are the same as those in the 2008 SNA. The MFSMCG focuses on the IFRSs to illustrate the relationship between FCs’ accounting data and the source data for the monetary and financial statistics. With increasing globalization of financial markets, many countries have been adopting the IFRSs as their accounting standards, or have been harmonizing their national financial reporting standards with the IFRSs. The main IASB reference for the preparation of the MFSMCG was the International Financial Reporting Standards 2012 containing the Framework for the Preparation and Presentation of Financial Statements, IFRS 1 through IFRS 7, and IAS 1 through IAS 41 (excluding IAS 3 through IAS 6, IAS 9, IAS 13, IAS 15, IAS 22, IAS 25, and IAS 35, which have been superseded by other Standards).

39 Characteristics of the SRFsAll countries report in same standard: comparability Structure reflects methodology: Manual, Guide and draft MFSMCG Surveys automatically derived from the SRFs Use of a balance sheet framework Three major pillars: Sectoring of economic units Classification of financial instruments Accounting rules (valuation, recording, currency denomination)

40 SRFs: Reporting to the IMFForm 1SR – Central Bank (CBS) Form 2SR – Other Depository Corporations (ODCs) Form 4SR – Other Financial Corporations (OFCs) Form 5SR – Monetary Aggregates Forms 1SR, 2SR and 4SR based on sectoral balance sheets Depository corporations survey (3SG) is consolidation of CBS (1SG) and ODCs (2SG) Financial corporations survey (5SG) is consolidation of (3SG) and OFCs (4SG)

41 Money, Liquidity, Credit and DebtBroad Money: What components are included in broad money Benchmark definition in the draft MFSMCG The application is done by the national authorities Monetary base: support the expansion of credit Credit and debt, and liquidity aggregates Terminology: – monetary aggregates are all items compiled in a monetary survey or  financial sector survey. In other words, monetary aggregates are all by-products of monetary statistics compilation. Broad money, the net position of government, foreign assets, credit to households and/or other domestic sectors are monetary aggregates; –there are more specific sub-categories of monetary aggregates. Prominent sub-categories of monetary aggregates are: credit aggregates (credits to non financial corporations, to households, etc.), debt aggregates (they may be considered as some of the credit aggregates viewed from the lender side), money aggregates (base money/monetary base and money supply that are different aggregates usually named from the series M0 to Mx) and liquidity aggregates (beyond money aggregates). – The MFSMCG provides international definitions of money, credit, and debt aggregates to be used as global benchmarks.

42 Definition of (Broad) MoneyBroad Money includes: media of exchange (usually: national currency holdings and transferable deposits in national currency) + other financial assets “easily” convertible into media of exchange without incurring a “significant” loss of the amount initially invested Broad money is defined in the MFSMCG as financial liabilities issued by money-issuing sectors and held by money holding sectors that: (1) are used as a means of payments and (2) are close substitutes for the means of payment and can be transformed into means of payment at short notice at minimum time, without incurring a significant loss on the amount initially invested. Financial liabilities included in broad money must be both liquid and a reliable store of value. Financial liabilities that are used as a means of payment include currency (coins and banknotes) in the hands of the public as well as transferable deposits at commercial banks and other categories of depository corporations. Electronic money and, under some conditions, travelers checks issued by resident financial or nonfinancial corporations are means of payment in the considered economy.. In an economy, means of payment are denominated in the domestic currency; there are several economies where means of payment in foreign currency are widely and, even, officially accepted as legal tender.  Spending decisions are also determined by the available amount of a broader range of financial liabilities than those that can be used as a means of payment. Saving deposits, short-term deposits, bonds, and debt securities, as well as non transferable shares/units in money market investment funds are a very liquid and reliable store of value. These financial assets are considered close substitutes for the means of payment.  Liquidity is an important characteristic of financial liabilities included in broad money. A financial asset is liquid if, at short notice, it can be sold or redeemed for means of payment (currency or transferable deposit) with minimum cost and time, and without unduly affecting the value of the asset.

43 What Components are Included in Broad MoneyThe dimensions of the broad money triangle : Money-issuing sector Money-holding sectors No lecture note Financial assets that are “money” (“moneyness”)

44 Monetary Base The funding base that underlies the money aggregates, rather than a money aggregate itself Can support increases in credit and money through the money-multiplier Monetary base is sometimes also called: High- powered money Base money Reserve money Central bank money The monetary base comprises central bank liabilities that support the expansion of credit and broad money. The monetary base is sometimes called high-powered money, because changes in the monetary base can support increases in credit and money through the money multiplier. The money multiplier is the number of times the resident deposit-taking corporations that maintain excess reserves can create additional broad money mainly through the extension of loans to money holders sectors. This increase in broad money may be reached by deposit-taking corporations through the direct extension of loans to money holders sectors or by purchasing financial or nonfinancial assets from them.  The monetary base is calculated exclusively with items selected on the liability side of the central bank balance sheet. Thus, the central bank is the sole issuer of the monetary base. Other resident sectors, particularly ODCs, are possible monetary base holders. As in the case for broad money (as discussed above), central government and nonresidents are not monetary base holders, i.e., central bank liabilities to these sectors are excluded from the monetary base.  The monetary base is defined as currency holdings by all subsectors other than the central bank, and other depository corporations’ deposit holdings at the central bank and holdings of domestic currency. National compilers sometimes include additional components in the monetary base, depending on the types of liabilities issued by the central bank and the analytical use for which the monetary base is formulated. MFSMCG, Section 6.4

45 Liquidity Aggregates Broader than broad money with respect toTypes of financial instruments Issuing sectors Components: Broad money Plus other liabilities that are somewhat liquid such as: Longer-term liabilities of ODCs, OFCs, and other sectors Commercial paper issued by nonfinancial corporations Securities issued by central, state, and local governments May be disaggregated into Core liabilities of the financial sector Non-core liabilities of the financial sector Holding sectors the same as for broad money The global financial crisis has demonstrated that traditional monetary aggregates on a national level may not capture the full range of liquidity-creating instruments and cross-border financial intermediation. A more encompassing measure of global liquidity beyond the traditional monetary aggregates is under construction at the IMF, to help policy-makers assess better the build-up of risks in and the performance of the financial system.  This definition of liquidity focuses on the liabilities available to expand depository corporations’ and financial corporations’ balance sheets and represents the degree to which other depository corporations and financial corporations can borrow. The objective of this MFSMCG is to provide a benchmark definition for liquidity, using two instrument-dimensions: core liabilities of the financial sector (the broad money aggregates of currency and deposits which do not include inter-bank deposits) and non-core liabilities of the financial sector (non-residents’ deposits; debt securities; loans, repos and other structured finance products; net intra-financial sector liabilities). This is work in progress. IMF Working Paper, “Exploring the Dynamics of Global Liquidity”, October 2012. MFSMCG, Section 6.5

46 Credit and Debt AggregatesCredit is viewed from the creditor side, and debt is viewed from the debtor side Credit provision by ODCs is the mechanism underlying the expansion of money: Credit multiplier similar to money multiplier Credit expansion leads to expansion of the money supply Credit and debt have the same 3 dimensions as money Financial instruments Issuers (borrowers, or debtors) Holders (creditors, or lenders) – Credit provision by depository corporations is the mechanism underlying the expansion of the money stock: this has been theorized in 1960 by John G. Gurley and Edward S. Shaw in the book “Money in a Theory of Finance”

47 Central Bank SubsectorCentral bank: a subsector of financial corporations sector Central banks are independent of government control Different names – Central Bank, Reserve Bank, National Bank Other institutional arrangements also in the central bank subsector: Currency boards Government-affiliated agencies Currency unions and regional central banks Central bank is a subsector of the financial corporations sector. As discussed earlier, central bank is the national financial institution (or institutions) that exercises control over key aspects of the financial system and carries out such activities as issuing currency, regulating money supply and credit, managing international reserves, transacting with the IMF, and providing credit to other depository corporations. Central banks perform all or some of the central bank functions, which were discussed earlier. In some countries, there are institutions or institutional arrangements other than the central banks that perform some or all central bank functions and that may also be included in the central bank sector. These institutions or institutional arrangements include: Currency boards Government-affiliated agencies Currency unions Regional central banks. Each of these institutions or institutional arrangements will be discussed in the next few slides.

48 Central Bank Subsector Currency Union and Regional Central BankCentralized model Decentralized model A single central bank that operates in all member countries Owned by the national governments BCEAO, BEAC, ECCB assets and liabilities are allocated to each country Comprises a RCB and national central banks (NCBs) RCB is a separate nonresident unit Each NCB is a resident of a country in which located This slide shows some specific features of the centralized model of a currency union: The currency union has a RCB owned by the governments of the member countries. The central bank operations in each member country are carried out by branches or agencies of the RCB—that is there is no national central bank in each member country. Nevertheless, as you will see later in this presentation, the central bank data for each member country are compiled based on the allocation of the RCB’s transactions and positions to the individual member countries in proportion to each member’s claims on and liabilities to the RCB. The MFSMCG recommend that the RCB is not be treated as a separate institutional unit, but rather should allocate its transactions and positions to the individual member countries, in proportion to each member’s claims on and liabilities to the RCB. This slide shows some specific features of the decentralized model. In the decentralized model, the currency union comprises an RCB and national central banks (NBCs), which own the RCB and act as the central banks for the countries in which they are located. This is unlike the centralized model, in which there are no NCBs. The monetary and foreign exchange policies are formulated and approved by the decision-making bodies of the RCB, whereas policy implementation is a responsibility of the NCBs. The decentralized model is the one adopted within the European Union through the creation of the European Central Bank (ECB) and which includes the 17 members of the euro area (February, 2013). The MFSM and this Guide recommend the following: the headquarters office of the RCB should be classified as a separate nonresident unit, holding its own assets and liabilities, and that each NCB should be classified as resident of the country in which it is located. NCBs’ claims on the RCB headquarters should be recorded as claims on nonresidents.

49 Monetary Authorities’ AccountsSometimes central bank functions are carried out by the government: Government liability for the issuance of currency Government liability for financial obligations to the IMF Government assets part of official international reserves The monetary authorities’ accounts is an account that is augmented to cover all central bank functions As mentioned earlier, in some countries, the central government may include units that perform some of monetary authorities’ functions, such as the issuance of currency, holding of international reserves and operation of exchange stabilization funds, and a financial relationship with the IMF. When financially integrated into the central government and under the direct control of the central government, these monetary authorities’ functions are recorded as part of the government sector. In these countries, in addition the central bank survey covering only the central bank accounts, it is analytically important to compile the Monetary authorities’ accounts that cover all monetary authorities functions performed by both the central bank and the central government. A monetary authorities’ account is a presentation of a central bank survey that has been augmented with line items associated with central banking functions performed by the central government as discussed earlier. While the central bank survey may not include all Fund accounts (e.g., SDR allocations are included in the MOF accounts based on the agreement between the relevant national authorities), the monetary authorities accounts should always include all central bank functions regardless which institution(s) perform these functions. Depending on what central bank functions performed by the government, the monetary authorities’ accounts may include: 1) a government liability for the issuance of currency (typically coins), 2) a government liability for financial obligations to the IMF, and 3) government assets (typically, foreign exchange holdings) that are part of official international reserves etc. A government liability is matched by a contra-entry claim on the central government, and an entry for a central government asset is matched by a contra-entry liability to the central government. The MFS Guide recommends that each entry and contra-entry should be presented as a separate line item in the monetary authorities account

50 Central Bank Survey: AssetsNet foreign assets Claims less liabilities to nonresidents (by type of instrument) Claims on ODCs Net claims on central government Claims (by securities and other claims) less liabilities (by deposits and other liabilities) Claims on other sectors By sector These are the aggregates presented in the asset section of the central bank survey. Central bank’s claims on nonresidents are presented on both a net and a gross basis, with breakdowns by instrument. Net foreign assets equals claims on nonresidents minus liabilities to nonresidents. Claims on nonresidents are presented with breakdowns by instruments—monetary gold and SDR holdings, foreign currency, deposits, debt securities, loans, financial derivatives, and other. Liabilities to nonresidents are presented in the same format as claims on nonresidents, excluding monetary gold and SDR holdings and foreign currency. The separate categories are Deposits, debt securities, Loans, Financial derivatives, and Other.’ transactions with the rest of the world. Claims on other depository corporations are presented on a gross basis and without breakdowns by instruments. These claims on category includes a common set of major financial assets, such as deposits, securities other than shares, loans, shares and other equity, and financial derivatives—as well as the subcategories of Trade credit and advances and Settlement accounts within Other accounts receivable. Claims on central government are presented on both a net and a gross basis. Net claims on central government equal claims on central government minus liabilities to central government. The presentation on a net basis facilitates the analysis of financial corporations’ financing of central government operations. Claims on central government are disaggregated into securities and other claims. Other claims comprise mainly loans to and other accounts receivable from central government in the subcategories of Trade credit and advances and Settlement accounts. Two data categories are presented under liabilities to central government—deposits and other liabilities. Other liabilities may include loans from and other accounts payable to central government the subcategories of Trade credit and advances and Settlement accounts. Claims on other sector are presented on a gross basis and without breakdowns by instruments. However, claims on each sector are presented separately—Claims on other FCs, Claims on state and local government, Claims on public nonfinancial corporations, Claims on other nonfinancial corporations, and Claims on other resident sectors, comprising households and NPISHs. These claims on category includes a common set of major financial assets like claims on ODCs discussed in the previous slide. As you will see, claims on and liabilities to each of the other subsectors of the financial corporations sector are separately identified to enable the consolidation of the subsector surveys in the DCS and the FCS.

51 Central Bank Survey: LiabilitiesMonetary base: Currency in circulation Liabilities to ODCs: reserve deposits and others Deposits included in broad money (by sector) Debt securities included in broad money (by sector) Other liabilities to ODCs (excluded from monetary base) Deposits excluded from broad money Debt securities excluded from broad money Loans Financial derivatives Trade credit and advances Equity and investment fund shares Other items (net) The liability categories in the CBS are presented by financial instruments. A further distinction is made between those liabilities that are included in the national definition of broad money and those that are excluded, with further breakdowns by sector. The liability categories are grouped into monetary base and those that are not included in monetary base are presented by instruments excluded from broad money. This slide shows the presentation of monetary base in the liability section of the CBS. Monetary base is presented with breakdown into currency in circulation, liabilities to ODCs, deposits and securities included in broad money. In accordance with MFSM, currency in circulation equals currency issue minus central bank’s holdings of domestic currency. Liabilities to ODCs are presented with further breakdown into reserve deposits and other liabilities. These reserve deposits (or required reserves and clearing balances) and the corresponding entry in the other depository corporations survey (ODCS) comprise ODCs’ transferable deposits, denominated in national and foreign currency, held at the central bank. Other liabilities to ODCs include ODCs’ transferable deposits that are not classified as reserve deposits and other deposits at the central bank as well as ODCs’ holdings of securities issued by the central bank. Deposits included in broad money are presented with breakdown by money holding sectors, such as OFCs, state and local government, public nonfinancial corporations, other nonfinancial corporations, and other resident sectors (households and NPISHs). Also securities included in broad money are presented with breakdown by money holding sectors. In addition to the monetary base, the liability section of the CBS also presents the following categories separately: Other liabilities to ODCs: it should be noted that other liabilities in various forms that are not classified as part of monetary base should be separately presented for consolidation with the counterpart entries in the ODCS to produce the DCS. Deposits excluded from broad money: these are deposits of the money holding sectors (OFCs, NFCs, state and local government, and other resident sectors) that do not qualify for inclusion in broad money (based on national authorities’ discretion), such as less liquid, long-term deposits that usually involves delays and/or substantial penalties for early withdrawal, restricted deposits for which withdrawals are restricted for protracted periods. It should be noted that based on the MFSM, central bank liabilities to other financial corporations, nonfinancial corporations, and other resident sectors are usually included in the monetary base, particularly if these liabilities are included in the national definition of broad money. Debt securities excluded from broad money are typically long-term securities that are much less liquid even if traded in secondary markets, because of their fluctuations in value when interest rates change. Some types of short- and medium-term securities may also not qualify for inclusion in broad money due to the uncertainty of their liquidness. Central bank liabilities to OFCs in the form of deposits and securities excluded from broad money should be separately identified and presented for consolidation with their counterpart entries in the OFCS to produce FCS. Central bank liabilities in the form of loans, financial derivatives, and trade credit and advances listed in this slide are usually excluded from broad money as they are normally considered less liquid or because of their fluctuations in value when interest rates or market condition change. Like other central bank liabilities to OFCs, positions on loans, financial derivatives, and trade credit and advances with OFCs should be separately identified and presented for consolidation with their counterpart entries in the OFCS to produce FCS. Equity and investment fund shares: unlike other categories of assets and liabilities, liabilities in the form of shares and other equity are neither sectorized nor netted out in the consolidation process. Rather, they are shown as a separate class of liabilities in order to provide a comprehensive view of the capital base of the institutional units in each subsector. Shares and other equity is disaggregated into separate components for Funds contributed by owners, Retained earnings, General and special reserves, and Valuation adjustment. It should be noted that, based on IMF’s new guidelines, SDR allocations are reclassified from shares and other equity to foreign liabilities—SDR allocations should now be classified as a separate item under other foreign liabilities. SDR allocations may be included in CBS or in MOF accounts depending on the agreement between the relevant national authorities. Other items (net) equals other liabilities less other assets plus Consolidation adjustment and may be positive (net liability) or negative (net asset).

52 Constructing ODCs’ Sectoral Balance SheetsStarting point: structure of an ODC balance sheet: Assets Liabilities Building block for deriving surveys Map to statistical concepts: Sectoring of institutional units Classification of financial instruments Accounting and valuation rules Usually construct sectoral balance sheet for each type of different ODC’s Aggregate to the ODC sectoral balance sheet

53 Deriving the ODCs’ surveyConsolidate the aggregated sectoral balance sheet Consolidation inter–ODCs’ claims and liabilities Key items for compiling money measures Claims on central bank Monetary base counterpart National currency holdings Liabilities included in broad money Liabilities excluded from broad money Other items

54 Derivation of the DCS Consolidated statement of stocks and flows for the accounts of the central bank and other depository corporations surveys: DCS = CBS + ODCS Consolidate for: Currency held by ODCs (ODC asset) consolidated against currency in circulation (CB liability) Claims on ODCs (CB asset) consolidated against borrowing from CB (ODC liability) Deposits of ODCs (CB liability) against deposits at CB (ODC asset) But don’t consolidate for holdings of equity between CB and ODCs The DCS and its component surveys, the CBS and ODCS, are the major focus of the monetary statistics and constitute a core set of data for macroeconomic analysis. The DCS contains stock and flow data on those depository corporations’ liabilities that are components of broad money and those assets that are claims on other sectors of the economy. The DCS also contains data on the depository corporations’ claims and liabilities to nonresidents. The DCS covers the accounts of the depository corporations and is a consolidation of the CBS and the ODCS.

55 Analytical Framework of the DCSThe DCS is constructed around the following accounting identity: BML ≡ NFA + DC – OIN ≡ NFA + NDA Where: BML = Broad money liabilities NFA = Net foreign assets DC = Domestic claims OIN = Other items net NDA = Net domestic assets The above are accounting identities and not equations. The DCS can be rearranged to show that BML equal the sum of NFA, DC and OIN. NFA equals claims on nonresidents less liabilities to nonresidents. DC comprises net claims on central government and claims on other sectors. OIN is the residual for other liabilities less other assets, when other liabilities includes liabilities not included in broad money. NDA equals the sum of DC and OIN.

56 Other Financial Corporations (OFCs)Key features and importance of OFCs Very diverse and evolving rapidly Alternatives to banks for investment and obtaining credit Growing insurance companies and pension funds engaged in different types of financial assets Increasingly important for financial stability analysis Increased demand for OFC data Following 2008 SNA classification of financial corporations Compiling OFC sectoral balance sheet and survey Using SRFs to report for dissemination by STA

57 Other Financial Corporations (concluded)Types of OFCs and methodological focus Non-MMF investment funds—definitions, fund types, and sub-groups Insurance corporations and pension funds—definitions, insurance and technical reserves, and statistical issues Other Financial Intermediaries (OFIs except insurance corporations and pension funds)—definitions, demarcation of ODCs and OFIs, and types of OFIs Captive financial institutions and money lenders—definitions, types of captives Financial auxiliaries—definitions, types of auxiliaries, data collection issues, E-money Corporations—as OFCs or ODCs? Compilation Strategies

58 OFC Sectoral Balance Sheet and SurveyCollection of OFC data Include the most relevant institutions and use metadata to describe types of OFCs covered or excluded Use a format that allows mapping to SRF for OFCs OFCs’ sectoral balance sheet Present gross assets and liabilities Serve as building block for deriving OFC and FC surveys OFC survey (OFCS) Claims/liabilities between units in OFCs are netted out in the consolidation Provide an analytical presentation of the positions in stocks of OFCs

59 Financial Corporations Survey (FCS)FCS is a consolidation of OFCS and the depository corporations survey (DCS) Covers the entire financial corporations sector Contains the same asset categories as DCS, but does not show broad money components Has four levels of consolidation adjustments Elimination of the positions between DCs and OFCs Other Items (net) also include consolidation adjustments in compiling OFCS, ODCs, and DCS Provide an analytical presentation of the positions in stocks of FCs

60 Financial Statistics (1)Comprehensive stock and flow data on financial assets and liabilities of all sectors and between the economy and the rest of the world Have a wide range of uses, such as tracking flows of financial resources, pattern of interactions between financial and real sectors, identifying financing insufficiencies, vulnerabilities, and imbalances etc. Can cover microeconomic detail on financial subsectors and instruments Variants have different names Flow of funds Capital and Investment accounts Financial Accounts (Compilation Guide) Table of financing and investment (TFI) From-whom-to-whom accounts Template for minimum set of internationally comparable sectoral accounts

61 Financial Statistics (2)Different Formats of Financial Statistics Basic financial statistics offer simplified methods to construct accounts, covering MFS, government finance, BOP, and IIP statistics Integrated capital and financial account—best picture of investment activities, providing detailed breakdown of resources and uses Fully configured matrix—full detail from-whom-to-whom-with-what- instrument matrix, but rarely published Financial accounts are often expressed in terms of financial resources provided to a sector and financial uses by a sector Resources must equal uses Important for analysis of financial flows and compiling accounts

62 Financial Statistics (concluded)Rest of the world (ROW) in financial statistics—domestic sectors’ positions and flows with nonresidents are separately identified ROW in SNA integrated accounts—SNA current accounts depict transactions of the economy and its sectors, including transactions with nonresidents (a measure of net financial payments from abroad) ROW in financial account—in net lending/borrowing, the net figure for ROW is equal to savings from the Current Account, which are counterparts to domestic current account and financial transactions with nonresidents ROW in balance sheet—a component of the national balance sheet, which equals national stock of real assets plus net positions with ROW

63 Financial Statistics: Compilation Guidance (1)Challenges in compiling financial accounts Capture full financial sector or all significant parts Prioritize to collect most important parts—cost/benefit analysis is useful to set priorities Gradual build-up of data might be needed Emphasis on 3 major components of OFCs—insurance and pension funds, non- MMF investment funds, and all other Gathering the Data with emphasis on: Using standardized Report Form (SRFs), which cover three subsectors of the financial corporations sector and are sufficient to construct basic stock Financial Accounts Securities and derivatives data—become more important as corporations increasingly raise funds directly and actively engaged in using financial derivatives for hedging

64 Financial Statistics: Compilation Guidance (2)Building and balancing the accounts Definition and scope—need to decide on number of sectors, noting that analysis of links is cumbersome with too many sectors, but significant relationships are hidden with too few sectors Role of residual sectors, which are built up from counterparty data or cover all other assets and liabilities—how much is missing: are distortions serious? is policy affected? Data conflicts due to multiple data sources where amounts or conceptual frameworks differ and adjustments are often used to reconcile diverse source data Several estimation techniques for balancing of accounts—e.g., sum of assets in each instrument must be matched by sum of liabilities, resources and uses for each sector must be equal

65 Financial Statistics: Compilation Guidance (conclusion)Presentation of Financial Statistics Matrix presentation of flow of funds accounts—displays financial instruments by sector, which can be used to trace the impact of changes A two-dimensional matrix can provide cross-sector information on assets/liabilities (resources/uses)—basic flow of funds tables and SDDS Plus Matrix for Internationally Comparable Sectoral Accounts A three-dimensional structure can show counterparty data for each instrument transaction Time series presentation Sector tables Can have mix of stocks and flows and mix different frequencies in the same table Instrument tables are used to summarize activity for instruments and a set of equations that are applied Data quality and metadata Some data series are usually more reliable, while others are not Need to improve data over time, develop and publish metadata

66 Balance Sheet Approach Matrix (1)General framework—capital account crises in the 1990’s/2000’s shifted focus to BSA, embedded in 2008 SNA, for examining macroeconomic vulnerabilities; IMF Board approved use of BSA in surveillance Key features—objective is to analyze vulnerabilities and transmission mechanisms; focus on policy that can reduce vulnerabilities Matrix of inter-sectoral balance sheets provides important information about sectoral balance sheet positions that are netted out in a consolidated country balance sheet Sectorization—grouping institutional units into sectors based on 2008 SNA is important for constructing BSA and data analysis Classification and valuation of financial instruments—need breakdown of financial instruments by type and distinction among them; more detailed analysis (e.g., maturity and currency mismatches) according to country circumstances

67 Balance Sheet Approach Matrix (concluded)Data requirements depend on the level of the desired sector and financial instrument disaggregation Main data sources include SRFs, IIP, CPIS, CDIS, GFS, quarterly external debt statistics, reserve template, Joint External Debt Hub Tracking balance sheet vulnerabilities for surveillance BSA tracks the evolution of balance sheet vulnerabilities on a regular and timely basis Provide an up-to-date monthly comprehensive picture of net positions of one sector against another with underlying claims and liabilities Policy implications Information should be timely to allow policymakers to identify and address weaknesses and systemic threat to the financial and economic system, and better understand the scale of official support