ECB Monthly Bulletin – euro area statistics

METHODOLOGICAL NOTES

Chapter 6: Saving, investment and financing in the euro area

I.

INTRODUCTION...............................................................................................................................................1

II.

METHODOLOGICAL FRAMEWORK ..........................................................................................................2 A.

SET OF ACCOUNTS .............................................................................................................................................2

B.

ASSETS AND LIABILITIES ...................................................................................................................................3

C.

INSTITUTIONAL SECTORS ...................................................................................................................................3

D.

VALUATION PRINCIPLES, TIME OF RECORDING, CONSOLIDATION AND MATURITY BREAKDOWN........................4

III. TABLE 6.1 - FINANCIAL INVESTMENT AND FINANCING OF NON-FINANCIAL SECTORS IN THE EURO AREA .............................................................................................................................................5 A.

TABLE ON FINANCING AND INVESTMENT ...........................................................................................................5

B.

DATA SOURCES .................................................................................................................................................6

IV. TABLE 6.2 – SAVING, INVESTMENT AND FINANCING IN THE EURO AREA ..................................8

V.

A.

ACCUMULATION ACCOUNT: CAPITAL AND FINANCIAL ACCOUNTS. ...................................................................8

B.

DATA SOURCES. ..............................................................................................................................................10 DOWNLOAD OF DATA AND CONTACTS .................................................................................................10

I.

Introduction

As outlined in the ECB publication "Statistical information collected and compiled by the ESCB" – May 2000 – a two-step approach will be followed in the compilation of a full set of quarterly financial accounts and financial balance sheets accounts for the euro area (MUFAs). As a first step, a table on financing and investment (TFI) has been compiled (Table 6.1 of the "Euro area statistics" section). This table provides an overview of the financial transactions and positions of the non-financial sectors in the euro area. The data are based on euro area money and banking statistics, quarterly national financial accounts and international banking statistics of the Bank for International Settlements (BIS). A second step involves the development of a broader set of quarterly MUFAs, using the euro area statistics and enlarging the current requirements on quarterly national financial accounts. For this purpose, the euro area will be divided into six resident sectors and sub-sectors1 with links between the various sectors of the euro area and the rest of the world. These data will also provide the basis for an enhanced analysis of the link between financial and non-financial developments. The quarterly data are complemented by annual euro area capital and financial accounts in Table 6.2 (saving, investment and financing table). Contrary to the TFI, all investment and financing opportunities, financial and non-financial, are included, thus showing the structural framework in which the quarterly developments are better understood. Since August 2002, this table on annual saving, investment and financing presents broader and more detailed information compared with previous versions. It shows transactions in EUR billions rather than as percentages of GDP and presents additional instrument breakdowns. Also for the first time, the data follow the ESA 95 standards for all the periods covered and are fully consistent with the other euro area statistics published in the Monthly Bulletin. The data are mainly based on national annual capital and financial accounts as compiled by the euro area countries. This note briefly explains the methodological framework and the structure of the TFI and of the annual saving, investment and financing table. It also provides information on the data sources and gives some insights into the compilation process. Finally, it gives guidance on the downloading of the data and provides a contact for further explanations.

1

Three non-financial sectors (non-financial corporations, general government and households, including non-profit institutions serving households) and three financial sub-sectors (MFIs, other financial intermediaries, except insurance corporations and pension funds, and financial auxiliaries, and insurance corporations and pension funds).

II.

Methodological framework

There are essentially three conceptual elements in the design of quarterly MUFAs: their articulation in the set of national accounts, the selection of financial assets and liabilities and the breakdown of the economy into institutional sectors. This section presents the methodological framework in which MUFAs are designed in respect of this and other elements. A.

Set of accounts

The European System of Accounts (ESA 95) records flows and stocks (balance sheets) in an ordered set of accounts describing the economic cycle from the generation of income, through its distribution and redistribution and finally to its accumulation in the form of assets. Flows are described as events that "create, transform, exchange, transfer or extinguish economic value". The flows of the generation, distribution and redistribution of income as well as its use in the form of final consumption are shown in the "current accounts". A second group of flow accounts, the "accumulation accounts", records the various causes of changes in the assets and liabilities of institutional units and the change in their net worth (the difference between assets and liabilities), which are the elements constituting the "balance sheet accounts". The accumulation accounts comprise the "capital account", the "financial account", the "other changes in volume of assets account" and the "revaluation account". Flows (or changes in stocks) are also described in ESA 95 as involving "changes in the volume, composition or value of an institutional unit’s assets or liabilities". They comprise the components "transactions", "other changes in the volume of assets", and "revaluations" (Table 1). Table 1. Components of the system of accounts Flows (Changes in assets and liabilities owing to transactions and other flows) Transactions Other changes in the volume of assets Revaluations Stocks (Outstanding amounts of assets and liabilities in balance sheets)

A transaction is defined as "an economic flow that is 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." While the current account flows are all transactions, among the accumulation accounts, transactions are recorded in the "capital account" (those of non-financial nature) and the "financial account" (those of financial nature). So defined, transactions are distinguished from "other economic flows", which are events other than transactions. These include the depletion of natural resources, write-offs, natural growth of resources, etc., events included in the

2

"other changes in the volume of assets account." Finally, the asset value changes due to changes to the asset price and the resulting revaluation; these effects are shown in the "revaluation account". Changes in net worth are therefore the result of net transactions (i.e. saving and capital transfers), other changes in the volume of assets and revaluations related to assets and liabilities. B.

Assets and liabilities

Seven categories of financial assets/liabilities or instruments are distinguished in ESA 95; these are classified according to liquidity factors and legal characteristics (the ESA 95 codes in brackets): Monetary gold and special drawing rights (F.1); Currency and deposits (F.2); Securities other than shares (F.3); Loans (F.4); Shares and other equity (F.5); Insurance technical reserves (F.6); and Other accounts receivable/payable (F.7).

However, this listing of financial assets only gives a very general presentation of financial instruments. Provision is made for a further diversification of the list of financial assets, in particular according to maturity and market capacity. Thus, transferable deposits, term deposits, savings deposits and other deposits are included under the deposits category. With regard to securities other than shares and loans, a distinction is made between short and long-term maturities. Account has also been taken of the financial derivatives, which were not previously included in the accounts. Shares and other equity are broken down into quoted and unquoted shares, mutual fund shares and other equity. Insurance technical reserves is divided into net equity of households in life insurance reserves and in pension funds reserves, and prepayments of insurance premiums and reserves for outstanding claims. Finally, other accounts receivable and payable are broken down further into trade credits and advances and other. In addition to financial assets, the balance sheet comprises non-financial assets, which in turn can be broken down into produced or non-produced. Net worth (B.90) is calculated as the difference between all assets – produced, non-produced and financial – and liabilities. The concept of net worth is to be distinguished from that of net financial assets (BF.90). The latter is defined as the difference between financial assets and liabilities. C.

Institutional sectors

ESA 95 groups the institutional units of a national economy into five sectors according to their type of economic behaviour: non-financial corporations, financial corporations, general government, households and non-profit institutions serving households (Table 2). Most of the sectors may be further broken down by sub-sector; for instance, for financial corporations, into the central bank, other monetary financial

3

institutions, other financial intermediaries, except insurance corporations and pension funds, financial auxiliaries, and insurance corporations and pension funds. Table 2. Classification by institutional sector and subsector according to ESA 95 Non-financial corporations (S.11) Financial corporations (S.12) Central bank (S.121) Other monetary financial institutions (S.122) Other financial intermediaries, except insurance corporations and pension funds (S.123) Financial auxiliaries (S.124) Insurance corporations and pension funds (S.125) General government (S.13) Central government (S.1311) State government (S.1312) Local government (S.1313) Social security funds (S.1314) Households (S.14) Non-profit institutions serving households (S.15) Rest of the world (S.2) The European Union (S.21) Third countries and international organisations (S.22) The abbreviations given in brackets are the sectors as they are numbered in ESA 95.

D.

Valuation principles, time of recording, consolidation and maturity breakdown

Following the ESA 95 principles, flows and stocks should be recorded at exchange value, i.e. the value at which the financial assets and/or liabilities involved are or can be created, liquidated, exchanged or assumed between institutional units. Thus and especially when the exchange is made or can be made through a market, ESA 95 recommends market prices as a general reference for valuation. Flows and stocks are recorded as a general rule when the value is created, liquidated, exchanged or assumed, and not when the payments is made, i.e. the accrual principle is followed. The elements of the balance sheets and their associated flows are to be shown in gross terms, without netting out liabilities from assets and/or inter-sector positions. The original maturity split – short versus long-term – is normally based on a one-year cut-off and in exceptional cases on a two-year cut-off. Therefore, short-term financial assets are those with an original maturity of up to one year and – in exceptional cases – of up to a maximum of two years, while long-term financial assets are those with an original maturity of more than one year and, in exceptional cases, of more than a minimum of two years.

4

III. Table 6.1 - Financial investment and financing of non-financial sectors in the euro area A.

Table on financing and investment

Based on the conceptual background outlined, a simplified version of quarterly MUFAs, the table on financing and investment (TFI) of the euro area non-financial sectors, has been derived and presented in Table 6.1 of the "Euro area statistics" section (Table 3). Table 3. Financial investment and financing of non-financial sectors in the euro area Main financial assets Main liabilities Currency and deposits Currency Deposits of non-financial sectors other than central government with euro area MFIs Overnight With agreed maturity Redeemable at notice Repurchase agreements Deposits of central government with euro area MFIs Deposits with non-MFIs Memo: deposits of euro area non-banks with banks outside the euro area Securities other than shares Short-term Long-term Shares Quoted shares Mutual fund shares of which: Money market fund shares

Loans taken from euro area MFIs and other financial corporations by of which: taken from euro area MFIs General government Short-term Long-term Non-financial corporations Short-term Long-term Households Short-term Long-term Memo: loans taken from banks outside the euro area by euro area non-banks Securities other than shares issued by General government Short-term Long-term Non-financial corporations Short-term Long-term

Insurance technical reserves Net equity of households in life insurance reserves Quoted shares issued by non-financial corporations and pension fund reserves Prepayments of insurance premiums and reserves for Deposit liabilities of central government outstanding claims Pension fund reserves of non-financial corporations

The TFI shows (non-seasonally adjusted) quarterly data for the non-financial sectors. They cover balance sheets (levels outstanding) and transactions for the main financial assets (financial investment) and liabilities (financing) of the non-financial sectors. On the financing side (liabilities), the data presented are broken down by sector and original maturity. On the assets side, the information is currently less detailed than that on financing, especially since a breakdown by sector is not yet possible. On both the investment and financing sides, and as far as possible, the detail of transactions and positions vis-à-vis MFIs is presented separately.

5

Most of the financial asset and liability categories defined in ESA 95 are covered. These are currency and deposits, securities other than shares, loans (except those granted by general government and nonfinancial corporations), quoted shares, mutual fund shares and insurance technical reserves. Other financial instruments (financial derivatives, unquoted shares, other (than share) equity and other receivables and payables) are not included. Among these, unquoted shares, other equity and trade credits and advances are of relevance. In essence, the instruments currently covered are those which are either mediated through financial corporations to non-financial sectors or traded on capital markets. B.

Data sources

Three statistical data sources are used to compile the current set of quarterly MUFAs – euro area statistics, quarterly national financial accounts, and BIS international banking statistics. Euro area statistics are collected, compiled and released by the ECB, quarterly national financial accounts data are supplied by the members of the Working Group on MUFAs (WG MUFA) and taken from the national financial accounts or other alternative sources and BIS data are compiled and published by the Bank for International Settlements.

i. Euro area statistics Euro area statistics cover money and banking statistics, the balance of payments (BoP) and international investment position statistics and securities issues statistics. For the time being, only money and banking statistics are used in the compilation of quarterly MUFAs because of problems in the delimitation of instruments (BoP) and in valuation (securities issues statistics). Table 4. Euro area statistics as data sources for the compilation of quarterly MUFAs Money and banking statistics Monthly data Quarterly data Balance of payments and international investment position statistics Quarterly and annual balance of payments of the single currency area Annual international investment position Securities issues statistics

Quarterly and monthly money and banking statistics (stocks) are based on an ECB Regulation (ECB/1998/16).2 Quarterly stock data – together with the less detailed monthly data – represent one of the most important pieces of information for the compilation of MUFAs. The available data sets are well suited to compile deposits and loans vis-à-vis euro area MFIs. The definitions of the financial instruments almost entirely follow the sector and maturity breakdowns as proposed in ESA 95. However, the available data do not, at present, allow the establishment of a perfect link between short-term investment and monetary aggregates. Stock data are available from the third quarter of 1997 onwards and monthly transaction data from October 1997 onwards.

6

Balance of payments and international investment position statistics for the euro area follow a functional approach, distinguishing primarily between data on direct, portfolio and other investment as well as on reserve assets. The functional approach, however, complicates the bridging exercise between these data and the instrument categories used in the rest of the world account of quarterly MUFAs, in particular because the breakdowns by financial instrument and institutional sector are rather less detailed. As outlined in the "Statistical information collected and compiled by the ECB", detailed quarterly balance of payments data are available from 1999 onwards and preliminary annual international investment position data since end-1997. Securities issues statistics comprise data provided by the NCBs on end-month stocks (outstanding amounts) and monthly flows (gross issues, redemptions and net issues) of securities issued by residents of the euro area in both euro and other currencies, and end-quarter stocks and quarterly flow data provided by the BIS for rest of the world issues in euro. The database contains time series at different levels of aggregation according to the residency of the issuer and the issuing currency. In relation to the maturity, sector, and the instrument breakdown, securities issues statistics conform to ESA 95. Securities issues are valued at nominal value, which deviate from the market-value approach applied in quarterly MUFAs. Currently, data from 1990 onwards are available for securities other than shares (debt securities) broken down by original maturity, sector, and security type. Data on quoted shares will be added in the future.

ii.

Quarterly national financial accounts

Quarterly data sets based on national financial accounts are requested and transmitted in the framework of the WG MUFA to supplement euro area statistics. The data request relates to quarterly stocks (from 1996 Q4 onwards) of and financial transactions (from 1997 Q1 onwards) in securities other than shares, quoted shares, mutual fund shares, money market fund shares, insurance technical reserves and various types of loans provided by non-MFI financial corporations, i.e. other financial intermediaries, and insurance corporations and pension funds. For securities other than shares, the data comprise holdings and issues of non-financial sectors. Data on quoted shares (held by non-financial sectors and issued by non-financial corporations), mutual fund shares held by the non-financial sectors and insurance technical reserves are collected to cover the major long-term investment and financing instruments of euro area non-financial sectors. Data on loans provided by financial corporations other than MFIs are also collected to achieve a full coverage of loans granted by the financial sector to the non-financial sectors.

2

Amended by the ECB Regulation (ECB/2001/13).

7

IV.

Table 6.2 – Saving, investment and financing in the euro area

A.

Accumulation account: capital and financial accounts

As already mentioned, the accumulation account, when jointly considered, shows how changes in net worth (wealth) are reflected in changes in assets and liabilities or, in other words, what portfolio decisions (in a broader sense also encompassing incurrence of liabilities) agents take. Increases in net worth may result in increases in financial and/or non-financial assets and/or in reductions in liabilities. At the same time, agents may change the distribution of their wealth by altering the proportion of non-financial and financial assets or by incurring liabilities to finance the acquisition of more assets. These portfolio allocation decisions also feed back into the generation of wealth by affecting consumption, the capability of producing output (through non-financial assets), the volume of income payments and receipts or the exposure to changes in asset prices. The accumulation account can be seen as the analytical tool to study all these developments. The accounts (Table 5) distinguish between changes due to pure allocation decisions (transactions) and those due to other reasons (mainly revaluations). The change in net worth itself is also broken down into the counterpart of net transactions (wealth generated from income, namely saving and capital transfers) and other changes in net worth. Table 5. Accumulation account. CHANGES IN ASSETS Changes in non-financial assets Transactions Other Changes in financial assets Transactions Other

CHANGES IN LIABILITIES AND NET WORTH Changes in net worth Saving and capital transfers Other Changes in liabilities Transactions Other

Capital and financial accounts (Table 6) cover the transactions part of the accumulation account. They show how saving and capital transfers are allocated among the different assets and liabilities, but they also exhibit portfolio decisions that might be driven by other reasons. Table 6. Capital and financial accounts CHANGES IN ASSETS Net acquisition of non-financial assets

CHANGES IN LIABILITIES AND NET WORTH Transactions in net worth

Net fixed capital formation

Net saving

Changes in inventories

Net capital transfers

Net acquisition of other non-financial assets

Net incurrence of liabilities

Net acquisition of financial assets

8

The other changes in volume and the revaluation accounts show the changes in net worth not due to transactions and how these are distributed among assets and liabilities. Finally, the balance sheet account (Table 7) presents the result of the accumulation of flows recorded in the accumulation account, or, in other words, the distribution of the net worth across assets and liabilities. Table 7. Balance sheet account ASSETS Non-financial assets Financial assets

LIABILITIES AND NET WORTH Net worth Liabilities

Table 6.2 of the "Euro area statistics" section shows the annual capital and financial accounts for the euro area. In the future, balance sheets and other changes in assets accounts will also be included in the table, thus completing the accumulation accounts for the euro area. Table 8. Saving, investment and financing for all sectors in the euro area Investment Net acquisition of non-financial assets Gross fixed capital formation

Financing Changes in net worth (due to saving and capital transfers)

(-) Consumption of fixed capital

Gross saving

Changes in inventories (and net acquisition of

(-) Consumption of fixed capital

valuables) Non-produced assets Net acquisition of financial assets

Net capital transfers receivable Net incurrence of liabilities Gold and SDRs

Gold and SDRs

Currency and deposits

Currency and deposits

Securities other than shares (excluding financial

Securities other than shares (excluding financial

derivatives)

derivatives)

Loans

Loans

Shares and other equity

Shares and other equity

Insurance technical reserves

Insurance technical reserves Other investment (net)

ESA 95 defines net worth as the balancing item of assets and liabilities at current value and therefore excludes from it the depreciation of capital (the use of it or consumption of fixed capital). The table nevertheless presents gross fixed capital formation and gross saving, i.e. transactions that are not netted out of consumption of fixed capital, following a traditional presentation of these variables. Therefore, and for the sake of accuracy, the table also presents consumption of fixed capital that is subtracted from both investment and financing in order to arithmetically draw changes in net worth.

9

Other investment includes the net transactions (assets minus liabilities) of financial derivatives, other accounts receivable/payable and statistical errors and omissions. Otherwise, the figures are nonconsolidated, although some netting due to deficiencies in the statistical sources might be present. The table shows the accounts for all sectors in the euro area, and individually for non-financial corporations and households. For the latter, disposable income and the savings ratio are also shown as memo items. B.

Data sources

Annual national sectoral capital and financial accounts as transmitted by the members of the WG MUFA have been used for compiling Table 6.2. This information has been complemented by national nonfinancial accounts from Table 1 of the ESA 95 Transmission Programme, euro area MFI statistics and securities issues statistics and government finance statistics. These have been used to provide a better estimate when the coverage from the national sectoral accounts is deemed insufficient. Moreover, the compilation process has taken into account all sources mentioned, therefore ensuring the overall consistency of the final outcome. The national figures are compiled on the basis of common methodological standards. However, certain deviations from international recommendations like the System of National Accounts (SNA 93) or ESA 95 may exist. These discrepancies relate mainly to the sectorisation of institutional units, the breakdown by financial instruments and the valuation procedures. In particular, the delimitation between nonfinancial corporations and households is not always the same across the countries. Discrepancies may also arise concerning the full coverage of financial instruments where some lack of statistical basis is encountered. This is particularly the case with unquoted shares and other equity where full coverage has not yet been achieved for all countries. Trade credits, especially for households, and financial derivatives, included under "Other investment" in Table 6.2., are not completely covered either. Finally, domestic (not captured through the Balance of Payments) inter-firm loan financing is in many cases not included.

V.

Download of data and contacts

The data presented in Tables 6.1 and 6.2 of the "Euro area statistics" section are also available for downloading from the ECB’s website at http://www.ecb.int/stats/ in the section "Monthly Bulletin euro area statistics – download". These data are available in a format which can be imported into most spreadsheets and ASCII editors (CSV files, comma separated values). The numbering of the columns follows the table layout.

10

If you have any questions on euro area MUFAs, please contact Nuno Silva ([email protected]) or Celestino Giron Pastor ([email protected]).

11