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Measuring the production of financial
corporations
Progress Report by the OECD Task Force on
Financial services (Banking Services) in National
Accounts
OECD Meeting of National Accounts Experts Paris,
10th of October 2002
2
Labour Productivity Index, 1990 - 2000
(Basis 1990 100)
160
150
National Economy
Services (excl. Financial Intermediaries)
140
Financial Intermediaries
130
120
110
100
90
80
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
3
Evolution of revenues of Swiss banks,
1985-2001 Basis 1985 100
4
Recent changes on financial markets

• Enhanced role of the equity and bond markets for
  financial corporations

• New channels and institutional forms for
  financial services

• Increasing importance of intra-sectoral
  transactions

• Increased liquidity of assets and liabilities

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Identifying financial corporations Current
treatment in the SNA93
Financial corporations
all resident corporations or
quasi-corporations principally engaged in
financial intermediation or in auxiliary
financial activities which are closely related to
financial intermediation
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Identifying financial corporations Current
treatment in the SNA93
Financial corporations
all resident corporations or
quasi-corporations principally engaged in
financial intermediation or in auxiliary
financial activities which are closely related to
financial intermediation
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Identifying financial corporations Current
treatment in the SNA93
Financial Intermediation

• productive activity in which an institutional
  unit incurs liabilities on its own account for
  the purpose of acquiring financial assets by
  engaging in financial transactions on the market
  (.).

8
Identifying financial corporations Current
treatment in the SNA93
Financial Intermediation

• productive activity in which an institutional
  unit incurs liabilities on its own account for
  the purpose of acquiring financial assets by
  engaging in financial transactions on the market
  (.).

• Financial corporations . collect funds from
  lenders and trans-form, or repackage, them in
  ways that suit the requirement of borrowers.

9
Identifying financial corporations Current
treatment in the SNA93
Financial Intermediation

• productive activity in which an institutional
  unit incurs liabilities on its own account for
  the purpose of acquiring financial assets by
  engaging in financial transactions on the market
  (.).

• Financial corporations . collect funds from
  lenders and trans-form, or repackage, them in
  ways that suit the requirement of borrowers.

• . A financial intermediary does not simply act
  as an agent for other institutional units but
  places itself at risk by incurring liabilities on
  its own account.

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Identifying financial corporations
Points of analysis

• Particular emphasis is put on financial
  intermediation

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Identifying financial corporations
Points of analysis

• Particular emphasis is put on financial
  intermediation ? activity.

12
Identifying financial corporations
Points of analysis

• Particular emphasis is put on financial
  intermediation ? activity.

• Activity is characterised by features of
  Risk-taking and Repackaging.

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Identifying financial corporations
Points of analysis

• Particular emphasis is put on financial
  intermediation ? activity.

• Activity is characterised by features of
  Risk-taking and Repackaging.

• General definition of financial intermediation -
  beyond the deposit and loan case characteristic
  of traditional banks.

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Identifying financial corporations
Points of analysis

• Particular emphasis is put on financial
  intermediation ? activity.

• Activity is characterised by features of
  Risk-taking and Repackaging.

• General definition of financial intermediation -
  beyond the deposit and loan case characteristic
  of traditional banks.

• Yet, at the same time, ambiguity about the role
  of Own funds. These do not provide any
  financial service.

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The changing nature of financial activities
Risk management
Risks involved in traditional risk management

• Extension of credit lines ? acceptance of
  counterpart risk

• Taking of deposits ? acceptance of withdrawal
  risk

• Mismatch of terms ? acceptance of interest rate
  risk

? spread over time of risks that cannot be
diversified by other means
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The changing nature of financial activities
Risk management
Risks involved in traditional risk management

• Extension of credit lines ? acceptance of
  counterpart risk

• Taking of deposits ? acceptance of withdrawal
  risk

• Mismatch of terms ? acceptance of interest rate
  risk

? spread over time of risks that cannot be
diversified by other means
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The changing nature of financial activities
Risk management
Features of new risk management

• Strive for financial innovations

? Bundling and unbundling of assets and
liabilities

• Risk trading and shifting

? risk-adverse units bear less risk than
risk-friendly units
? spread of risks at a given point in time among
units according to their risk profile
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The changing nature of financial activities
Risk management
Features of new risk management

• Strive for financial innovations

? Bundling and unbundling of assets and
liabilities

• Risk trading and shifting

? risk-adverse units bear less risk than
risk-friendly units
? spread of risks at a given point in time among
units according to their risk profile

• Financial corporations are nevertheless the
  ultimate bearers of certain types of risks

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The changing nature of financial activities
Liquidity transformation
Traditional liquidity transformation

• Investors uncertainty about time when holdings
  of given financial asset are modified (mainly
  deposits)

• Borrowers uncertainty about ability to raise
  funding in future (mainly credits)

? Deposits/loans case - Typically Balance sheets
Demand driven
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The changing nature of financial activities
Liquidity transformation
New liquidity transformation

• Arbitrage and counterpart activities,
  underwriting facilities

• Multiple interactions, short term perspective

? On- and off-balance sheets Market oriented
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Identifying financial corporations
A working definition ...
Financial corporations are all resident
corporations or quasi-corporations principally
engaged in providing financial services. The
production of financial services is the result of
risk management, liquidity transformation and/or
auxiliary financial activities.
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Identifying financial corporations
A working definition ...
Financial corporations are all resident
corporations or quasi-corporations principally
engaged in providing financial services. The
production of financial services is the result of
risk management, liquidity transformation and/or
auxiliary financial activities.
23
Identifying financial corporations
A working definition ...
Financial corporations are all resident
corporations or quasi-corporations principally
engaged in providing financial services. The
production of financial services is the result of
risk management, liquidity transformation and/or
auxiliary financial activities.
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Identifying financial corporations
A working definition (continued)
Risk management and liquidity transformation
are productive activities in which an
institutional unit incurs financial liabilities
for the purpose of acquiring mainly financial
assets. Corpo- rations engaged in these
activities obtain funds, not only by taking
deposits but also by issuing bills, bonds or
other securities. They use these as well as own
funds to acquire mainly financial assets by
making advances or loans to others but also by
purchasing bills, bonds or other securities.
25
Identifying financial corporations
A working definition (continued)
Risk management and liquidity transformation
are productive activities in which an
institutional unit incurs financial liabilities
for the purpose of acquiring mainly financial
assets. Corpo- rations engaged in these
activities obtain funds, not only by taking
deposits but also by issuing bills, bonds or
other securities. They use these as well as own
funds to acquire mainly financial assets by
making advances or loans to others but also by
purchasing bills, bonds or other securities.
26
Identifying financial corporations
A working definition (continued)
Risk management and liquidity transformation
are productive activities in which an
institutional unit incurs financial liabilities
for the purpose of acquiring mainly financial
assets. Corpo- rations engaged in these
activities obtain funds, not only by taking
deposits but also by issuing bills, bonds or
other securities. They use these as well as own
funds to acquire mainly financial assets by
making advances or loans to others but also by
purchasing bills, bonds or other securities.
27
Identifying financial corporations
Issues for discussion

• Should financial corporations be identified via
  the services they provide, as suggested in the
  working definition?

• Do Risk management, Liquidity transformation
  and Auxiliary financial activities properly
  capture core activities of financial corporations?

• Does the group support the proposal of the task
  force to include own funds as a source for the
  provision of financial services?