## 2019 Financial Soundness Indicators Compilation Guide ## Source details **Canonical URL:** [2019 Financial Soundness Indicators Compilation Guide](https://www.imf.org/-/media/files/data/2019/2019-fsi-guide.pdf) ## Other formats - [Markdown version](/-/media/files/data/2019/2019-fsi-guide.pdf.md) - [Structured JSON version](/-/media/files/data/2019/2019-fsi-guide.pdf.json) --- ### Preface — motivation, purpose, and key features - IMF launched FSI data collection in the late 1990s to monitor system‑wide financial soundness from a macroprudential vantage point. - 2019 Guide updates: - Title: 2019 Financial Soundness Indicators Compilation Guide (Guide). - Recommends compilation of 50 FSIs—13 of them new. - Expanded coverage to OFCs, MMFs, insurance corporations, pension funds, nonfinancial corporations, and households. - Adds new capital, liquidity, asset‑quality metrics, and concentration and distribution measures (CDMs) to enhance forward‑looking analysis and policy relevance. - Rationale: lessons from the 2007–2008 global financial crisis, adoption of Basel III, and the G‑20 Data Gaps Initiative motivated revisions to reflect new standards and to operationalize concentration and tail risk measurement. ### Role and intended use of FSIs - FSIs measure current financial health and system linkages (financial institutions, corporations, households). - Calculated from aggregated institution data and market‑representative indicators; supervisory data are primary sources. - Purpose: support macroprudential analysis, stress testing, network analysis, calibration of macroprudential tools, and financial stability surveillance. --- ### Institutional definitions, residence, and sectoring - Institutional units: households and legal/social entities; classification follows 2008 SNA. - Residence: economic territory with center of predominant economic interest (operationally, actual or intended location for one year or more). - Key sectors for FSIs: (1) financial corporations (FCs) — including deposit takers (DTs) and other financial corporations (OFCs), (2) nonfinancial corporations (NFCs), (3) general government, (4) households (HH), (5) NPISHs. - DTs definition and scope: - DTs comprise all deposit‑taking institutions regardless of inclusion in national broad money. - Short‑term maturity defined as up to three months (resolves prior one‑year ambiguity). --- ### Accounting, valuation, and provisioning (IFRS alignment) - Guide defers to IFRS (noting national variations) and supervisory practices for provisioning and loan classification. - IFRS 9 (effective January 2018) adopts Expected Credit Loss (ECL) approach; supervisory frameworks may retain general/specific provision concepts—compilers should follow supervisory practice and document treatment in metadata. - Valuation frameworks: - Measurement options: amortized cost, FVOCI, FVTPL per IFRS 9. - Amortized cost defined as initial recognition amount adjusted for principal repayments, cumulative amortization (effective interest method), and loss allowance. - Fair value hierarchy: Level 1, Level 2, Level 3 inputs; use Level 1 when possible. - Interest accrual guidance: - Interest on a nonperforming asset should not be accrued (cash basis while nonperforming); provisions for accrued interest should be deducted from gross interest income when present. - Loans and repos: - Repos treated as collateralized loans; securities remain on cash‑taker balance sheet and loan recorded for cash provider. --- ### Basel capital and liquidity alignment (key quantitative requirements preserved) - Basel evolution highlights: - Basel I (1988) — minimum capital requirement 8 percent of RWA. - 1996 Amendment — market risk, Tier 3. - Basel II (2004) — Pillars, IRB approaches. - Basel III (2010) — higher quality capital, leverage ratio, LCR and NSFR; effective minimum plus capital conservation buffer raises effective minimum to 10.5 percent of RWA. - 2017 Finalisation — output floor 72.5 percent for internal models; enhanced standardized approaches. - Basel III capital ratios (percent of risk‑weighted assets) presented: - CET1 Minimum: 4.5 - Tier 1 Capital Minimum: 6 - Total Capital Minimum: 8 - Capital conservation buffer: 2.5 (applies to CET1, Tier 1, Total Capital) - Minimum plus capital conservation buffer: CET1 7.0, Tier 1 8.5, Total Capital 10.5 - Leverage ratio: - Numerator: Tier 1 capital (Basel III definition). - By 2018, banks required Tier 1 equal to at least 3 percent of the exposure measure (with transition to revised exposure definition by 2022); G‑SIB leverage buffer equals half of G‑SIB capital buffer (example: G‑SIB with 1 percent capital buffer => leverage limit 3.5 percent). - Liquidity standards: - LCR: HQLA divided by net cash outflows over 30 days under prescribed stress (phased implementation ends in 2019). - NSFR: ASF divided by RSF over one‑year horizon; NSFR should be greater than 100 percent. --- ### Core and additional FSIs — deposit takers (selected highlights) - Core set for DTs (selected): - Capital adequacy: - Regulatory capital to risk‑weighted assets - Tier 1 capital to risk‑weighted assets - Nonperforming loans net of provisions to capital - Common Equity Tier 1 capital to risk‑weighted assets - Tier 1 capital to assets (leverage) - Asset quality: - Nonperforming loans to total gross loans - Loan concentration by economic activity - Provisions to nonperforming loans - Earnings/profitability: - Return on assets - Return on equity - Interest margin to gross income - Noninterest expenses to gross income - Liquidity: - Liquid assets to total assets (liquid asset ratio) - Liquid assets to short‑term liabilities - LCR and NSFR where Basel III implemented - Sensitivity to market risk: - Net open position in foreign exchange to capital - Real estate markets: - Residential real estate prices (RPPI) — now a core FSI - Additional set (selected): - Large exposures to capital (numerator: sum of exposures > 10 percent of Tier 1; denominator: Tier 1) - Geographical distribution of loans to total loans - Gross asset/liability positions in financial derivatives to capital (denominator clarified as total regulatory capital) - Trading income to total income - Personnel expenses to noninterest expenses - Spread between reference lending and deposit rates (SLDR) - Spread between highest and lowest interbank rate - Customer deposits to total (noninterbank) loans - Foreign‑currency‑denominated loans/liabilities to totals - Credit growth to private sector — now a new FSI --- ### OFCs, MMFs, Insurance, and Pension FSIs (selected) - OFC indicators: - Assets to total financial system assets (total OFCs and by subsectors) - Assets to GDP (total OFCs and by subsectors) - MMFs (new FSIs): - Sectoral distribution of investments (as percent of total investments) — indicates concentration and asset‑quality proxy. - Maturity distribution of investments (1–30 days; 31–90 days; >90 days) — preferred on remaining maturity basis. - Insurance corporations (new FSIs): - Shareholder equity to total invested assets (life and non‑life) - Combined ratio (non‑life only) - Return on assets (life insurance only) - Return on equity (life and non‑life) - Pension funds: - Liquid assets to estimated pension payments in the next year - Return on assets --- ### Consolidation bases, group consolidation, and recommended practice - Recommended consolidation for DTs: CBCSDI — cross‑border, cross‑sector, domestically incorporated consolidation basis. - Rationale: consistent with BCBS consolidated supervision; captures domestically incorporated DTs and their resident and nonresident branches and subsidiaries; excludes insurance subsidiaries from DT consolidated data to promote comparability. - Alternative bases and guidance: - Domestic Location (DL) — secondary option where few foreign cross‑border or cross‑sector subsidiaries exist. - CBCSDC — cross‑border, cross‑sector, domestically controlled — appropriate only where no material foreign‑controlled DTs. - CBDI/CBDC — other cross‑border domestically incorporated options; deviations must be documented in metadata. - Consolidation mechanics: - Income statement adjustments: eliminate intra‑group fees, gains/losses, prorated earnings, inter‑group interest. - Balance sheet adjustments: eliminate intra‑group claims/liabilities (deposits, interbank loans, loans, debt securities, equity). - Memorandum adjustments: regulatory capital participations, RWA intra‑group deductions, large exposures net of intragroup, foreign currency exposures, etc. - Numerical consolidation example provided (Annex) with exact figures (Millions of US dollars) for illustrative Step 1 (group consolidated) and Step 2 (sectoral aggregation) — selected figures include: - Total assets (DT2 group consolidated) = 48,023; DT1 = 19,357; Sectoral = 67,380 - Risk‑weighted assets (after intragroup adjustment) (DT2 group consolidated) = 36,909; DT1 = 15,862; Sectoral = 52,771 - Total regulatory capital (after intragroup adjustment) (DT2 group consolidated) = 5,658; DT1 = 2,345; Sectoral = 8,003 - Total net open position in foreign currency (after intragroup adjustment) (DT2 group consolidated) = –2,333; DT1 = –1,400; Sectoral = –3,733 --- ### Compilation, metadata, dissemination, and operational guidance - Compilation recommendations: - Primary responsibility recommended to central bank (in collaboration with other agencies); MOUs encouraged where multiple agencies involved. - Prefer supervisory sources for DTs; OFCs/NFCs/HHs often require coordination with NSO and other regulators. - Report forms should be tested with reporters; maintain contact registers and institutional memory. - Metadata requirements (to be publicly available with FSIs): - Consolidation basis used, regulatory framework (Basel version), accounting rules, exchange rates used, source data coverage, frequency/timeliness, treatment of provisions and ECL allocation, and any deviations from the Guide. - Frequency and timeliness: - Recommended minimum: quarterly dissemination with a lag of one quarter. - Strongly encouraged: monthly dissemination with one‑month lag where possible. - Data quality controls: - Automated validation checks, outlier detection, documentation of breaks and revisions, transparent revision policy. - Dissemination channels: - SDMX recommended for electronic exchange; centralized lead‑agency website for simultaneous release; IMF FSI portal encouraged for cross‑country comparability. --- ### Concentration and Distribution Measures (CDMs) — prescriptive guidance - Purpose: reveal tail risks, concentration, dispersion, and distributional features masked by sectoral averages; support macroprudential analysis. - Recommended CDMs (frequencies): - Herfindahl concentration index — Annual - Weighted quartiles — Monthly/Quarterly/Annual - Weighted standard deviation — Monthly/Quarterly/Annual - Weighted skewness — Monthly/Quarterly/Annual - Weighted kurtosis — Monthly/Quarterly/Annual - Weighting principle: use denominator of relevant FSI (e.g., RWA for Tier 1 to RWA; loans for NPL ratios) so measures reflect economic importance. - Herfindahl index formula and guidance: - H = Σ_{i=1}^N (a_i)^2 where a_i = institution i assets / total sector assets (percent). - Rule of thumb: H below 0.1 limited concentration; H above 0.18 significant concentration. - Weighted quartiles computation steps and example: show potentially large differences between unweighted and weighted medians (example: unweighted median 8.1 vs weighted median 12.2). - Confidentiality safeguards: - Minimum number of reporting institutions per CDM to avoid disclosure: Herfindahl = 7; weighted quartiles = 28; weighted standard deviation/skewness/kurtosis = 7. - Pilot results: - IMF pilot with 35 participants found CDMs analytically valuable and not a large resource burden; recommended further consultation before global collection. --- ### FSIs in macroprudential framework and policy use - FSIs inform identification of vulnerabilities and calibration of macroprudential tools; no mechanical rule prescribes deployment — expert judgment required. - Key resilience indicators: capital ratios (total capital/RWA; Tier 1/RWA; CET1/RWA), liquidity ratios (liquid assets ratios; LCR; NSFR), NPL net of provisions to capital. - Additional FSIs help detect emerging vulnerabilities: credit growth to private sector, real estate price indices, household and NFC debt metrics, FX exposures. - Country examples: - Hong Kong: used RPPI and turnover to justify a 25 percent risk‑weight floor for mortgage IRB risk weights and tightened LTV and DSR. - Iceland: applied LTV limits (85 percent general; 90 percent for first‑time buyers) in response to RPPI trends and underwriting relaxation. --- ### Nonfinancial corporations, households, and real estate FSIs (selected) - NFC indicators: - Total debt to equity; External debt to equity; Foreign currency debt to equity; Total debt to GDP. - Total debt to GDP FSI: numerator = debt (line 26 in Table 5.5); denominator = annual GDP (use annualized GDP even at higher frequency). - Household indicators: - Household debt to household disposable income (denominator = annualized gross disposable income); debt‑service and principal payments to income. - Household debt measured as end‑period outstanding stock; income annualization choice must be recorded in metadata. - Real estate FSIs: - Residential real estate prices (core FSI): 12‑month percent change in RPPI; recommended at least quarterly frequency; compile RPPI using hedonic, repeat‑sales, or stratification methods as feasible and document metadata. - Commercial real estate prices: 12‑month percent change in CPPI; data limitations and heterogeneity noted. - Residential real estate loans to total loans (numerator = line 50 in Table 5.1; denominator = gross loans line 18.i); requires memorandum series from DTs. - Commercial real estate loans to total loans (numerator includes loans collateralized by commercial real estate, loans to construction and development firms — line 51 in Table 5.1); also requires memorandum series. --- ### Money market funds, insurance corporations, pension funds (OFCs) — compilation pointers - MMFs: - Key FSIs: sectoral distribution of investments and maturity distribution (1–30 days; 31–90 days; >90 days) presented as ratios to total investments; remaining maturity preferred. - Insurance corporations: - Recommended FSIs: shareholder equity to total invested assets (life and nonlife), combined ratio (nonlife), ROA and ROE (life and nonlife). - Consolidation basis: CBDI recommended for ICs. - Pension funds: - Key FSIs: liquid assets to estimated pension payments in next 12 months; ROA (net income before taxes to total assets). - Resident‑based compilation recommended; estimated pension payments based on actuarial calculations. --- ### Islamic finance and IDTs — mapping and specific guidance - Islamic Deposit Takers (IDTs) use profit and loss sharing (PLS) and other Shariah‑compliant contracts; Guide maps common instruments to FSI line items (Box 7.4): - Murabaha, Bai Muajjal, Bai Salam, Tawarruq, Mudaraba, Musharaka generally mapped to Loans (L.1) for FSI purposes unless circumstances dictate otherwise. - Ijarah: Operating Ijarah (operating lease classification L.4); Financing Ijarah treated as financing lease/Loan (L.1). - Sukuk: generally classified as debt securities (L.2) unless investor has claim on residual value (equity). - Capital treatment and prudential notes: - Musharaka Sukuk may be included in AT1 (subject to loss‑absorbency criteria); Mudaraba or Wakala Sukuk may be included in Tier 2. - Risk‑weights should be adjusted for assets funded by PSIA; PSIA typically treated as deposits (not part of regulatory capital); IRR and PER related to IAH are generally excluded from IDT capital. - PSIFI guidance and selected memorandum series align IDT reporting to Table 5.1 lines with additional clarifications (lines 33–36 on Tier 1, CET1, AT1, Tier 2). --- *Source: 2019 Financial Soundness Indicators Compilation Guide — Preface and selected chapters/excerpts (IMF).* ### Preface ### Preface ### Background and purpose - In the late 1990s, the International Monetary Fund (IMF) launched the Financial Soundness Indicators (FSIs) data collection to monitor the system-wide financial sector from a macroprudential vantage point. - The FSIs include indicators of capital adequacy, asset quality, profitability, liquidity, and market risk sensitivity. - The 2006 Financial Soundness Indicators Compilation Guide (2006 Guide) provided guidance on source supervisory statistics, consolidation options, and compilation and dissemination advice, aiming at cross-country comparability. - The initiative led to growth in the number of economies compiling and reporting FSIs and persuaded policymakers of their value for tracking financial soundness trends relevant to financial stability analysis and policies. ### Motivation for the 2019 Guide - The global financial crisis that started in 2007–2008 revealed the need to enhance financial sector data collections and bridge data gaps, including supplementing with tail and macroeconomic measures to strengthen macrofinancial surveillance. - Responses included IMF revisions to the original list of FSIs and the IMF/Financial Stability Board G-20 Data Gaps Initiative (DGI). - These initiatives yielded a revised list of FSIs that: - Includes new international standards. - Operationalizes measurement of concentration and tail risk in the financial system. - Enhances the coverage of FSIs. - The revisions were prepared in consultation and close collaboration with national and international experts, international standard setting bodies, IMF departments, FSI-reporting countries, and concerned international organizations. ### Key features of the 2019 Guide - Title: 2019 Financial Soundness Indicators Compilation Guide (Guide). - Expanded coverage to include other financial intermediaries, money market funds, insurance corporations, pension funds, nonfinancial corporations, and households. - The Guide recommends the compilation of 50 FSIs—13 of them new. - Additions include new capital, liquidity and asset quality metrics, and concentration and distribution measures to: - Enhance the forward-looking aspect of FSIs. - Increase policy focus on stability of the financial system. ### Role and intended use of FSIs - FSIs are indicators of the current financial health and soundness of financial institutions in a country, and of their corporate and household counterparts. - FSIs include both aggregated individual institution data and indicators representative of the markets in which financial institutions operate. - Supervisory data are important sources for calculation of FSIs. - FSIs are calculated and disseminated to support macroprudential analysis. - The Guide focuses on indicators of financial soundness directly relevant for the financial sector because: - FSIs have traditionally been associated with financial institutions and the necessary data sources are sufficiently available. - Consequently, the Guide gives less emphasis to non-financial corporations or other areas of the financial sector, like shadow banking. ### Institutional and process information (from Acknowledgments) - Prepared by staff of the Financial Institutions Division of the Statistics Department (STA) under the general direction of Gabriel Quirós Romero (STA Deputy Director) and Marco A. Espinosa-Vega (Division Chief). - Project managed by René Piché (Deputy Division Chief) and José Cartas (Senior Economist). - Primary contributors include: Evrim Bese Goksu, José Cartas, Thomas Elkjaer, Artak Harutyunyan, Phousnith Khay, André Mialou, José Carlos Moreno-Ramírez, Naoto Osawa, Renato Pérez, René Piché, Josep Puigvert, Samah Torchani, Giovanni Ugazio. - The Guide benefited from reviews and comments from a broad list of STA staff and Monetary and Capital Markets Department staff (names listed in source). - Comments by members of the FSI Reference Group, Michael Andrews and Russell Krueger, acknowledged. - Inputs from numerous officials in member countries and international organizations and participants at the April 2017 Users’ Workshop on Financial Soundness Indicators and Meeting of the FSI Reference Group in Washington, D.C., are acknowledged. - Administrative assistance by Brian Bowling and Tonia Takyi acknowledged. - Louis Marc Ducharme, Chief Statistician and Data Officer, and Director, Statistics Department, International Monetary Fund. ### Notable acronyms and terms introduced - 2006 Guide — 2006 Financial Soundness Indicators Compilation Guide - AMC — Asset Management Company - ASF — Available Stable Funding - AT1 — Additional Tier 1 Capital - BCBS — Basel Committee on Banking Supervision - BIS — Bank for International Settlements - BPM6 — Balance of Payments and International Investment Position Manual, sixth edition - CAMELS — Capital Adequacy, Asset Quality, Management Soundness, Earnings and Profitability, Liquidity, and Sensitivity to Market Risk - CAR — Capital Adequacy Ratio - CBCSDC — Cross-Border, Cross-Sector, Domestically Controlled Consolidation Basis - CBCSDI — Cross-Border, Cross-Sector, Domestically Incorporated Consolidation Basis - CBDC — Cross-Border, Domestically Controlled Consolidation Basis - CBDI — Cross-Border, Domestically Incorporated Consolidation Basis - CCP — Central Clearing Counterparties - CDM — Concentration and Distribution Measures - CET1 — Common Equity Tier 1 - CPPI — Commercial Property Price Index - DCR — Displaced Commercial Risk - DGI — Data Gaps Initiative - DL — Domestic Location Consolidation Basis - DM — Distribution Measure - DQAF — Data Quality Assessment Framework - DT — Deposit Taker - EBITE — Earnings Before Interest and Tax - ECL — Expected Credit Loss - ED — Exposure at Default - ES — Expected Shortfall - FBB — Foreign Bank Branches - FC — Financial Corporation - FISIM — Financial Intermediation Services Indirectly Measured - FSAP — Financial Sector Assessment Program - FSI — Financial Soundness Indicator - FVOCI — Fair Value Through Other Comprehensive Income - FVTPL — Fair Value Through Profit or Loss - GDP — Gross Domestic Product - GFC — Global Financial Crisis - GFSM 2014 — Government Finance Statistics Manual 2014 - GNF — Global Note Facility - G-SIFI — Global Systemically Important Financial Institutions - Guide — 2019 Financial Soundness Indicators Compilation Guide - HH — Household - HQLA — High Quality Liquid Assets - IAG — Inter-Agency Group on Economic and Financial Statistics - IAH — Investment Account Holders - IAS — International Accounting Standards - IASB — International Accounting Standards Board - IBS — International Banking Statistics - IC — Insurance Corporation - ICAAP — Internal Capital Adequacy Assessment Process - IDT — Islamic Deposit Takers - IFRS — International Financial Reporting Standards - IFSB — Islamic Financial Services Board - IIP — International Investment Position - IMF — International Monetary Fund - IRB — Internal Ratings-Based Approach - IRR — Investment Equalization Reserves - ISIC — International Standard Industrial Classification of All Economic Activities - LCR — Liquidity Coverage Ratio - LGD — Loss Given Default - LOC — Letter of Credit - MFSMCG — Monetary and Financial Statistics Manual and Compilation Guide 2016 - MMF — Money Market Fund - NAV — Net Asset Value - NFC — Nonfinancial Corporation - NIF — Note Issuance Facilities - NPI — Nonprofit Institution - NPISH — Nonprofit Institutions Serving Households - NPLs — Nonperforming Loans - NSFR — Net Stable Funding Ratio - NSON — National Statistics Office - OCIO — Other Comprehensive Income - OFC — Other Financial Corporation - OTC — Over-the-Counter - PD — Probability of Default - PER — Profit Equalization Reserves - PFP — Pension Fund - PLS — Profit and Loss Sharing - PSIA — Profit Sharing Investment Accounts - PSIFI — Prudential and Structural Islamic Financial Indicators - Repo — Repurchase Agreement - ROA — Return on Assets - ROE — Return on Equity - RPPI — Residential Property Price Index - RSF — Required Stable Funding - RUF — Revolving Underwriting Facility - RWA — Risk-Weighted Assets - SCR — Solvency Capital Requirement - SLDR — Spread Between Reference Lending and Deposit Rates - SNAS — System of National Accounts - SRF — Standardized Report Form - VaR — Value-at-Risk *Source: 2019 Financial Soundness Indicators Compilation Guide — Preface and I. Overview (IMF).* ### 1.3 The Guide has benefited from extensive con- ### 1.3–1.24 Introduction and Guide overview ### Consultations, purpose, and scope - The Guide has benefited from extensive consultations with FSI compilers and users, including: - (i) presentation to the IMF Board of the 2013 Board paper on the outcomes of STA consultations on revising the current list of FSIs in response to the global financial crisis, adoption of the Basel III Accord and the G-20 Data Gaps Initiative; - (ii) the April 2017 Statistics Department Workshop on Financial Soundness Indicators—A Users’ Perspective; and - (iii) consultations with the FSI Reference Group of experts, G-20 representatives, and Inter-Agency Group on Economic and Financial Statistics (IAG). - The new Guide incorporates changes in international regulatory standards, including new capital and liquidity requirements, and provides more practical advice on compilation issues. - The Guide is more prescriptive—to facilitate the compilation and cross-country comparability of these data—and more forward looking than the 2006 Financial Soundness Indicators Compilation Guide (2006 Guide). ### Rationale and background - A well-functioning financial system supports growth through maturity and liquidity transformation, credit origination, and other services, but is vulnerable to: - liquidity risks from funding long-term assets with short-term liabilities; - inadequate capital buffers to absorb unexpected losses. - The IMF introduced FSIs in the late 1990s to identify emerging risks at the aggregate financial sector level; core FSIs for deposit takers were inspired by the CAMELS supervisory rating system (Capital adequacy, Asset quality, Management capability, Earnings, Liquidity, and Sensitivity to market risk). - The global financial crisis revealed weaknesses in aggregate risk monitoring, bank capital adequacy (including exposures through special purpose vehicles, securitized assets, and derivatives), instruments that were not truly loss-absorbing, and insufficient attention to liquidity risk during benign market conditions. - The crisis motivated revisions to FSIs to: - reflect new international standards on capital and liquidity that are more risk-based and forward looking; - add tail risk, concentration, and distribution measures; - expand coverage to money market funds, insurance corporations, pensions, nonfinancial corporations, and households to better capture financial–real sector linkages. - The Guide acknowledges that future editions will need to cover emerging topics such as digital financial intermediation as international consensus on prudential standards and supervisory approaches develops. ### Key changes in regulatory and accounting alignment - The Guide reflects Basel III reforms: new definitions and measures of capital and new global liquidity standards. - Accounting guidance updated to reflect new and revised International Financial Reporting Standards (IFRS). - The Guide, consistent with Basel Committee guidance, recommends that the distinction between general and specific provisions—concepts not included in the IFRS 9 expected loss model—should be determined in line with national supervisory standards. - Short-term maturity is defined as up to three months (e.g., short-term liabilities should include liabilities with remaining maturity of three months or less), resolving confusion from the 2006 Guide where short-term maturity was in some places defined as one year or less. ### Structure of the Guide (overview of chapters) - Part I: Foundational blocks (Chapters 2–6) — accounting principles, consolidation bases, sectoring, financial corporations subsectors. - Part II: Specific guidance on calculation and metadata (Chapters 7–10) — definitions, interpretation, data sources, and compilation for FSIs across sectors. - Part III: Compilation and dissemination issues (Chapter 11) — compilation challenges, data frequency, and timeliness. - Part IV: Intersection with macroprudential analysis (Chapters 12–13) — concentration and distribution measures, uses of FSIs in macroprudential and financial stability analysis, and challenges to enhanced use. ### Notable chapter highlights - Chapter 3: Consolidates Basel prudential standards relevant for FSI compilation, emphasizing capital and liquidity standards and aggregation of capital components across Basel frameworks. - Chapter 4: Incorporates advances in accounting practices, defers largely to IFRS while retaining national supervisory practices for loan classification and provisioning. - Chapter 5: Aligns financial asset/liability descriptions with the System of National Accounts 2008 and provides sectoral financial statements and memorandum series for MMFs, insurance corporations, and pension funds. - Chapter 6: Recommends cross-border, cross-sector, domestically incorporated consolidation basis (CBCSDI) for deposit takers and recommends excluding insurance subsidiaries from deposit taker consolidated data to promote cross-country comparability. - Chapter 7: Focuses on core FSIs for deposit takers (DTs): definitions, interpretation, data sources, and compilation guidance. - Chapter 8: Presents the “additional set” of FSIs for DTs; Tier 1 capital to assets (leverage ratio) is now a core FSI; net open position in equity to capital discontinued; credit growth of private sector moved to the additional set. - Chapter 9: Specifies FSIs for Other Financial Corporations (OFCs) including MMFs, Insurance Corporations (life and non-life), and Pension Funds; recommends residency-based OFC balance sheets except where cross-border consolidation is relevant. - Chapter 10: Revises indicators for nonfinancial corporations (NFCs) and households (HH); introduces: - NFCs: external debt to equity; foreign currency debt to equity; total debt to GDP; earnings to interest and principal expenses; and earnings to interest expenses. Two indicators (net foreign exchange exposure to equity and number of applications for protection from creditors) were dropped. - HH: adds HH debt to household disposable income to the existing HH debt to GDP and HH debt service and principal payments to income. - Real estate: explicitly recommends compiling residential real estate price index (RPPI) and commercial real estate price index (CPPI); RPPI is now a core FSI. ### Core and additional FSIs (selected highlights from Table 1.1 and mapping from 2006) - Core set — Deposit Takers (selected indicators listed as in the Guide): - Capital Adequacy: - Regulatory capital to risk-weighted assets - Tier 1 capital to risk-weighted assets - Nonperforming loans net of provisions to capital - Common Equity Tier 1 capital to risk-weighted assets - Tier 1 capital to assets - Asset Quality: - Nonperforming loans to total gross loans - Loan concentration by economic activity - Provisions to nonperforming loans - Earnings and Profitability: - Return on assets - Return on equity - Interest margin to gross income - Noninterest expenses to gross income - Liquidity: - Liquid assets to total assets (liquid asset ratio) for all DTs - Liquid assets to short term liabilities for all DTs - Liquidity Coverage Ratio for the DTs that have implemented Basel III liquidity standards - Net Stable Funding Ratio for the DTs that have implemented Basel III liquidity standards - Sensitivity to Market Risk: - Net open position in foreign exchange to capital - Real Estate Markets: - Residential real estate prices (RPPI) — now a core FSI - Additional set — Deposit Takers (selected indicators and notable mapping changes): - Large exposures to capital — numerator: sum of exposures exceeding 10 percent of Tier 1 capital; denominator: Tier 1 capital (replacing previous denominator). - Geographical distribution of loans to total loans - Gross asset position in financial derivatives to capital — denominator clarified as total regulatory capital - Gross liability position in financial derivatives to capital — denominator clarified as total regulatory capital - Trading income to total income - Personnel expenses to noninterest expenses - Spread between reference lending and deposit rates - Spread between highest and lowest interbank rate - Customer deposits to total (noninterbank) loans - Foreign-currency-denominated loans to total loans - Foreign-currency-denominated liabilities to total liabilities - Credit growth to private sector — now a new FSI - Other Financial Corporations (OFCs) and subsectors (selected new FSIs): - OFCs: - Assets to total financial system assets (for total OFCs and by subsectors) - Assets to gross domestic product (GDP) (for total OFCs and by subsectors) - Money Market Funds (MMFs): - Sectoral distribution of investments (New FSI) - Maturity distribution of investments (New FSI) - Insurance Corporations: - Shareholder equity to total invested assets (life and non-life insurance) (New FSI) - Combined ratio (non-life insurance only) (New FSI) - Return on assets (life insurance only) (New FSI) - Return on equity (life and non-life insurance) (New FSI) - Pension Funds: - Liquid assets to estimated pension payments in the next year - Return on assets ### Prescriptive elements and future directions - Chapter 12 (Concentration and Distribution Measures) is prescriptive and provides concrete guidance on computation of selected FSIs with CDMs and discusses approaches to overcome confidentiality concerns. - Chapter 13 compares macroprudential and microprudential policies, discusses uses of FSIs in calibration of macroprudential tools, stress testing, network analysis, and macroprudential toolkits, and outlines challenges hampering enhanced use of FSIs. - The Guide signals that as risks evolve, future FSI editions will incorporate indicators for new topics such as digital financial intermediation when international consensus on standards emerges. *Source: IMF staff.* ### Introduction 7 ### Introduction 7 ### I. Chapter purpose and scope - Defines institutional units (holders and issuers of financial assets) and classifies them into sectors following the 2008 System of National Accounts (2008 SNA). - Uses the concept of residence to establish the economic boundary for compiling FSIs and to determine the foreign/domestic breakdown of assets and liabilities of financial corporations (FCs). - Classifies resident institutional units into institutional sectors and subsectors to present FCs’ claims on and liabilities to different sectors of the domestic economy. - Identifies and defines the main types of players and markets that typically constitute a financial system. ### II. Institutional units: definition and types - Institutional unit: an economic entity capable, in its own right, of decision-making autonomy in owning assets, incurring liabilities, and engaging in economic activities and transactions with other entities (paragraphs 2.2–2.3). - Two main types: - Households: groups sharing accommodation, pooling income and wealth, and consuming certain goods/services collectively; may be a single person or more (paragraph 2.4). - Legal or social entities: entities recognized by law or society that engage in economic activities in their own right; responsible and accountable for economic decisions (paragraph 2.5). - Three categories of legal/social entities: (1) corporations; (2) nonprofit institutions (NPIs); and (3) government units (paragraph 2.6). - Note: status cannot always be inferred from a name; economic objectives, functions, and behavior determine classification (reference to MFSMCG paragraphs 3.3–3.50). ### III. Residence: economic territory and center of predominant economic interest - Residence determines which units are part of the reporting population and the external position of the FCs sector (paragraph 2.7). - Residence is not based on nationality or currency of accounts (paragraph 2.7). - Economic territory: geographic area or jurisdiction for which statistics are required; commonly the area under effective economic control of a single government; includes special zones such as free trade zones and offshore financial centers (paragraphs 2.8–2.9). - Residence of institutional units: the economic territory with which the unit has its center of predominant economic interest (paragraphs 2.10–2.11). - Operational definition: actual or intended location for one year or more (paragraph 2.11). - Resident units: engaged in economic activities on a significant scale in the territory for one year or more, or intend to do so (paragraph 2.12). - Household residence determined by principal dwelling; members of same household share residence (paragraph 2.13). - Corporations and NPIs normally resident where legally constituted and registered; subsidiaries may be resident elsewhere; enterprises resident when they maintain at least one production establishment and plan to operate it indefinitely or over a long period (usually one year or more) (paragraph 2.14). - Unincorporated enterprises that are not quasi-corporations have the same residence as their owners; branches of nonresident enterprises may be identified as institutional units when substantial local operations exist (paragraph 2.14). - Nonresident units: units with center of predominant economic interest outside the economic territory; recorded as foreign assets or foreign liabilities of resident FCs irrespective of nationality or currency (paragraph 2.16). ### IV. Institutional sectors: classification and key sectors - Sectoring groups institutional units with similar economic objectives, functions, and behavior (paragraph 2.17). - For FSI compilation, key sectors are: - (1) financial corporations (FCs); - (2) nonfinancial corporations (NFCs); - (3) general government; - (4) households; - (5) nonprofit institutions serving households (NPISHs). - All resident units allocated to one sector; multisector activities without separate accounts are classified to the sector of the most prominent activity (paragraphs 2.18–2.19). - Financial corporations (FCs): - Include deposit takers (DTs) and other financial corporations (OFCs); OFCs are split into additional subsectors (paragraph 2.19). - FCs: resident corporations, including quasi-corporations, principally engaged in providing financial services; financial services are not usually produced as secondary production (paragraphs 2.20–2.21). - Nonfinancial corporations (NFCs): - Corporations and quasi-corporations principally producing market goods or nonfinancial services (paragraph 2.22). - NFC sector includes resident nonfinancial corporations, branches of nonresident enterprises engaged long-term in nonfinancial production, and resident NPIs that are market producers of goods or nonfinancial services (paragraph 2.23). - General government: - Government units established by political process; provide goods/services on a nonmarket basis, redistribute income/wealth, engage in nonmarket production, finance activities via taxation or compulsory transfers (paragraph 2.24). - General government sector comprises resident units fulfilling government functions as primary activity: central, state, provincial, regional, local governments, and social security funds, and resident nonmarket NPIs controlled by government units (paragraphs 2.25–2.26). - Resident public corporations: entities in deposit-taking and other sectors subject to control by government units (paragraph 2.26). ### V. Financial sector: definition and major components - Financial sector: institutional units, financial instruments and markets, and government regulation interacting to facilitate intermediation between providers and users of funds (paragraph 2.27). - Financial markets: facilitate transfer of productive resources, support productive potential and development, enable trading of financial claims, risk management, and price discovery (paragraph 2.28). - Definition differences: the Guide draws from MFSMCG but definitions (including DTs) are not equivalent across frameworks and may deviate from regulatory definitions in some countries (paragraph 2.29). - Central bank: - National financial institution exercising control over key aspects of the financial sector; functions generally include: (1) issuing currency, (2) conducting monetary policy, including by regulating money supply and credit, (3) managing international reserves, (4) providing credit to deposit-taking corporations, and (5) acting as banker to government by holding central government deposits and providing credit in the form of overdrafts, advances, and purchases of securities (paragraph 2.30). - FSIs are not computed for the central bank (paragraph 2.30). - Deposit takers (DTs): - Principal activity is financial intermediation; obtain funds through deposits or other financial instruments such as short-term certificates of deposits, bills, bonds, other debt securities, or other financial instruments; may be subject to license and regulatory requirements (paragraph 2.31). - DTs provide locations for placement and borrowing of funds, source of liquid assets, transmission of monetary policy, payments services; failures can have significant economy-wide impact, making DT analysis central to financial stability assessment (paragraph 2.32). - In the Guide, DTs comprise all deposit-taking institutions regardless of whether liabilities are included in the national definition of broad money (paragraph 2.33). - MFSMCG defines other depository corporations (ODCs) as those issuing deposits included in broad money; treatment of MMFs differs: MFSMCG may include MMFs as ODCs (MMF shares/units in broad money), while the Guide defines MMFs as OFCs because of differing business nature and regulatory frameworks (paragraph 2.33). *Source: IMF staff.* ### 2.34 DTs, as defined in the Guide, in some juris- ### 2.34 DTs, as defined in the Guide, in some juris- ### Deposit-taking corporations (DTs) and institutional coverage - 2.34: DTs, as defined in the Guide, in some jurisdictions may cover institutions outside of the banking system, defined de facto or de jure. - Some jurisdictions include institutions that do not have a “banking license” but can accept deposits; these DTs often fall outside banking supervision and may be subject to a prudential regime that varies from that applied to banks. ### Non-bank deposit-taking corporations (non-bank DTs) — compilation challenges and Guide recommendations - 2.35: Dealing with data for DTs not regulated as banks (non-bank DTs) adds complexity and may prove costly if regulatory-based information is not available. - The Guide recommends two options for dealing with non-bank DTs: - (i) report annually information on their number, asset size, and control in the IMF report form on the institutional coverage of FSIs; or - (ii) compile a subset of FSIs for these institutions and disseminate this information separately. - The Guide: The latter option is recommended when non-bank DTs comprise a significant part of the financial sector in terms of size or number of customers served. ### Commercial banks and other deposit-taking corporations - 2.36: A commercial bank is the most common designation of a deposit-taking corporation; classification should be based on activities undertaken, not name alone. - Commercial banks commonly accept deposits and grant loans or other forms of finance to corporations and households. Many countries require them to hold reserves at the central bank, often determined as a certain proportion of their deposit liabilities. - 2.37: Other DTs include: (1) merchant banks; (2) savings and loan associations, building societies, and mortgage banks; (3) credit unions, and credit cooperatives; (4) municipal credit institutions; (5) rural banks and agricultural banks; and (6) electronic money institutions, among others. 12 ### Special cases: offshore banks - 2.38: “Offshore banks” are DT corporations established in jurisdictions that provide legal and fiscal advantages (e.g., low or no taxation and less stringent regulations in reserve requirements or foreign exchange restrictions). They typically transact in currencies other than the local currency and may be restricted from accepting deposits from residents of the economy in which they are located. - 2.39: Offshore banks engaged in trade and finance are residents of the economies in which they are located. The Guide recommends that offshore banks are included in the DTs if they take deposits; if they do not take deposits, they should be classified as OFCs. ### Banks in distress — treatment and data options - 2.40: Under financial difficulties, some DTs may operate under receivers or regulators or may be closed; they are deemed to continue to exist until formal bankruptcy or reorganization has taken place. Until liquidated or reorganized, their deposits may be frozen. - 2.41: DTs in liquidation or reorganization may retain claims on various sectors, which may be transferred to a restructuring agency or acquired by other depository corporations; reorganization, sale, or merger may result in funds becoming available to depositors and other creditors. - 2.42: The Guide recommends that banks whose deposit liabilities are frozen during liquidation or reorganization continue to be included in the DTs subsector as long as they own financial assets and liabilities. It is recognized that in practice it is usually difficult to get data on the accounts of banks in liquidation reported on a regular basis, and reported values may not reflect true market value. 12 - 2.43: If DTs in distress constitute a significant share of the domestic financial system, the authorities may consider compiling data both including and excluding these institutions, particularly if the liquidation process is very lengthy. 13 ### Other Financial Corporations (OFCs): scope and key subsectors - 2.44: The OFC sector engages in a wide range of financial intermediary or auxiliary activities outside the banking system, including “shadow banking.” Total assets of all OFCs, plus selected financial statement and memorandum series for MMFs, insurance corporations and pension funds, are used in compilation of FSIs. - Money Market Funds (MMFs) - 2.45: MMFs are collective investment schemes that raise funds by issuing shares or units to the public and invest primarily in money market instruments, MMF shares or units, bank deposits, tradable debt instruments with residual maturity of not more than one year, and instruments that pursue returns approaching interest rates of money market instruments. - For an investment fund to be recognized as an MMF, there needs to be (1) a certain degree of capital certainty (reliable store of value); and (2) the possibility to withdraw funds immediately or on short notice. If these conditions are not met, the institution is a non-MMF investment fund. - Non-MMF Investment Funds - 2.46: Non-MMF investment funds raise funds by issuing shares or units to the public excluding MMFs and invest predominantly in long-term financial assets (equity shares, bonds, mortgage loans) and nonfinancial assets (real estate). They may invest a small percentage in highly liquid short-term instruments to meet redemptions. - Insurance Corporations - 2.47–2.50: Insurance corporations provide financial benefits through risk-sharing and risk-transfer contracts. Main types: life (long-term), non-life (property and casualty), and reinsurance. Included are captive insurance companies, deposit insurers, issuers of deposit guarantees, and other issuers of standardized guarantees that function like insurers. - 2.48: Life insurance corporations invest premiums to build portfolios to meet future claims and offer products that are purely insurance and products with savings components (term insurance, non-unit linked/traditional insurance, unit-linked insurance). - 2.49: Non-life insurers provide benefits for accidents, fire, property loss, health-related expenses, etc.; composite insurance companies sell both life and non-life insurance. - 2.50: Reinsurance corporations insure policies written by other insurers in exchange for premiums to offset policy risk. - Pension Funds - 2.51–2.54: The pension funds subsector consists of autonomous pension funds established to provide retirement incomes for specific employee groups. Governments may organize independent schemes for their employees. - Pension schemes may be funded (with separate pools of financial assets/reserves) or unfunded (no separate pool, not separate institutional unit). 14 - Three types of funded pension schemes: (1) operated by FCs (typically insurance or asset-management corporations); (2) operated as autonomous pension funds; (3) operated as non-autonomous pension funds. Funded schemes hold reserves dedicated to pension payments. - Pension plans can be defined benefit, defined contribution, or hybrid schemes. - Other Financial Intermediaries - 2.55–2.56: Other financial intermediaries (excluding insurers and pension funds) are FCs that provide financial services by incurring liabilities other than currency and deposits to acquire financial assets on own account via open-market transactions. They generally raise funds on wholesale markets or through sale of securities and extend loans or acquire financial assets. Examples include finance companies, financial leasing companies, investment banks, venture capital and private equity firms, underwriters and dealers, central clearing counterparties (CCPs), financial derivative intermediaries, securitization vehicles, specialized financial intermediaries, asset management companies (AMCs), and bank restructuring agencies. 15 - Financial Auxiliaries - 2.57–2.58: Financial auxiliaries facilitate transactions in financial assets and liabilities without taking ownership of the assets/liabilities. They include public exchanges, securities markets, clearing houses, brokers, agents, foreign exchange companies (bureau de change), insurance and pension funds auxiliaries (agents, adjusters, actuarial services), financial derivative corporations, representative offices of foreign banks, electronic payment operators, third-party payment processors (e.g., online payment corporations, remittance services), supervisory agencies, regulatory bodies, managers of pension funds and mutual funds, head offices of FCs, solicitor nominee companies, and peer-to-peer lending companies. 16 - Captive Financial Institutions and Money Lenders - 2.59–2.61: Captive financial institutions and money lenders provide financial services where most assets or liabilities are with related parties (e.g., subsidiaries of the same holding corporation), or extend loans from own funds provided by one sponsor. Captive financial institutions act as financial agents for parent corporations, raising funds to lend to parents or purchase parents’ accounts receivable. Captive insurance companies and pension funds that serve only their owners are classified as insurance corporations and pension funds, not captive institutions. Captive financial institutions may be included within parent balance sheets unless resident in a different economy; if treated as separate units they are classified in the OFC subsector. Holding companies are always allocated to the FCs sector and treated as captive financial institutions. ### Financial markets — money and capital markets - 2.62–2.65: A financial market is a market in which entities trade financial claims under established rules. Main categories: money and capital markets; other markets include derivatives, commodities, and foreign exchange. - Money market: short-term lending and borrowing—provides short-term liquidity to governments and financial and nonfinancial corporations; instruments include treasury bills, central bank bills, certificates of deposit, bankers’ acceptances, commercial paper, and repurchase agreements. An active money market facilitates liquidity management and monetary policy design. - Interbank market: banks lend excess liquidity to each other, often overnight and usually unsecured; an efficient interbank market facilitates banks’ liquidity management and contributes to monetary policy design. - Capital markets: markets where bonds and shares are issued and traded for long-term financing; bond markets provide long-term funds and allow credit risk distribution and investor opportunities for long-term horizons such as pension funds. *Financial Soundness Indicators Compilation Guide* ### 2.66 The equity market is where equity securities ### 2019-fsi-guide - 2.66 The equity market is where equity securities ### Equity markets and turnover - The equity market is where equity securities are traded. - An active equity market is an important source of capital to the issuer and allows the investor to benefit from the future growth of the business through dividend payments and/or an increase in the value of the equity. - Turnover serves as an indicator of liquidity in equity markets. ### Financial derivatives markets - Financial derivatives markets are used to trade financial risks such as those arising from foreign exchange and interest rates, to entities more able or willing to bear them. - Credit risk can also be traded through credit derivatives. - Derivatives comprise forwards, options, swaps, and sometimes combinations of these three elements, with the value of the derivative instrument depending mainly on the price of the underlying item—the reference price. - These markets can broaden financial market activity by providing a way to transfer financial risk that otherwise would have deterred an investor from purchasing the security. - Risk warning: Since financial derivatives transfer risk, financial stability can be threatened by an accumulation of risk exposures by derivatives counterparties, particularly if the risks have not been fully understood or properly priced. ### Market liquidity: dimensions and measures - Liquidity importance: liquidity allows investors to manage portfolios and risks more efficiently, which tends to reduce the borrowing cost. - Dimensions of market liquidity: - Tightness — a market’s ability to match supply and demand efficiently; can be measured by the bid-ask spread. - Depth — the ability of a market to absorb large trade volumes without a significant impact on prices; can be approximated by the amounts traded over a period of time (turnover) and quote sizes. - Immediacy — the speed with which orders can be executed and settled. - Resilience — the speed with which price fluctuations arising from imbalances in trades are dissipated. ### Basel capital and liquidity standards — introduction (chapter overview) - Chapter discusses prudential standards relating to capital and liquidity developed by the Basel Committee on Banking Supervision (BCBS) that are relevant to compiling FSIs. - Compilers should rely on national definitions and supervisory data for capital, liquidity, leverage and large exposures related series rather than recalculating Basel-prescribed methodology. - Compilers need to document in metadata which version of the Basel Capital Accord provides the foundation for the national capital adequacy regime and whether national discretion or variations exist. ### Evolution of the Basel Capital Accord — key elements and milestones - Basel I (origination, 1988): - Introduced commonly accepted definitions of regulatory capital elements. - Linked capital requirements to risk via risk weights. - Established a minimum capital requirement of 8 percent of risk-weighted assets for internationally active banks. - Capital composition under Basel I: - Requirement to be met by Tier 1 capital and Tier 2 capital, with Tier 2 limited to 50 percent of total capital. - 1996 Amendment to Incorporate Market Risks: - Addressed market risk by expressing market risk exposure as a risk-weighted asset equivalent. - Introduced Tier 3 capital at national discretion, limited to supporting market risks. - Basel II (2004, revised framework): - Retained 8 percent minimum but introduced more granular risk weights and advanced measurement approaches (internal models) for credit and operational risks, subject to supervisory approval. - Introduced Pillar 1 (credit, market, operational risks) and Pillar 2 (internal capital adequacy assessment process, ICAAP). - Basel II.5 (Enhancements post-2007–09 crisis): - Introduced requirements for retention of portion of credit risk for securitized assets or penal risk weights. - Strengthened requirements to ensure a “clean break” for securitized or sold assets before removal from risk-weighted assets. - Revised market risk capital charges and required consideration of stress scenarios. - Basel III (2010): - Required banks to hold more, higher quality capital, introduced a leverage ratio and two new liquidity ratios. - While the original 8 percent capital adequacy limit retained, effectively the minimum became 10.5 percent of risk-weighted assets through the capital conservation buffer. - Introduced Common Equity Tier 1 (CET1) requirement of 4.5 percent of risk-weighted assets; the 2.5 percent capital conservation buffer must be met with CET1, making CET1 effectively 7 percent. - Required Tier 1 capital of at least 6 percent of risk-weighted assets. - Instruments qualifying as Additional Tier 1 (AT1) must be subject to write-down or conversion to common equity. - Introduced two liquidity standards: the liquidity coverage ratio (LCR) and the net stable funding ratio (NSFR), requiring application of liquidity stress scenarios and supervisory review. - Basel III: Finalisation of Post‑Crisis Reforms (2017): - Introduced more granular credit risk weights in the standardized approach. - New Standardized Credit Risk Assessment alternative to external credit ratings. - Constraints on internal models to reduce variability in risk-weighted asset calculations. - Output floor for internal model calculation of capital for credit risk of 72.5 percent of the requirement determined using the standardized approach. - Single new method for calculating operational risk capital charges replacing previous options. ### Basel capital composition and quantitative requirements - Basel III capital ratios (percent of risk-weighted assets) as presented: - CET1 Minimum: 4.5 - Tier 1 Capital Minimum: 6 - Total Capital Minimum: 8 - Capital conservation buffer: 2.5 (applies to CET1, Tier 1, Total Capital rows in Table 3.1) - Minimum plus capital conservation buffer: CET1 7.0, Tier 1 8.5, Total Capital 10.5 - Basel III key capital definitions and principles: - Regulatory capital purpose: absorb unexpected losses to protect depositors and other liabilities. - Regulatory capital differs from accounting equity; includes liability instruments meeting prescribed criteria and excludes assets likely to be worthless in liquidation (e.g., goodwill, deferred tax assets). - Distinguishing elements of regulatory capital: permanence, freedom from fixed charges against income, and ability to absorb losses. - Tier 1 capital comprises paid-up shares/common stock and disclosed reserves considered freely available to meet claims; excludes revaluation reserves and cumulative preference shares. - Subordinated debt qualifying as capital must have a minimum term to maturity of five years; it is not permanent and carries fixed charges. - Under Basel I/II total regulatory capital formula (as given): (Tier 1 capital – goodwill) + Tier 2 capital – adjustments. - Under Basel III total regulatory capital expressed as: (CET 1 capital – adjustments) + (AT 1 – adjustments) + (Tier 2 capital – adjustments). - Consolidation principle: capital requirements should be applied on a consolidated basis; intra-group positions eliminated in accounting consolidation. Any investment in a non-consolidated subsidiary should be deducted from the parent bank’s capital. *Source: 2019 Financial Soundness Indicators Compilation Guide, chapter excerpts.* ### 3.27 CET1 capital (Basel III definition) consists ### 3.27 CET1 capital (Basel III definition) consists ### Common Equity Tier 1 (CET1) - CET1 consists of the sum of: - common shares, - retained earnings, - accumulated other comprehensive income, - other disclosed reserves, - common shares issued by subsidiaries of the bank that are consolidated with the bank and held by third parties that meet the criteria for inclusion in CET1, - less regulatory adjustments. ### Additional Tier 1 (AT1) - AT1 consists of subordinated instruments with no maturity and neither secured nor covered by a guarantee of the issuer. - Eligibility criteria (selected): - (1) issued and paid in; - (2) subordinated to depositors and general creditors of the bank; - (3) neither secured nor covered by a guarantee of the issuer or other arrangement that legally or economically enhances the seniority of the claim vis-à-vis bank creditors; - (4) perpetual (no maturity and no incentives to redeem). - Eligible capital instrument characteristics (footnote summary): - unsecured, subordinated, and fully paid-up; - not redeemable at the initiative of the holder or without prior consent of the supervisory authority; - available to participate in losses without requiring the bank to cease trading; - may allow service obligations to be deferred. ### Tier 2 capital (Basel I / continued in Basel II) - Tier 2 consists of instruments and reserves that absorb losses but may not be permanent or fully loss-absorbing. - Components include: - (1) undisclosed reserves (part of accumulated retained earnings that some countries may permit to maintain as an undisclosed reserve); - (2) asset revaluation reserves (fixed assets and long-term holdings of equities with latent revaluation gains); - (3) general provisions/general loan loss reserves (up to 1.25 percent of risk-weighted assets); - (4) hybrid instruments combining characteristics of debt and equity and available to meet losses; - (5) unsecured subordinated debt with a minimum original fixed term of maturity of more than five years and limited-life redeemable preference shares. - Limits: - Tier 2 capital and subordinated debt cannot exceed 100 percent and 50 percent, respectively, of Tier 1 capital. ### Tier 2 capital (Basel III definition) - Tier 2 consists of the sum of: - (1) unsecured subordinated debt with a minimum original maturity of at least five years and limited-life redeemable preference shares; - (2) stock surplus resulting from the issuance of instruments included in Tier 2 capital; - (3) instruments issued by subsidiaries that are consolidated with the bank and held by third parties that meet the criteria for inclusion in Tier 2 capital; - (4) general provisions or loan-loss reserves held against future unidentified losses, not ascribed to particular assets or known liabilities; - (5) regulatory adjustments applied in the calculation of Tier 2 capital. - Footnote: general provisions limits — Up to 1.25 percent of risk-weighted assets calculated under the standardized approach, and up to 0.6 percent of risk-weighted assets calculated under the IRB approach. At national discretion, lower limits may apply. ### Adjustments to regulatory capital (Basel I, II, and III) - Basel I and II adjustments include: - deduction of goodwill from Tier 1 capital; - deduction from total capital (50 percent from Tier 1 and 50 percent from Tier 2 in Basel II) of the value of investments in unconsolidated banking and financial subsidiaries to prevent multiple use of the same capital within a group. - National authorities have discretion to add supervisory deductions for: - investment in the capital of other banks and financial institutions, - other intangible assets. - Basel III introduced a wider set of deductions: - (1) goodwill; - (2) deferred tax assets; - (3) defined benefit pension plan deficits; - (4) excess minority interest in subsidiaries; - (5) profit revaluation of own debt; - (6) threshold deductions (other deferred taxes arising from timing differences, mortgage servicing rights, and investments in unconsolidated subsidiaries) taken as: - the excess over 10 percent of CET1 individually, and - the excess of 15 percent of CET1 when considered in aggregate. - Note: Provisions held against specific assets are excluded from the definition of capital. ### Risk-Weighted Assets (RWA) — Credit Risk and Basel history - Basel I introduced weighting assets using risk weights; capital held relative to risk-weighted assets instead of total assets. - Basel I initially considered only credit risk; 1996 Amendment incorporated market risk by expressing market risk as a risk-weighted asset equivalent. - Basel II introduced operational risk as a risk-weighted asset equivalent. - Example applying Basel minimum 8 percent capital adequacy standard: - a bank would require $8 in capital for each $100 in 100 percent risk-weighted commercial loans ($100 * 1.00 * 0.08), - $2 in capital for each $100 in 20 percent risk-weighted debt of another bank ($100 * 0.20 * 0.08), - and no capital for $100 in 0 risk-weighted government bonds ($100 * 0.0 * 0.08). - Total capital requirement formula: - Total Risk‑Weighted Assets * 0.08 = Minimum Capital Requirement - Basel I provided four asset groupings with corresponding risk weights (Table 3.2). Basel II and III increased granularity and introduced treatment of risk-mitigants (collateral and guarantees). ### Credit Conversion Factors for Off-Balance-Sheet Items (Basel) - Selected credit conversion factors (percent): - Direct credit substitutes, sale and repurchase agreements where credit risk remains with the bank, lending of banks' securities, forward asset purchases, off-balance-sheet items that are credit substitutes: 100 - Note issuance facilities and revolving underwriting facilities: 50 - Transaction-related contingent items (performance bonds, bid bonds, warranties, standby letters of credit related to particular transactions): 50 - Commitments (unless qualify for lower CCF): 40 - Short-term self-liquidating trade letters of credit: 20 - Commitments unconditionally cancellable at any time by the bank without prior notice, or that effectively provide for automatic cancellation due to deterioration in a borrower's creditworthiness: 10 ### Internal Ratings–Based (IRB) approaches (Basel II) - IRB approaches use banks' internal models, subject to supervisory approval. - Advanced IRB requires bank-provided inputs: probability of default (PD), loss given default (LGD), exposure at default (ED), and effective maturity (M). - Foundation IRB requires bank-provided PD only; supervisory authority prescribes other inputs. - Compilers should indicate in metadata whether national supervisory standards make advanced approaches available. ### Market Risk - Market risk: losses in on- and off-balance-sheet positions from market price movements. - 1996 Amendment introduced capital charges for interest rate–related instruments and equities in the trading book and for total trading/book currency and commodities positions. - Banks may use standardized approach or, subject to supervisory approval, internal models. - Under Basel I and II standardized framework, capital charge uses fixed risk factors (e.g., capital charge for foreign currency exposure is 8 percent of overall net currency positions). - Basel II.5 (2009 revisions) added: - stressed VaR calculation, - incremental risk charge for default and credit mitigation risk, - same capital charge for securitized products as banking book, - incremental charge for credit risk in the trading book. - 2016 revisions moved from VaR to expected shortfall (ES), introduced varying liquidity horizons, and revised trading book/banking book boundary. - January 2019 BCBS revised standard introduced: - new standardized approach and simplified standardized approach to enhance market risk sensitivity, - clearer trading book/banking book boundary, - more detailed and stringent requirements for internal market risk models and supervisory review. - Compilers should disclose in metadata whether national frameworks reflect Basel I/II, Basel II.5, or Basel III market risk approaches. ### Operational Risk - Defined as risk of loss from inadequate internal procedures or external events; includes legal risk but excludes strategic and reputational risks. - Basel II introduced capital charges for operational risk with three methods: - basic indicator approach, - standardized approach, - advanced measurement approaches (later withdrawn). - Basel III (2017) introduced a new standardized approach using business line revenues and assumed or observed operational loss experience as inputs, replacing the two prior options. - Compilers should disclose in metadata whether capital charges for operational risk have been adopted nationally and which calculation methods are available. ### Leverage Ratio - Basel III introduced a non-risk-based leverage ratio as a supplementary measure to risk-based capital requirements. - Capital measure (numerator): Tier 1 capital (Basel III definition). - Exposure measure (denominator): all balance sheet assets, derivatives exposures, securities financing transaction exposures, and off-balance-sheet items. - Exposure measure uses accounting measure of exposure plus regulatory requirements for derivatives, repurchase agreements and securities finance, committed credit facilities, direct credit substitutes, and other specified items. - Exposure measure was revised in December 2017. *Source: Financial Soundness Indicators Compilation Guide (excerpt).* ### 3.47 By 2018, banks were required to hold Tier 1 ### 3.47 By 2018, banks were required to hold Tier 1 ### Leverage ratio requirements and G-SIB leverage buffer - By 2018, banks were required to hold Tier 1 capital equal to at least 3 percent of the exposure measure as originally defined and have until 2022 to meet the 3 percent requirement using the revised exposure definition. - December 2017 revisions introduced a requirement for a leverage buffer for global systemically important banks (G-SIB). - The leverage buffer add-on is equal to half of the G-SIB buffer the bank is required to hold. - Example: a G-SIB with a capital buffer of 1 percent would be required to meet a leverage limit of 3.5 percent—the broadly applicable 3 percent leverage limit, plus a leverage buffer equivalent to half of the applicable G-SIB buffer. - Implementation will be phased in through 2022. - There is the option, at national discretion, of early adoption of the revised exposure measure. ### Data sources and metadata guidance for leverage - Compilers will rely on supervisory sources for leverage data. - Compilers should note in the metadata whether the national definition is aligned with either the original or revised Basel definition. ### Liquidity standards: overview - Basel III introduced two internationally harmonized global liquidity standards: the LCR and NSFR. - These two ratios are calculated using prescribed stress-scenarios and agreed international definitions of HQLA. - National implementation may vary; compilers should rely on national supervisory standards. - Some jurisdictions may apply the LCR and NSFR requirements only to a sub-set of banks (for example, only large internationally active banks). - The LCR and NSFR FSIs should be compiled based on aggregation of those banks to which the standards apply. ### Liquidity coverage ratio (LCR) - The LCR is intended to promote resilience to potential liquidity disruptions over a 30 day horizon. - The LCR standard is defined by dividing the stock of HQLA by net cash outflows over a 30-day time period under stressed conditions. - Unlike other liquidity FSIs (except the net stable funding ratio), the LCR is not a ratio of balance sheet items, but rather the result of a supervisor-prescribed stress scenario. - Compilers will rely on supervisory data sources. - Phased implementation ends in 2019, meaning that HQLA must equal or exceed a stressed one-month cash outflow using run-off rates prescribed by the supervisory authority. - HQLA are those assets that can be easily and immediately converted into cash at little or no loss of value. - Basel III sets out fundamental and market-related characteristics and operational requirements that HQLA should possess or satisfy. - HQLA should be unencumbered, liquid in markets during a time of stress and, ideally, eligible as collateral for the central bank standing liquidity facilities. - Implementing the LCR will be challenging in many countries because of a lack of assets that would meet the Basel definition of HQLA. - Compilers should provide in the metadata definitions of HQLA if these differ from the Basel standard. ### Net stable funding ratio (NSFR) - The NSFR is defined as the ratio of the available amount of stable funding relative to the amount of required stable funding over a one-year time horizon. - Like the LCR, but in contrast to other liquidity FSIs, the NSFR is not a ratio of balance sheet items, but the outcome of a supervisor-prescribed stress scenario applied to individual banks. - The NSFR is intended to limit overreliance on short-term wholesale funding, encourage assessment of funding risks across all on- and off- balance sheet items, and promote funding stability. - The NSFR should be greater than 100 percent and complements the short-term horizon of the LCR. - Available stable funding (ASF) is defined as the portion of a banks’ capital and liabilities that are expected to remain with the bank in a stress scenario over a one-year horizon. - Calibration of the presumed degree of stability considers the funding tenor, the funding type, and counterparty. - Required stable funding is institution-specific, reflecting the liquidity characteristics and residual maturities of its assets and its off-balance-sheet exposures. - Compilers will rely on supervisory data and will not generally need to be familiar with the highly detailed specification of ASF and RSF. - Additional detail can be obtained from national supervisory standards and BCBS Basel III: The Net Stable Funding Ratio (2014). ### Aggregation of capital components under different Basel accords - In some countries, different prudential standards may apply to different types or classes of bank; differing capital definitions in force will create aggregation challenges. - Recommended approach: aggregate sectoral data by combining capital components reported under Basel I, Basel II, and Basel III according to the prescribed mapping (examples from Table 3.4): - Sectoral CET1 = Common Equity Under Basel I and II + Basel III CET1* - Sectoral Tier 1 = Basel I Tier 1 + Basel II Tier 1 + Basel III Tier 1 (CET1*+ AT1*) - Sectoral Tier 2 = Basel I Tier 2 + Basel II Tier 2 + Basel III Tier 2* - Sectoral Tier 3 (if applicable) = Basel I Tier 3 + Basel II Tier 3 (Basel III Tier 3 is eliminated) - Sectoral supervisory adjustments = Basel I supervisory adjustments + Basel II supervisory adjustments (as applicable) - Sectoral Total Regulatory Capital = Sectoral Tier 1 + Sectoral Tier 2 + Sectoral Tier 3 (if applicable) – Sectoral supervisory adjustments (as applicable) - Note: AT1 = Additional Tier 1; CET1 = Common Equity Tier 1. Items marked with * are net of supervisory adjustments. ### Accounting principles for FSIs: introduction and recognition - A consistent set of accounting principles is required for compiling position and flow data for FSIs and is a precondition for aggregating data from different institutional units within a sector. - The Guide defers to IFRS as the overarching framework for compiling FSIs for DTs and OFCs but recognizes not all countries adhere to them; some follow generally accepted national accounting practices instead. - The Guide defers to supervisory standards, particularly with respect to allowance for losses. - Reporters are encouraged to provide metadata indicating the statistical and financial reporting standards used, including any critical assumptions and significant differences from IFRS. ### Flows, positions, recognition, and accrual accounting - Flow data: economic actions and effects of events within a period of time, including transactions in goods, services, income, transfers, nonfinancial and financial assets; holding gains and losses; and other changes in the volume of assets and liabilities. - Position data: value of outstanding stocks at a specific point in time. - Assets are resources controlled by an entity resulting from past events, expected to yield future economic benefits. - Financial assets are financial claims arising from contractual relationships; each financial asset has a corresponding liability. - Ownership distinguishes legal and economic ownership; economic ownership (beneficial ownership) reflects entitlement to benefits and acceptance of risks. - An entity shall recognize financial assets or liabilities in its financial statements when the entity becomes party to the contractual provisions of the instruments. - IFRS 10 requires consolidation when an entity controls another; the Guide generally defers to IFRS on consolidation but recommends supervisory consolidation for the DT sector. - Purchase or sale of financial assets shall be recognized and derecognized using the trade date or, if not feasible, the settlement date. - Financial liabilities are derecognized when extinguished (discharged, cancelled, or expired). - Accrual accounting is the main method used in the Guide, in IFRS and for macroeconomic statistics: record flows and changes when economic value is created, transformed, exchanged, transferred, or extinguished. - Accrual accounting records effects in the period in which they occur, irrespective of payment, and excludes contingent positions. - Change of economic ownership is central to timing; it reflects transfer of substantially all risks and rewards of ownership. *Source: IMF staff, Financial Soundness Indicators Compilation Guide (extracts).* ### 4.12 When a transaction occurs in assets, the ### 4.12 When a transaction occurs in assets, the ### Transaction recording and recognition - Record change in position on the date of the transaction (the trade date). - If an existing asset is sold, the seller derecognizes and the buyer recognizes the asset on the date of the transaction — when the economic risks and rewards transfer. - If no precise ownership change date can be fixed, the settlement date (date on which the creditor receives payment in cash or in some other asset) is decisive. - The date of recording may be specified to ensure matching entries in the books of both parties. ### Financial claims, services, dividends, and accruals - A financial claim is created and exists until payment is made or forgiven. - An asset transaction is recorded when: - a service is rendered, - interest accrues, or - an event occurs that creates a transfer claim (i.e., taxation). - Service charges can accrue continuously, similar to interest. - After dividends are declared payable, they are recorded as liabilities/assets until paid. ### Accrual of interest — guidance and measurement - The Guide recommends interest costs accrue continuously on debt instruments, matching cost of funds with provision of funds and increasing principal outstanding until interest is paid. - As set forth in IFRS 9: - An entity should recognize interest income by applying the effective interest method. - For fixed-rate instruments, the effective interest rate is the rate that exactly discounts estimated future cash payments/receipts through the expected life of the financial asset/liability to the gross carrying amount (financial asset) or amortized cost (financial liability). - For variable-rate instruments, the yield will vary over time in line with contractual terms. - Except for instruments meeting the IFRS 9 criteria for hedge accounting, no adjustment should be made to interest income for gains or losses arising from financial derivatives contracts; these are recognized as gains and losses on financial instruments (see paragraph 5.19). - The recommendations are based on IFRS 9. - For traded instruments under IFRS, interest may accrue to the new creditor at the effective yield at acquisition rather than issuance, creating potential asymmetric reporting of interest income between debtor and creditor deposit takers. - Interest costs that accrue in a recording period should be recorded as an expense (income) in that period. - Three possibilities for measuring accrued interest costs for position data: - a. Interest earned is paid within the reporting period, with no impact on end-period positions - b. Interest earned is not paid because it is not yet due; positions increase by the amount of interest accrued during the reporting period - c. Interest earned is not paid when due; positions increase by the amount of interest costs that has accrued during the period (excluding any specific provisions against such interest, see paragraph 5.15) - The Guide recommends including interest costs that have accrued and are not yet payable as part of the value of the underlying instruments (second bullet point). ### Arrears and guaranteed debt - When principal or interest payments are not made when due, arrears are created. - Arrears should be recorded from their creation date until extinguished (repaid, rescheduled, or forgiven). - Arrears should continue to be recorded in the underlying instrument, except interest on nonperforming assets (see paragraph 5.14). - If debt payments are guaranteed and the debtor defaults, the debtor records an arrear until the creditor invokes the guarantee; upon invocation the debt is attributed to the guarantor and the original debtor’s arrear is extinguished as though repaid. - Depending on contractual arrangements, when a guarantee is exercised the debt may be classified not as guarantor arrears but as a short-term debt liability until any grace period ends. ### Contingencies and off-balance-sheet exposures - Many contractual financial arrangements do not give rise to unconditional payment obligations; these are "conditional" and are not recognized as financial assets or liabilities in the Guide because they are not actual claims and no certain future economic benefits can be measured reliably. - Off-balance-sheet exposures represent potential exposures to risk; data should be collected on the basis of the maximum potential exposure for various contingent arrangements. - Loan and other payment guarantees: - Commitments to make payments to third parties when another party fails to perform obligations; contingent liabilities because payment is required only on nonperformance. - Deposit-taking guarantors commonly assume commercial risk or financial performance risk of the borrower. - Letters of credit (LoCs), including stand-by LoCs, are included under payment guarantees: - LoCs are a mechanism for international trade where a bank pays a supplier on behalf of its customer upon documentary proof of delivery per the LoC terms. - Irrevocable LoCs provide certainty of payment if original terms are met; revocable LoCs allow terms to be changed without beneficiary approval and are seldom used. - Performance bonds typically cover part of contract value and guarantee contractual performance; used in construction to ensure remedial payment up to the bond limit if the contractor fails to complete or does so with material deficiencies. - Lines of credit and credit commitments, including undisbursed loan commitments, are contingencies that guarantee availability of future funds but create no financial liability/asset until funds are advanced. - Unutilized back-up facilities such as note issuance facilities (NIFs), revolving underwriting facilities (RUFs), multiple options facilities, and global note facilities (GNFs) are included under credit commitments; both banks and nonbank financial institutions provide such facilities. ### Provisions for loan losses and impaired assets (IFRS 9 and supervisory practices) - IFRS 9 (effective January 2018) prescribes an expected credit loss (ECL) treatment for establishing a loss allowance for financial assets. - Previously (IAS 39), an incurred credit loss approach established loss allowances only when objective evidence of impairment existed. - Supervisory treatment has long taken an expected loss approach; divergence between supervisory expected-loss approach and IAS 39 incurred-loss approach produced differences in provision amounts. - Supervisory requirements often include minimum provisioning amounts for loans over a specified number of days in arrears, which may result in higher specific provisions than accounting allowances. - Supervisory frameworks frequently require a general provision amount (for example, 1 percent of the total portfolio) to recognize portfolio losses even if individual loans are not yet identified as impaired. - The combination of prescribed minimum provisions and requirement for general provisions may lead to higher provisions under supervisory rules than under IAS 39 or IFRS 9 accounting principles. - Under Basel I: - Excess provisions above accounting allowance were treated as a general provision and, to a maximum of 1.25 percent of risk-weighted assets, included as an element of Tier 2 capital. - Basel II: - Divergent treatment between Standardized Approach and Internal Ratings-Based Approach for specific and general provisions. - For advanced approaches, the difference between provisions and expected losses may be included in or must be deducted from regulatory capital. - The excess, to a maximum of 0.6 percent of risk-weighted assets, is included in Tier 2 capital. - Any shortfall in provisions relative to expected loss would be deducted from capital, 50 percent from Tier 1, and 50 percent from Tier 2. - Institutions using advanced approaches for part of portfolio and standardized for balance should allocate total general provisions pro rata. - Basel III retained Basel II approach; any shortfall in provisions is to be deducted from CET1. - Under IFRS 9: - The loss allowance is a cumulative account, with increases or decreases recognized in profit and loss. - For financial assets measured at amortized cost (typically loans and leases and securities held to collect cash flows), the loss allowance is netted against carrying amount; net amount reported on statement of financial position. - For FSIs, the Guide recommends loans be reported on a gross basis (without deduction for loss allowance). - Loss allowance for off-balance-sheet items (loan commitments or guarantees) is recognized as a provision (liability). - For securities measured at fair value through other comprehensive income (FVOCI) — typically debt instruments — provision expense is recognized in profit or loss using same credit impairment methodology as amortized cost assets; other fair value changes recognized in OCI and recycled to profit or loss on derecognition. - Adoption of the ECL approach in IFRS narrows some conceptual differences between accounting and supervisory provisioning but substantial application differences remain across jurisdictions. - At time of writing, BCBS prescribed an interim approach continuing existing Basel determinations and recommended national authorities issue guidance on allocation of IFRS 9 ECL to general and specific provisions. - The Guide states concepts of general and specific provisions remain relevant to FSIs (e.g., provisions to regulatory capital, paragraph 7.27, and provisions to non-performing loans, paragraph 7.39); compilers should follow supervisory practices in their jurisdiction and obtain data from supervisory sources. Details of national treatment should be provided in metadata. ### Valuation (measurement) — IFRS 9 framework - Valuation in the Guide corresponds to the IFRS concept of measurement: assigning monetary amounts at which elements of financial statements are recognized and carried on the balance sheet. - IFRS 9 requires measurement using: - amortized cost, - fair value through other comprehensive income (FVOCI), or - fair value through profit and loss (FVTPL). - Determination of approach is based on the entity’s business model for managing financial assets and contractual cash flow characteristics. - Financial assets are measured at amortized cost if: - the asset is held to collect contractual cash flows, and - contractual terms give rise, on specified dates, to cash flows that are solely payments of principal and interest. - FVOCI is used if: - the business model includes both collecting contractual cash flows and selling financial assets, and - contractual terms give rise, on specified dates, to cash flows that are solely payments of principal and interest. - Financial assets not meeting criteria for amortized cost or FVOCI are measured at fair value through profit and loss. *Financial Soundness Indicators Compilation Guide — excerpts (paragraphs 4.12–4.37).* ### 4.38 Amortized cost is the amount at which the ### 2019-fsi-guide - 4.38 Amortized cost is the amount at which the ### Amortized cost (paragraph 4.38) - Amortized cost is defined as: - the amount at which the financial asset or financial liability is measured at initial recognition - minus the principal repayments - plus or minus the cumulative amortization using the effective interest method of any difference between that initial amount and the maturity amount - and, for financial assets, adjusted for any loss allowance. - Interest income (accrued interest) is: - calculated using the effective interest method - recognized in profit and loss. - Changes in fair value of assets valued at amortized cost: - recognized in profit and loss only when the asset is derecognized or reclassified. - Presentation recommendations: - Financial assets other than loans (lines 19–22 in Table 5.1) valued at amortized cost: present net of allowance for loss (consistent with IFRS 9). - Loans (line 18 in Table 5.1): present net of specific provisions, with subtotals on gross loans by category and the amount of specific provisions. - Treatment differences with IFRS 9: - IFRS 9 ECL model does not include supervisory concepts of specific and general provisions. - Allocation of IFRS 9 loan loss allowance between specific and general provisions should follow national supervisory guidance. - Specific provisions are netted against gross loans (line 18.i in Table 5.1). - General provisions are recorded as a liability item in line 30. ### Fair value — definitions and assumptions (paragraphs 4.39–4.41) - Fair value defined as: - “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” (IFRS 13 Fair Value Measurement, paragraph 9) - Under IFRS 9: - Assets and liabilities not measured at amortized cost are to be measured at fair value. - Measurement assumptions: - Entity assumes market participants would use it when pricing the asset or liability under current market conditions, including assumptions about risk. - Fair value measurement of a nonfinancial asset takes into account its highest and best use from the market participant’s perspective. - Fair value measurement context: - Assumes an orderly and hypothetical transaction between market participants at the measurement date under current market conditions. - Transaction takes place in the principal market for the asset or liability, or in absence of a principal market, the most advantageous market. - Fair value of a financial liability or an entity’s own equity instruments: - Assumes transfer to another market participant without settlement, extinguishment, or cancellation of the liability when transferred. - Reflects non-performance risk, including the entity's own credit risk, assuming the same non-performance risk before and after the transfer. ### Valuation techniques and hierarchy (paragraphs 4.42–4.43) - Three widely used valuation techniques for fair value: 1. Market approach — uses prices and other information generated by market transactions involving identical or comparable assets/liabilities. 2. Cost approach — reflects the amount required to replace the service capacity of an asset (current replacement cost). 3. Income approach — converts future cash flows of income and expenses into a single current (discounted) amount reflecting current market conditions and expectations. - Fair value hierarchy (IFRS): - Level 1 inputs (highest priority): (unadjusted) quoted prices in active markets for identical assets or liabilities accessible at the measurement date. - Level 2 inputs (medium priority): inputs other than Level 1 quoted prices that are directly or indirectly observable, such as similar instruments or identical instruments in inactive markets. - Level 3 inputs (lowest priority): unobservable inputs for the asset or liability, to be developed using the best information available to the entity. - Use rules: - Entities required to use Level 1 if possible. - May use Level 3 only if required inputs are not available for Level 1 or 2. ### Transactions and initial measurement (paragraph 4.44–4.46) - Transactions generally measured at fair value of consideration given or received. - Initial recognition (consistent with IFRS 9): - Measure financial assets or financial liabilities at fair value plus or minus, for assets/liabilities not at FVTPL, transaction costs directly attributable to acquisition or issue. - If part of consideration is for something other than the financial instrument, measure the fair value of the financial instrument. - IFRS 9 classification at initial recognition: - Amortized cost - Fair value through other comprehensive income (FVOCI) - Fair value through profit or loss (FVTPL) - Basis for classification: 1. Business model for managing the financial asset. 2. Contractual cash flow characteristics of the financial asset. - Instruments measured at amortized cost: - Loans and deposits held to collect cash flows and with contractual terms giving rise to payments of principal and interest. - These instruments are measured using Level 3 inputs, specifically discounted cash flow using market rates of interest, as generally no observable market prices exist. - Positions of all financial assets not measured at amortized cost must be recorded at fair value, either as FVTPL or FVOCI. - FVTPL applies to assets held to sell or elected to value at fair value at initial recognition to address accounting mismatch. - FVOCI includes financial assets (debt instruments and equity) held to collect contractual cash flows and to sell the financial asset. ### Derivatives and hedge accounting (paragraphs 4.47–4.48) - Under IFRS 9: - All derivatives, including those linked to unquoted equity investments, are measured at fair value. - Changes in the value of derivatives must be recognized in profit or loss, unless the entity applies hedge accounting designating a derivative as a hedging instrument. - Hedge accounting: - Recognizes offsetting effects on profit or loss of changes in fair values of hedging instrument and hedged items. - Allows matching of risk exposure in hedged instruments with opposite gains or losses on hedging instruments. - Results in netting or reclassification of hedged items and hedging instruments in balance sheet presentation. - Three types of hedging relationships recognized in IFRS 9: 1. Fair value hedge 2. Cash flow hedge 3. Hedge of a net investment in a foreign operation ### Recording of gains and losses (paragraphs 4.49–4.51) - Financial assets classification: amortized cost vs fair value. - Gains and losses for assets measured at fair value: - Recognized either in profit or loss (FVTPL) or other comprehensive income (FVOCI). - Reporting differences for FVOCI: - Debt instruments at FVOCI: unrealized gains and losses recognized in other comprehensive income. - Equity investments at FVOCI: realized gains and losses allocated directly to retained earnings. - Financial liabilities designated at FVTPL: - Gain and loss must be split into: - Amount of change in fair value attributable to changes in credit risk of the liability presented in other comprehensive income. - Remaining amount presented in profit or loss. ### Domestic and foreign currencies; unit of account; exchange rate conversion (paragraphs 4.52–4.56) - Domestic currency: - The currency that is legal tender in the economy and issued by the monetary authority for that economy or the common currency area to which the economy belongs. - Currencies not meeting this definition are foreign currencies to that economy (e.g., an economy using U.S. dollars issued by another economy classifies it as foreign). - Currency composition rules: - Foreign currency instruments: denominated in a currency other than domestic currency. - Foreign-currency-linked instruments: payable in domestic currency but amounts payable linked to a foreign currency — considered denominated in foreign currency. - Domestic currency instruments: denominated in domestic currency and not linked to a foreign currency. - For debt instruments with interest payable in a foreign currency but principal in domestic currency (or vice versa): only the present value of amounts payable in a foreign currency should be classified as foreign currency instrument. - Unit of account for FSIs: - Domestic currency unit is the preferred unit for calculating FSIs to ensure compatibility with national accounts and other economic/monetary statistics. - Conversion rules: - Assets and liabilities translated at the closing rate at the date of the financial statement position. - Income and expenses translated at the exchange rate at the dates of the transactions. - Preferred exchange rate for position data: market (spot) exchange rate prevailing on the reference date; midpoint between buying and selling rates is preferred. - Multiple rate systems (paragraph 4.56): - Use the rate on the closing date of the actual exchange rate applicable to specific liabilities or assets. - If not available, use average rates for the shortest applicable period. - If only aggregated transaction information is available, average exchange rate over the period is a suitable proxy. ### Maturity (paragraphs 4.57–4.58) - Importance: - Relevant for financial stability analysis from liquidity and asset/liability mismatch perspectives. - Short-term definition in the Guide: - Short-term is defined as a maturity of three months or less. - Maturity classification approaches: - Remaining (residual) maturity: time until repayments of principal (and interest) are due. - Original maturity: maturity at issuance, indicating whether funds were raised in short-term or long-term markets. - Guide recommendation: - Calculate short-term liabilities based on residual maturity; if unavailable, original maturity may be used as an alternative and should be noted in metadata. - Note on interest rate mismatch: - Maturity may not capture interest rate repricing mismatches if repricing period is shorter than term to maturity (example provided in text). *Source: 2019 Financial Soundness Indicators Compilation Guide (selected excerpts, paragraphs 4.38–5.6)* ### 5.7 The balance sheet (known in IAS 1 as statement ### 5.7 The balance sheet (known in IAS 1 as statement of financial position) ### Balance sheet definition and solvency - The balance sheet is the statement of assets, liabilities, and capital at the end of each accounting period. - Assets comprise both nonfinancial and financial assets (including financial derivatives). - Liabilities include debt liabilities, financial derivatives, and general provisions. - The difference between the book value of assets and liabilities is known in the Guide as capital and reserves and coincides with the IFRS term “equity.” - Capital and reserves represent the “cushion” to absorb any losses arising from the income and expense statement, or for other reasons. - If liabilities exceed assets, then the entity is balance‑sheet insolvent. ### Off‑balance‑sheet items and monitoring - Some liabilities and assets of corporations are contingent on a certain event(s) occurring and are therefore recorded off‑balance sheet (see paragraphs 4.19–4.24). - Such items require monitoring to assess the full financial risk exposure of the corporation. ### Dependence of FSIs on accounting definitions - Measures of profitability and capital depend on the accounting definitions and recognition rules adopted. - The Guide defers to IFRS and to the banking supervision standards set by the Basel Committee on Banking Supervision (BCBS) in developing guidance on definitions. ### Measurement Frameworks (Box 5.1) - In determining the most relevant measurement framework for the compilation of FSIs, three basic standards can be drawn upon—national accounting, commercial accounting, and banking supervision. - National accounts data - The system of national accounts (SNA) consists of a coherent, consistent, and integrated set of macroeconomic accounts based on internationally agreed concepts, definitions, classifications, and accounting rules. - The SNA provides a comprehensive accounting framework of aggregated macroeconomic data. - Central to the development of national accounts and the related methodologies is the concept of residency; there are five resident institutional sectors and the rest of the world. - The main source of information on national accounting is the System of National Accounts 2008 (2008 SNA) (United Nations and others, 2008). - Other related methodologies include The Monetary and Financial Statistics Manual and Compilation Guide 2016 (MFSMCG) (IMF, 2016); Balance of Payments and International Investment Manual, sixth edition (BPM6) (IMF, 2009); Government Finance Statistics Manual 2014 (GFSM) (IMF, 20014); and External Debt Statistics: Guide for Compilers and Users (Bank for International Settlements and others, 2013). - International accounting standards - International Financial Reporting Standards (IFRS), formerly international accounting standards (IAS), are a series of standards for commercial accounting that provide concepts that underlie the preparation and presentation of financial statements of commercial, industrial, and business reporting enterprises, whether in the public or the private sector. - Over time, IFRS are replacing or supplementing IAS, with 17 IFRS and 25 IAS in force at end‑July 2018. - There may also be specific national accounting standards in jurisdictions that have not adopted IFRS, or that have included some national variations from IFRS. - The IFRS, including earlier IAS, are available from the International Accounting Standards Board (IASB), www.iasb.org. - Note: The effective date of IFRS was January 1, 2001. The IASs and IFRS are voluntary standards implemented by national authorities; adoption timing and local adaptations vary. - Banking supervision - The Basel Committee on Banking Supervision (BCBS) provides standards governing capital adequacy and the measurement of capital in relation to perceived credit and market risk. - Key BCBS publications referenced include: - “International Convergence of Capital Measurement and Capital Standards” (BCBS, 1988) - “Amendment to the Capital Accord to Incorporate Market Risks” (BCBS, 1996) - “International Convergence of Capital Measurement and Capital Standards: A Revised Framework” (Basel II, BCBS 2004) - “Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems” (BCBS 2010) - “Basel III: Finalizing Post‑Crisis Reforms” (BCBS 2017) - Supervisory reporting commonly prescribes treatments that may vary from IFRS with respect to classification and provisioning of loans and other assets, and requires detailed reporting on asset and liability items, including deposits and liquid assets. - Financial soundness indicators (FSIs) - Unlike commercial accounting and supervisory approaches which concern individual entities, the FSI framework, like the national accounts, focuses on aggregated sector information. - The FSI framework, like commercial and supervisory standards, favors a consolidated approach for financial corporations to avoid the double counting of capital and activity. - The Guide uses the national accounts concept “equity and investment fund shares” together with “net worth”; in the Guide, the term “equity and investment fund shares” is used only to denote equity assets. ### Sectoral financial statements and compilation guidance - Sectoral financial statements are shown on an institutional sector basis. - Income and expense statements and balance sheets for financial corporations have considerable overlap, but presentation and composition differ between DTs and subsectors of OFCs, with implications for FSI calculation. - It is not possible to aggregate separate information from individual institutional units to construct sectoral financial statements for NFCs and HHs; their data are sourced from SNA estimates. - The line‑item series defined are those required to calculate the FSIs set out in Chapters 7 to 10, either directly or as important building blocks. - To avoid duplication, each series is defined only once, even if it appears in multiple sectoral financial statements. - Data for NFCs aggregate and HHs are largely sourced from SNA estimates. - Compilers are encouraged to document any material differences between national practice and the Guide. ### Deposit Takers — key income and balance sheet line items (Table 5.1) - Income and Expense Statement (selected line items) - 1. Interest income - i. Gross interest income - ii. less Provisions for accrued interest on nonperforming assets - 2. Interest expense - 3. Net interest income (= 1 – 2) - 4. Noninterest income - i. Fees and commissions receivable - ii. Gains or losses on financial instruments - iii. Prorated earnings - iv. Other income - 5. Gross income (= 3 + 4) - 6. Noninterest expenses - i. Personnel costs - ii. Other expenses - 7. Provisions (net) - i. Loan loss provisions - ii. Other financial asset provisions - 8. Net income (before taxes) (= 5 – (6 + 7)) - 9. Income tax - 10. Net income after tax (= 8 – 9) - 11. Other comprehensive income (loss) net of tax - 12. Dividends payable - 13. Retained earnings (= 10 – 12) - 14. Total assets (= 15 + 16 = 23 + 31) - 15. Nonfinancial assets - 16. Financial assets (= 17 through 22) - 17. Currency and deposits - 18. Loans (after specific provisions) (= 18.i – 18.ii) - i. Gross loans - i.i. Interbank loans - i.i.i. Resident - i.i.ii. Nonresident - i.ii. Noninterbank loans - i.ii.i. Central bank - i.ii.ii. General government - i.ii.iii. Other financial corporations - i.ii.iv. Nonfinancial corporations - i.ii.v. Other domestic sectors - i.ii.vi. Nonresidents - ii. Specific provisions - 19. Debt securities - 20. Equity and investment fund shares - 21. Financial derivatives - 22. Other financial assets - 23. Liabilities (= 28 + 29 + 30) - 24. Currency and deposits - i. Customer deposits - ii. Interbank deposits - ii.i. Resident - ii.ii. Nonresident - iii. Other currency and deposits - 25. Loans - 26. Debt securities - 27. Other liabilities - 28. Debt (= 24 through 27) - 29. Financial derivatives and employee stock options - 30. General and other provisions - 31. Capital and reserves - 32. Balance sheet total (= 23 + 31 = 14) ### Deposit Takers — memorandum and supplemental series (Table 5.1) - Memorandum Series (selected supervisory-based and additional series) - 33. Tier 1 capital less corresponding supervisory deductions - 34. Common Equity Tier 1 capital less corresponding supervisory deductions - 35. Additional Tier 1 capital less corresponding supervisory deductions - 36. Tier 2 capital less corresponding supervisory deductions - 37. Tier 3 capital - 38. Other supervisory deductions - 39. Total regulatory capital (= 33 + 36 + 37 – 38) - 40. Risk-weighted assets - 41. Basel III total exposure measure - 42. High-quality liquid assets - 43. Total net cash outflows over the next 30 calendar days - 44. Available amount of stable funding - 45. Required amount of stable funding - 46. Large exposures - Series that provide a further analysis of the balance sheet (selected) - 47. Liquid assets - 48. Short-term liabilities - 49. Nonperforming loans - 50. Residential real estate loans - 51. Commercial real estate loans - 52. Geographic distribution of loans - 53. Foreign currency loans - 54. Foreign currency liabilities - 55. Net open position in foreign currency for on-balance-sheet items - 56. Total net open position in foreign currency - 57. Credit to the private sector - 58. Loan concentration by economic activity - 59. Reference lending rates - 60. Reference deposit rates - 61. Highest interbank rate - 62. Lowest interbank rate - Notes (selected) - To understand interconnections among DTs, separate identification of income and claims on other DTs in the reporting population is encouraged. - Interbank loans and deposits comprise those loans to or deposits from any other DT. Nonperforming interbank loans should be included in line 49. - If only gross loans data are available, including the accrual of interest on NPLs, any provisions for accrued interest on NPLs should be included in line item 18 and, if significant, separately identified. - Depending on the regulatory framework, memorandum lines 33–36 vary. - Sum of supervisory deductions not already deducted from the corresponding regulatory capital component is captured in line 38. - While individual country circumstances vary, data on the distribution of lending by regional groupings of countries are encouraged (see paragraph 8.9). *Source: IMF staff.* ### 29. Net worth (= 11 – 23 – 28) ### 29. Net worth (= 11 – 23 – 28) ### Definition and identity - Net worth is defined as: 11 – 23 – 28 (as labeled in the source tables). - For the sectoral balance sheet identity used in the Guide, the Balance sheet total is given by: 30. Balance sheet total (= 23 + 28 + 29 = 11). ### Guidance on interest accrual for nonperforming assets - The Guide recommends that an asset cease accruing interest upon its classification as nonperforming, and to subsequently record interest income only if the debtor makes an interest payment. - Paragraph 5.14: "The Guide recommends that interest on a nonperforming asset should be recorded on a cash payment, not accrual, basis. Interest income should not include accrued interest on nonperforming assets because doing so would overstate net interest income relative to the actual interest‑earning capacity of the DT." - Paragraph 5.15: "Table 5.1 includes the line items for gross interest income (line 1.i), including accrued interest on nonperforming assets, and provisions for interest accrual on nonperforming assets, (line 1.ii). The latter should be deducted from the former to eliminate the interest accruing on nonperforming assets in the interest income line. If the debtor subsequently pays interest on nonperforming assets to the DT, interest income should be recognized in the period when payments are received and, if significant, should be referred to in any accompanying explanatory documentation." - If any interest is accrued before an asset was classified as nonperforming, this accrual should be reversed. - If data are available only on interest income excluding interest accrual on nonperforming assets, then report only interest income (line 1 in Table 5.1). ### Income and expense concepts relevant to net worth - Net interest income: interest income less interest expense. - Net income (before taxes) and net income after taxes feed into retained earnings and hence capital and reserves, which are components of net worth. - Noninterest income includes fees and commissions, gains and losses on financial instruments (subject to exclusions described in the Guide), prorated earnings from associates/unconsolidated subsidiaries/reverse equity investments, dividends declared payable, gains or losses on sales of fixed assets, rental and royalty income, and compensation receivable. - Other comprehensive income (line 11 in relevant statements) includes items specified in IFRS (e.g., net change in unrealized gains/losses on financial assets at FVOCI, foreign currency translation gains/losses, gains/losses on derivatives designated as cash flow hedges, actuarial gains/losses on employee benefit plans, and changes in net unrealized gains/losses on equity securities designated at FVOCI). - Noninterest expenses cover all expenses other than interest expenses, including personnel costs, expenses for property and equipment, other operating expenditures, taxes other than income taxes (less related subsidies), fines and penalties, and premiums paid to a deposit insurance fund. - Loan loss provisions (net new allowances) reflect changes in expected credit loss (ECL) and are recognized consistent with IFRS 9 (12‑month ECL for instruments without significant increase in credit risk since initial recognition; full‑lifetime ECL if credit risk has increased significantly). - Other financial asset provisions cover ECL allowances on other financial assets within the scope of IFRS 9 (including securities at amortized cost) and net new supervisory provisions for market liquidity factors. ### Table 5.5 — Nonfinancial Corporations: Income and Expense Statement / Balance Sheet (selected line items) - Income statement lines: - 1. Revenue from sales of goods and services (excluding indirect sales taxes) - 2. Cost of sales - 3. Net operating income (= 1 – 2) - 4. Interest income - 5. Interest expenses - 6. Other income (net) - 7. Net income (before taxes) (= 3 + 4 – 5 + 6) - 8. Corporate income taxes - 9. Net income after taxes (= 7 – 8) - 10. Dividends payable - 11. Retained earnings (= 9 – 10) - Balance sheet lines: - 12. Total assets (= 13 + 14) - 13. Nonfinancial assets (13.i through 13.v) - i. Real estate property - ii. Equipment - iii. Intellectual property products - iv. Inventories - v. Other - 14. Financial assets (= 15 through 20) - 15. Currency and deposits - 16. Debt securities - 17. Equity and investment fund shares - 18. Trade credit - 19. Financial derivatives - 20. Other financial assets - 21. Liabilities (= 26 + 27 + 28) - 22. Loans - 23. Debt securities - 24. Trade credit - 25. Other liabilities - 26. Debt (= 22 through 25) - 27. Financial derivatives and employee stock options - 28. General and specific provisions - 29. Capital and reserves - 30. Balance sheet total (= 21 + 29 = 12) - Memorandum series (selected): - 31. Earnings before interest and taxes - 32. Total debt to nonresidents - 33. Total debt in foreign currency - 34. Debt-service payments (principal and interest) - 35. Interest income receivable from other nonfinancial corporations - 36. GDP ### Table 5.6 — Households: Income and Expenses / Balance Sheet (selected line items) - Sources of income and disposable income: - 1. Wages and salaries - 2. Property income receivable - 3. Current transfers (e.g., from government) - 4. Other - 5. Less taxes, including social security contributions, and other current transfers - 6. Gross disposable income (= 1 + 2 + 3 + 4 – 5) - Balance sheet lines: - 7. Total assets (= 8 + 9) - 8. Nonfinancial assets (= 8.i + 8.ii + 8.iii) - i. Real estate - ii. Consumer durable goods - iii. Other - 9. Financial assets (= 10 through 15) - 10. Currency and deposits - 11. Debt securities - 12. Loans - 13. Equity and investment fund shares - 14. Insurance, pensions, and standardized guarantee schemes - 15. Other financial assets - 16. Liabilities (= 19 + 20) - 17. Loans - 18. Other debt instruments - 19. Debt (= 17 + 18) - 20. Other liabilities - 21. Net worth (= 7 – 16) - Memorandum series (selected): - 22. Debt-service payments (interest and principal) - 23. Debt collateralized by real estate - 24. GDP ### Key arithmetic relations and memorandum items (as presented) - Net worth calculation notation: 29. Net worth (= 11 – 23 – 28) - Balance sheet total (sectoral identity): 30. Balance sheet total (= 23 + 28 + 29 = 11) - Memorandum items relevant to net worth and analysis include: 31. Liquid assets; 32. Estimated pension payments in the next 12 months; 33. GDP (for the nonfinancial corporations table, memorandum series includes 36. GDP; for households memorandum series includes 24. GDP). *Source: IMF staff.* ### 5.33 Nonfinancial assets are all economic assets ### 5.33 Nonfinancial assets are all economic assets ### Definition and general guidance - Nonfinancial assets are all economic assets other than financial assets. - Nonfinancial assets provide benefits to their owners but do not represent claims on other institutional units. - It is expected that balance sheets of DTs and OFCs show a small proportion of nonfinancial assets within the total. - Nonfinancial assets are further discussed when presenting the sectoral balance sheet for NFCs (paragraph 5.141). ### Nonfinancial assets specific to DTs - Some nonfinancial assets of DTs might be goods and real estate property acquired in the process of collecting impaired loans; these are not part of the fixed and other nonfinancial assets used in the normal conduct of business but are assets to be sold to (totally or partially) recover outstanding loans (paragraph 5.34). - For some financial instruments used by Islamic banks, Islamic banks may record nonfinancial assets used for leasing or installment sales agreements in relation to financial instruments, which can result in larger proportions of nonfinancial assets on the balance sheet compared to countries without Islamic banks (footnote 23). ### Financial assets: definition and primary classifications - Financial assets are a subset of economic assets that are financial instruments; most are financial claims arising from contractual relationships when one institutional unit provides funds or other resources to another (paragraph 5.35). - Creation of a financial claim simultaneously incurs a liability of equal value for the debtor. - Primary classifications in the Guide focus on instruments by functional type: - currency and deposits - loans - debt securities - equity and investment fund shares (assets) - financial derivatives - other assets/liabilities (paragraph 5.36) ### Currency - Currency consists of notes and coins of fixed nominal values issued or authorized by central banks or governments and is divided into domestic currency and foreign currency (paragraph 5.37). - Domestic currency is the legal tender issued by the central bank (or government) of the economy or of the common currency area to which the economy belongs. - Foreign currency represents claims on nonresident central banks or governments. - Gold and commemorative coins not in circulation as legal tender are classified as nonfinancial assets rather than as currency. ### Deposits: definitions, types, and volatility - Deposits are standard, non‑negotiable contracts open to the public representing placements of funds available for later withdrawal; they include claims on the central bank, government units, and some OFCs represented by evidence of deposit (paragraph 5.38). - Claims of one DT on another are excluded from deposits and recorded as interbank loans (paragraph 5.38). - Deposits comprise: - Transferable deposits: deposits exchangeable for banknotes and coins on demand at par and without penalty or restriction; directly usable for third‑party payments by check, draft, giro order, direct debit/credit, or other direct payment facility. - Nontransferable deposits: deposits that cannot be used for third‑party payments or have restrictions on number or size of such payments, including among others: - (1) sight deposits permitting immediate cash withdrawals but not usable for direct third‑party payments; - (2) savings deposits, which pay interest but cannot be used for direct payments to third‑parties; - (3) fixed‑term deposits, with maturities ranging from a month to a few years; - (4) non‑negotiable certificates of deposits; - (5) repayable margin payments in cash related to different financial contracts, such as financial derivatives; - (6) repurchase agreements that resemble a deposit where the DT is the cash‑taker (paragraph 5.38). - Volatility of deposits refers to the likelihood that depositors will, at short notice, withdraw funds in response to a perceived weakness in an individual DT or in the banking system; key factors include type of depositor, existence of insurance coverage, and remaining maturity (paragraph 5.39). - Deposits covered by credible insurance schemes are more likely to be a stable form of funding; longer remaining maturity generally implies greater stability, though low withdrawal penalties can reduce this effect (paragraph 5.39). - Customer deposits (used to calculate the ratio of customer deposits to loans) are defined primarily by depositor type: include all deposits placed by residents or nonresidents except those placed by financial corporations (resident and nonresident), central governments, and central banks. Deposits from excluded sectors may be included as customer deposits if penalties for withdrawal are high and remaining maturity is more than one year (paragraph 5.40). ### Loans: scope, classification, and special forms - Loans are financial assets created when a creditor lends funds directly to a debtor and evidenced by documents that are not negotiable (paragraph 5.41). - Collateral may be provided (financial or nonfinancial), though not essential; loans collateralized by real estate should be separately identified (paragraph 5.41). - Loan category includes commercial loans, overdrafts, installment loans, hire‑purchase credit, loans to finance trade credit, financial leases, and repurchase agreements (paragraph 5.41). - Undrawn lines of credit are not recognized as an asset and therefore not as loans; accounts receivable/payable are treated as a separate financial assets category and are excluded from loans (paragraph 5.41). - Loans to other DTs (resident and nonresident) are distinguished in Table 5.1 as interbank loans (line 18.i.i) and are attributed by sector on a residency basis (paragraph 5.41). - Loans that become negotiable are to be reclassified from loans to debt securities only with firm evidence of secondary market trading, existence of market makers, and frequent quotations; a transfer or one‑time sale to an SPV for securitization does not normally reclassify the loan (paragraph 5.42). - Finance leases: - A finance lease is a contract where the lessor (financial corporation providing financing) as legal owner conveys substantially all risks and rewards to the lessee, who becomes the economic owner (paragraph 5.43). - The lessor recognizes assets under a finance lease as a receivable equal to the net investment in the lease; payments are treated as finance income over the lease term based on a constant periodic rate of return (paragraph 5.43). - Repurchase agreements (repos) and gold swaps: - A repo is the provision of securities in exchange for cash with a commitment to repurchase the same or similar securities at a fixed price on a specified future date or with an “open” maturity (paragraph 5.44). - Repos convey legal ownership to the cash provider but economic ownership is retained by the cash taker; repos should be recorded as loans collateralized by the securities (paragraph 5.44). - Securities should remain on the balance sheet of the cash taker and a loan asset recorded for the cash provider; repos resembling a standard deposit (client is cash‑provider) should be classified as deposits (paragraph 5.44). - If securities acquired under a repo or securities‑lending arrangement are sold to third parties, the security taker should record a liability equal to the current market value of the sold security (short position) (paragraph 5.44). - A gold swap is similar to a repo and should be recorded as a collateralized loan (paragraph 5.45). - Securities lending: - Securities lending transfers ownership of the security to the borrower with agreement to return it; lender typically takes collateral in securities or cash (paragraph 5.46). - If cash is provided as collateral, treat arrangement like a repo, with securities remaining on the provider’s balance sheet. If non‑cash collateral is provided, ownership of both lent securities and collateral changes hands; borrowed securities are recorded on borrower’s balance sheet and collateral on lender’s balance sheet (paragraph 5.46). - Interbank loans: - Interbank loans are loans to other DTs, usually short‑term; they should be identified separately from other loans for FSI compilation and to monitor interbank exposures (paragraph 5.47). ### Loan loss provisions - Specific loan loss provisions are the outstanding amount of provisions made against the value of individual non‑performing loans, collectively assessed groups of loans, and non‑performing loans to other DTs in accordance with DT supervisory requirements (paragraph 5.48). - In some economies provisions are constituted against nonperforming and performing loans without separate identification; in such cases the Guide defers to the national legal framework, which should be documented in metadata (paragraph 5.48). - The Guide recommends reporting specific loan loss provisions as a negative asset item, netting from total gross loans (line 18.ii in Table 5.1) (paragraph 5.48). - The Guide recommends that interest on NPLs should not accrue, so specific loan provisions should not in principle include specific provisions for interest accrual on NPLs; if interest in suspense is included with specific provisions, this should be explained in metadata (footnotes and paragraph 5.48). ### Debt securities - Debt securities are negotiable financial instruments evidencing obligations to settle by providing cash, a financial instrument, or some other item of economic value, and give the holder an unconditional right to receive interest and/or principal payments (paragraph 5.49). - Debt securities include bills, bonds and debentures, commercial paper, negotiable certificates of deposit, asset‑backed securities, loans that have become de facto negotiable, preferred stocks or shares that pay a fixed income but do not provide for participation in residual value, bankers’ acceptances, and similar market‑traded instruments (paragraph 5.49). - If a conversion option of a bond into shares is traded separately, it is recorded as a separate asset classified as a financial derivative (paragraph 5.49). - Common types of debt securities: - (1) coupon basis — periodic interest (coupon) payments during life and principal at maturity; - (2) amortized basis — interest and principal paid in installments during life; - (3) discount or zero coupon basis — issued at price less than face value, all interest and principal paid at maturity; - (4) indexed basis — interest or principal tied to a reference index (price index, exchange rate index, or commodity price) (paragraph 5.50). - The Guide defers to IFRS regarding accrual of interest and classification and measurement of all types of debt securities (paragraph 5.50). *Source: 2019 FSI Guide — section 5.33–5.50 (2019‑fsi‑guide).* ### 5.51 Table 5.1, line 19, includes all the above instru‑ ### 2019-fsi-guide - 5.51 Table 5.1, line 19, includes all the above instru‑ ### Debt securities and instrument classification - Table 5.1, line 19, includes instruments under the heading of debt securities, while national practices may separately identify types such as mortgage‑backed securities, government securities, and securities considered to be of a liquid nature. - Debt is defined as the outstanding amount of actual current and non‑contingent liabilities that require payment of principal or interest by the debtor at some point(s) in the future. - For DTs, debt comprises financial liabilities that are deposits, loans, debt securities, and other liabilities. ### Equity - Equity comprises all instruments and records acknowledging claims on the residual value of a corporation after the claims of all creditors have been met. - Ownership of equity is usually evidenced by shares, stocks, participations, depository receipts, or similar documents. - Shares and stocks have the same meaning. - Participating preferred shares are equity securities whether or not income is fixed or determined by a formula. - Buybacks by a DT of its own equity securities reduce the number of equity securities outstanding. - Equity assets include equity investments in associates, unconsolidated subsidiaries, reverse equity investments, other equity investments in DTs, and (in domestic data) share capital provided to foreign branches. ### Investment fund shares - Investment fund shares comprise shares or units issued by money market funds (MMFs) and non‑MMF investment funds. - MMFs typically: - invest in low‑risk liquid money market instruments with a residual maturity of less than one year; - are often transferable; and - are often regarded as close substitutes for deposits. - Non‑MMF investment funds typically invest in longer‑term financial assets and possibly real estate. - MMF and non‑MMF investment fund shares or units represent a claim on a proportion of the value of an established investment fund. ### Financial derivatives — definitions, purpose, and valuation - Financial derivatives are instruments linked to another specific financial instrument, indicator, or commodity, through which specific financial risks (e.g., interest rate risk, foreign exchange risk, equity and commodity price risk, and credit risk) can be traded. - The value of a derivative depends on the price of the underlying item (the reference price), which may relate to a commodity, a financial asset, an interest rate, an exchange rate, another derivative, or a spread; the contract may refer to an index or a basket of prices. - Unlike debt instruments: - no principal amount is advanced that has to be repaid, and - no investment income accrues. - Uses include risk management, hedging, arbitrage, and speculation. - Gross market values for financial derivative assets and liabilities should be recorded on the balance sheet, and valuation gains and losses should be recorded in the income and expense statement. ### Types of derivatives: forward‑type contracts and options - Two broad types: - forward‑type contracts (forwards, futures, swaps, forward rate agreements, forward foreign exchange contracts); - options (calls and puts). - Key contrasts between forward‑type contracts and options: 1. At inception, an option involves payment of a premium and thus a non‑zero contract value; a forward‑type contract typically begins with zero value reflecting mutual net exchange of claims and obligations. 2. During the life of an option contract, the buyer is always the creditor and the writer always the debtor; for a forward‑type contract, either party can be creditor or debtor and classification may change over time. 3. At maturity, redemption for an option is determined by the buyer; for a forward‑type contract, settlement is unconditional. - A forward‑type contract is an unconditional agreement to exchange a specific quantity of an underlying item at an agreed strike price on a specified date; swap contracts involve exchanging cash flows based on reference prices. - Futures are forward‑type contracts traded on organized exchanges; forwards are OTC contracts, though clearing may occur through a central counterparty. Exchanges standardize terms and require margins. ### Contract valuation dynamics and special cases - At inception, forward‑type contracts typically have zero market value; market value changes as market rates and underlying prices change, and classification may change between asset and liability positions. - An off‑market swap has a nonzero value at inception due to reference rates priced differently from current market values ("off‑the‑market"); economically equivalent to a combination of a loan and an on‑market derivative. - Off‑market swaps should be recorded as two stock positions in sectoral balance sheets: a loan and an on‑market financial derivative. - Option contracts: purchaser acquires right to buy (call) or sell (put) at a strike price on or before a specified date; purchaser pays a premium to the writer; writer carries a liability and buyer an asset during the contract life; options may expire worthless. - Financial derivative contracts are usually settled by net cash payments rather than delivery; some, particularly involving foreign currency, are settled by delivery of underlying items. - Once a derivative reaches its settlement date, any unpaid overdue amount is reclassified as accounts receivable/payable; its value is fixed and the nature of the claim becomes debt. ### Embedded derivatives and accounting treatment - If an instrument contains an embedded derivative inseparable from the host: - For financial liabilities: the embedded derivative is accounted for separately (FVTPL) if not closely related to the host contract; examples include convertible bonds and securities with options for repayment in different currencies. - For financial assets: if the host falls within the scope of IFRS 9, there is no bifurcation and the entire instrument is measured in accordance with IFRS 9; if the host does not fall within IFRS 9 scope, the derivative is accounted for separately (FVTPL). ### Other financial assets and trade credit - Other financial assets/liabilities cover prepayments of insurance premiums and miscellaneous items due to be received or paid (e.g., accrued but unpaid taxes, dividends declared but not yet payable, purchases and sales of securities, rent, wages, social contributions, social benefits). - Trade credit and advances: - Mostly relevant to NFCs and separately identified in their balance sheets; for other sectors included in other financial assets/liabilities. - Consist of (1) trade credit extended directly by suppliers, and (2) advances for work in progress and prepayments by customers. - Trade credit does not include loans, debt securities, or other liabilities issued to finance trade credit; third‑party trade‑related loans are classified under loans. - Compilers are encouraged to separately identify significant allowances made against these assets. ### Provisions and presentation - General provisions for losses on financial assets and other provisions are presented as liability items and classified as a separate component (line 30 in Table 5.1), although they are "internal accounts" reflecting losses on assets rather than liabilities to creditors. - The Guide defers to national supervisory standards for allocation of allowances for ECL to general and specific provisions. - When provisions are created: - they are included in the income and expense statement as an expense (see paragraph 5.27); - the counterpart for created specific provisions reduces the net value of the relevant asset on the balance sheet; - the counterpart for created general provisions shows as a liability item in the balance sheet. ### Capital and reserves; regulatory capital (memorandum and supervisory series) - Capital and reserves are the equity interest of owners and equal total assets minus liabilities; represent the amount available to absorb unidentified losses. - Total capital and reserves include: a. Funds contributed by owners — valued as the nominal amount of proceeds from initial and subsequent issuances (not revalued). b. Retained earnings — valued at the nominal amount of retained after‑tax profits (not revalued). c. Current year result — accumulation of profit or loss since the beginning of the business year. d. General and special reserves — appropriations from retained earnings. - Under consolidated reporting at group level, capital and reserves attributable to minority shareholders in subsidiaries are included in capital and reserves. - Memorandum series: some series required to calculate FSIs are not directly available from financial statements and are included as memorandum items; they fall into (1) supervisory‑based series, and (2) series for further analysis of the balance sheet. - Supervisory‑based series are sourced from supervisory information because definitions conform to supervisory guidance; the Guide relies on BCBS definitions as implemented by national authorities and compilers should document national discretion. - Regulatory capital: - Banks are expected to have total regulatory capital of at least 8 percent of risk‑weighted assets, with specific minimums for components. - Under Basel I and Basel II: - Tier 1 capital comprises equity capital and freely available disclosed reserves and should reflect supervisory deductions (e.g., goodwill). - Tier 2 capital consists of instruments and reserves available to absorb losses but which might not be permanent or have uncertain values; Tier 2 and subordinated debt limits are described (Tier 2 and subordinated debt cannot exceed 100 percent and 50 percent, respectively, of Tier 1 capital). - Under Basel III: - Tier 1 is split into (1) Common equity tier 1 (CET1) capital, and (2) Additional tier 1 (AT1) capital; both measured net of supervisory deductions. - CET1 consists predominantly of common shares, retained earnings, accumulated other comprehensive income, and other disclosed reserves. - AT1 consists of subordinated instruments with fully discretionary non‑cumulative dividends or coupons, with neither a maturity date nor an incentive to redeem. - Supervisory deductions for total capital cover investments in unconsolidated banking and financial subsidiaries and, at national discretion, investments in capital of other banks and financial institutions. *Source: 2019 Financial Soundness Indicators Compilation Guide, excerpts from section 5 (sectoral financial statements).* ### 5.79 Tier 3 capital was introduced in the 1996 ### 2019-fsi-guide - 5.79 Tier 3 capital was introduced in the 1996 ### Tier 3 capital - Tier 3 capital was introduced in the 1996 amendment to Basel I (see paragraph 3.6). - At the discretion of national authorities, it can be used solely to support market risk. - It consists of medium-term subordinated debt. - It is limited to 250 percent of the bank’s Tier 1 capital. - Tier 3 capital is eliminated under Basel III. ### Supervisory deductions and goodwill - Supervisory deductions: - Cover goodwill and all other intangibles, as a deduction from Tier 1 capital (CET1 in Basel III). - With regard to total regulatory capital, cover investments in unconsolidated banking and financial subsidiaries and, at the discretion of national authorities, investment in capital of other banks and financial institutions, and other specified types of asset. - The data reported in Supervisory deductions (line 38 of Table 5.1) is the amount, if any, not already deducted from the components of regulatory capital Tier 1 (CET1 and AT1) and Tier 2, in accordance with paragraphs 5.76 to 5.78. - Goodwill: - Defined as the excess of the fair (paid) value for a business entity over the book value of the acquired net assets. - Accounting standard setters consider goodwill to be an asset. - As an intangible asset, goodwill is not available to absorb losses. - Note: Consistent with IFRS, if the cost of the acquired entity is lower than the market or fair value of its net assets (negative goodwill), any excess that remains after a rigorous valuation of the net assets acquired is a gain in profit or loss. ### Risk-weighted assets (RWA) - Arise from applying specified risk weights to all on- and off-balance-sheet assets in: - Basel I and the Standardized approaches in Basel II and III. - Approved methodology for risk modeling of specified assets in the internal-ratings-based approaches of Basel II (see paragraphs 3.32–3.36). - Assets are weighted by factors representing credit riskiness and potential for default. - Off-balance-sheet exposures are included via credit conversion factors (e.g., credit line commitments, letters of credit). - The calculation of RWA evolved from fixed coefficients for credit risk in Basel I to basic and more sophisticated methods measuring credit, market, and operational risks in Basel II and III. ### Differences between regulatory capital and sectoral balance-sheet capital - Both measures cover paid-in capital, reserves (disclosed and undisclosed), valuation adjustments, retained earnings, and current year result. Amounts posted to reserves can differ due to accounting and regulatory frameworks. - Regulatory capital can include general provisions (up to 1.25 or 0.6 percent of risk-weighted assets, in the standardized or advanced approaches, respectively). - Goodwill is deducted from regulatory capital, while in the sectoral balance sheet it is recorded as intangible assets and implicitly included in total capital and reserves. - Regulatory measure covers certain debt instruments, such as subordinated debt, which are classified as liabilities in the sectoral balance sheet measure. - At the sector level, only intragroup equity investments are excluded from the sectoral balance sheet measure; equity investments in DTs not within the same group are included. - Non-DTs may be consolidated for regulatory capital calculations (or investments deducted), but this is not preferred for sectoral balance-sheet calculations. - In absence of data on Tier 1 capital (units not subject to Basel guidelines), funds contributed by owners together with retained earnings (including earnings appropriated to reserves) could be used. ### Off-balance-sheet exposures and leverage - Off-balance-sheet exposures include contractual financial arrangements not defined as financial assets or liabilities, such as: - Commitments (including liquidity facilities), unconditionally cancellable commitments, direct credit substitutes, acceptances, stand-by letters of credit, trade letters of credit, failed transactions, and unsettled securities. - Off-balance-sheet items are a source of potentially significant leverage. ### Liquidity concepts (Basel III definitions) - High-quality liquid assets: - Defined in Basel III as unencumbered assets that can be converted easily and immediately into cash at little or no loss of value. - Basel III sets specific market-related characteristics and operational requirements for such assets. - Total net cash outflows: - Defined in Basel III as the total expected cash outflows minus total expected cash inflows in the specified stress scenario for the subsequent 30 calendar days. - Stable funding: - Defined in Basel III as the portion of equity and liability financing expected to be reliable over a one-year time horizon under conditions of extended stress. ### Liquid assets and short-term liabilities (Guide definitions) - Liquid assets: - Readily available assets to meet a demand for cash. - In the Guide, comprise (1) currency; (2) deposits and other financial assets available on demand or within three months or less; and (3) securities traded in liquid markets (including repo markets) that can be readily converted into cash with insignificant risk of change in value under normal business conditions. - Typically include securities issued by the government or the central bank in their own currency; in some markets, high credit-quality private securities may also qualify. - Short-term liabilities: - The short-term element of DTs’ debt liabilities (line 28 in Table 5.1) and the net (short-term, if possible) market value of financial derivatives positions (liabilities (line 29) less assets (line 21) in Table 5.1). - Short-term could be withdrawn on demand or within three months or less; preferably defined by remaining maturity, though original maturity is an alternative. ### Nonperforming loans (NPLs) and replacement loans - NPLs are defined as loans for which: 1. Payments of interest or principal are past due by 90 days or more; or 2. Interest payments equal to 90 days or more have been capitalized, refinanced, or rolled over; or 3. Evidence exists to reclassify them as nonperforming even without a 90-day past due payment (e.g., debtor files for bankruptcy). - The amount recorded as NPLs should be the gross value of the loan as on the balance sheet, not just the overdue amount. - Once classified as nonperforming, a loan (and/or any replacement loans) should remain classified as such until payments are received or the principal is written off on this or subsequent replacement loans. - Replacement loans: - Include loans from rescheduling or refinancing the original loan(s) (restructured loans) and loans provided to make payments on the original loan. - May be granted on easier than normal commercial terms; if terms are complied with and subject to national supervisory guidance, the replacement loan is no longer classified as an NPL. ### Real estate loan classifications - Residential real estate loans: - Loans collateralized by residential real estate: houses, apartments, other dwellings (e.g., houseboats and mobile homes), and associated land intended for occupancy by individual HHs. - Commercial real estate loans: - Loans collateralized by commercial real estate, loans to construction companies, and loans to companies active in real estate development (including multi-household dwellings). - Commercial real estate includes buildings, structures, and associated land used by enterprises for retail, wholesale, manufacturing, or similar purposes. ### Loan counterparties, geographic distribution, and foreign currency exposure - Counterparties to Total gross loans can be broken down by institutional sectors and nonresidents following the SNA sector classification: DTs (excluding central bank), central bank, OFCs, general government, NFCs, other domestic sectors (HHs and NPISHs), plus non-residents. - Geographic distribution of loans: - Attributed by residence of the immediate counterparty (country of residence of the debtor). - Regional classification encouraged, based on the IMF’s World Economic Outlook classification. - Foreign currency loans and liabilities (for DTs): - Include assets and liabilities denominated in a currency other than domestic currency, and those denominated in domestic currency but with amounts to be paid linked to a foreign currency (foreign currency linked). - By convention, instruments denominated in a foreign currency but with amounts to be paid linked to domestic currency (domestic currency linked) are also included in foreign currency loans and liabilities. - For related financial derivative liabilities, recommended to include the net fair value position (liabilities less assets) in foreign currency liability measure rather than gross liability. - Net open position in foreign currency: - Calculated by summing the net position for each foreign currency into a single unit of account (the reporting currency); described in more detail in Chapter 7 (paragraphs 7.77–7.83). ### Credit to the private sector and data sources - Credit to the private sector includes: - Gross loans extended by DTs to the private nonfinancial sector, plus debt securities issued by private NFCs and held by DTs. - Data should be compiled on a domestic consolidated basis. - Private sector comprises private NFCs, HHs, and NPISHs. - Alternative data source: - Standardized report form for other depository corporations used for transmitting monetary data to the IMF for International Financial Statistics. ### Other Financial Corporations (OFCs) and Money Market Funds (MMFs) - OFC sector: - Comprises a wide range of institutions performing financial intermediary or auxiliary activities outside the deposit-taking system. - Two FSIs for OFCs show the relative importance of OFCs within the domestic financial sector and the total economy; no sectoral financial statements are needed to calculate these two FSIs. - Specific FSIs should be compiled for three OFC subsectors requiring separate financial statements: (1) MMFs, (2) insurance corporations (ICs), and (3) pension funds (PFs) (Tables 5.2 to 5.4). - MMFs (Table 5.2): - Balance sheet dominated by financial assets largely comprising holdings of high-quality, short-term maturity debt securities. - Main liability is amount due to investors, entitled to receive the value of each share with accumulated income (or loss) or net asset value (NAV). - Total other comprehensive income (or loss) reported in an IFRS Statement of Comprehensive Income should be included in line 9. - Sectoral distribution of investments (as percent of total investments) indicates concentration and rough asset quality (higher proportion of government and central bank exposures suggests less risk). - Investment distribution is based on the 2008 SNA economic sectors: central bank, DTs, OFCs, general government, NFCs, and non-residents. - Liquidity profile of MMF investments monitored through maturity distribution as percent of total investments, split into: (1) from 1 to 30 days; (2) from 31 to 90 days; and (3) more than 90 days. Data preferably compiled on a remaining maturity basis; original maturity is an alternative. *Italic: Extracted from the Financial Soundness Indicators Compilation Guide (selected paragraphs 5.79–5.108).* ### 5.109 Summarized sectoral financial statements ### 5.109 Summarized sectoral financial statements ### Insurance corporations (ICs) — Income and expense - Table 5.3 presents summarized sectoral financial statements for ICs and memo‑randum items; statements should be compiled separately for life insurance and non‑life insurance (including reinsurance). - Premiums earned: - Main revenue source together with investment income. - Constitutes all premiums received and receivable (after deduction of any taxes or other duties levied on direct insurance premiums) recognized as income during the reporting period. - Report premiums earned (line 1 in Table 5.3) net of reinsurance ceded (line 1.ii) and including transfer of premium reserves from other insurers (line 1.iii). - Claims incurred: - Financial obligations to beneficiaries for risks realized by events during the period as defined by the policy. - Include gross claims paid during the period plus changes in reserves for claims outstanding and transfer of premium reserves to other companies (typically reinsurers). - Presented on a net basis, subtracting reinsurers’ share of gross claims. - Net change in technical reserves: - Expense item reflecting reserves for future claims for unearned premiums, life insurance, outstanding claims, and other technical reserves. - Other operating income: - Income not due to premiums or investments (e.g., commissions, rents on real estate holdings). - Other operating expenses: - Personnel costs, underwriting expenses, depreciation of non‑financial assets, and other operating costs not related to claims or investments. - Investment income: - Income from holdings of financial and nonfinancial (property) assets, associated with both unit‑linked and non‑unit‑linked products. - Presented net of interest cost on liabilities, property management costs, and income on unit‑linked products passed on to policyholders. - For non‑unit‑linked (non‑participating) insurance, ICs bear all investment risk and income; for unit‑linked (participating) insurance, investment income is passed through to policyholders. - Gains and losses on revaluation of financial assets: - Arising during the period; distinguish revaluations allocated to non‑unit‑linked insurance (appropriated by ICs) from unit‑linked insurance (appropriated by policy holders). - Net income before and after taxes: - Calculated similarly to DTs but adapted: relevant items include net income from insurance activity (premiums less claims less net change in technical reserves), net operating income, and net income on own investments. - Total other comprehensive income (or loss) reported in an IFRS Statement of Comprehensive Income should be included in line 13. ### Insurance corporations (ICs) — Balance sheet - Nonfinancial assets: - Include property for own use and property held for investment (generally real estate). - Investments in real estate may be channeled through real estate investment funds; claims on these funds are classified as equity and investment fund shares. - Reinsurance claims (assets): - Record reinsurance claims recoverable from reinsurers and claims on other insurers for reinsurance sold for which premiums have not yet been paid. - Insurance, pensions, and standardized guarantee schemes (liabilities): - Reserves covering: (1) life insurance and annuities entitlements (assets of HHs); (2) non‑life insurance payable for claims not yet settled or presented; (3) prepayment of non‑life insurance premiums not yet used; (4) pension fund reserves when ICs offer pension schemes; and (5) any other technical reserve. - Capital and reserves: - Represent equity interest of ICs’ owners, calculated as difference between total assets and total liabilities. ### Pension funds (PFs) — Income and expense - Table 5.4 presents summarized sectoral financial statements for PFs and memo‑randum items. - Investment income: - Main source of income for PFs: interest income on financial instruments, other income on financial instruments (e.g., capital gains on equity), income from investments in property, and net change in fair value of investments. - Defined benefit schemes: PFs bear gains and losses of investments because liabilities are defined by benefit. - Defined contribution schemes: PFs pass through gains and losses to pension beneficiaries. - Investment expenses: - Mainly expenses for managing investments and taxation of return on investments. - Net actuarial gains/losses: - Part of PFs’ net income; measure gains or losses from differences between long‑term estimates and actual events or changes in actuarial assumptions (e.g., mortality, salary increases, retirement rates). - Actuarial assumptions often subject to legal constraints and regulatory/supervisory approval. - Total other comprehensive income (or loss) reported in an IFRS Statement of Comprehensive Income should be included in line 10. ### Pension funds (PFs) — Balance sheet and entitlements - Nonfinancial assets: - PFs hold nonfinancial assets for own use and for investment purposes, mainly real estate. - Main liabilities: - Financial claims that existing and future pensioners hold against PFs to pay pensions — the net equity of households in pension funds reserves. - Reserves reflect extent of claims both existing and future pensioners hold against the PF. - Some schemes may have other related liabilities (e.g., health benefits) included under entitlements to non‑pension benefits; for pragmatic reasons, liabilities for non‑pension entitlements may be included with pension entitlements. - Measurement: - PF entitlements are measured as present value of amounts expected to be paid based on actuarial assumptions. - Reserves can be distinguished between: (1) defined contribution plans, (2) defined benefit plans, and (3) hybrid schemes. - Net totals: - Difference between total assets and total non‑pension‑related liabilities constitute net total assets of a PF. - Difference between net total assets and pension fund reserves is recorded as net worth of the PF (can be positive or negative). ### Pension funds — Memorandum series - Liquid assets of PFs comprise: (1) currency; (2) deposits and other financial assets available on demand or within one year or less; and (3) securities traded in liquid markets. - Guide recommends compilation of liquid assets on a remaining maturity basis (original maturity may be an alternative). - Estimated pension payments in the next 12 months: - Sum of actuarially expected payments to beneficiaries by PFs during the next year. ### Nonfinancial corporations (NFCs) — Overview and data sources - Data for sectoral income statements and balance sheet for NFCs are sourced from SNA financial accounts. - Aggregation: - Sectoral statements are estimates from national account data rather than sums of individual NFC financial statements; methodological and efficiency problems may arise when aggregating individual financial statements. ### Nonfinancial corporations (NFCs) — Income and expense - Table 5.5 sets out a simplified income and expense statement and sectoral balance sheet needed for additional NFC FSIs. - Operating income: - Revenue from sales of goods and services (excluding taxes on goods and services) less cost of those sales. - Cost of sales includes: (1) personnel costs; (2) cost of materials purchased; (3) depreciation of installations and equipment; (4) production overheads; (5) rentals on land, buildings, equipment; (6) royalties; (7) distribution costs (transportation, advertising); and (8) other production/sales costs (professional fees, insurance, R&D, taxes other than income tax). - Other income sources: - Net interest income (interest income less interest expense) and other income (net). - Interest income: remuneration on holdings of deposits and debt securities and loans made by NFCs. - Interest expenses: cost incurred for borrowed funds; accrued and payable on borrowings. - Other income (net): - Rents, rentals, royalties receivable/payable; income from holdings of shares and other equity; gains/losses on financial instruments and sales of fixed assets; amounts receivable/payable from compensation for damage or injury. ### Nonfinancial corporations (NFCs) — Balance sheet - Definitions of balance sheet series in Table 5.5 align with corresponding series in Table 5.1. - Total assets: - Comprise financial and nonfinancial assets (paragraphs 5.33 and 5.35). - Nonfinancial assets: - Distinguish between: (1) real estate property, (2) equipment, (3) intellectual property products, (4) inventories, (5) valuables, and (6) other nonfinancial assets. - Trade credit and advances: - Separately identified; include trade credit extended directly to purchasers and advances for work in progress or to be undertaken (e.g., progress payments, prepayments). Trade credit excludes loans, debt securities, or other liabilities issued to finance trade credit. - Equity and investment fund shares: - Include claims on associates, unconsolidated subsidiaries, reverse equity investments, and (for domestic‑basis data) share capital provided to foreign branches. - Capital and reserves (equity): - Claims of shareholders on residual value after creditors’ claims; presented at book value in sectoral balance sheet (difference between total assets and liabilities). SNA treats equity as a liability with difference between book value and market value recorded as net worth. ### Nonfinancial corporations — Memorandum series and ratios - Interest income receivable from other NFCs: - Amount of interest income (item 35 in Table 5.5) receivable from other NFCs in the reporting population. - Earnings before interest and tax (EBIT): - Defined as net operating income (item 3) plus interest income (item 4) plus other income (net) (item 6) less interest income receivable from other NFCs (item 35). Interest expenses are excluded. Interest receivable from other NFCs is deducted to avoid inflating sector earnings by intrasector income. - Total debt to nonresidents: - Outstanding actual (not contingent) liabilities requiring principal or interest payments owed to nonresidents by resident NFCs; compiled consistent with External Debt Statistics Guide. - Total debt in foreign currency: - Part of NFCs’ total debt with principal and interest payments denominated in a currency other than the domestic currency, regardless of creditor residence. - Debt‑service payments: - Interest and principal payments made on outstanding debt liabilities within the specified period; principal payments reduce outstanding debt; interest payments meet interest costs. ### Households (HHs) — Data sources and caveats - HH micro data typically from sample surveys subject to response and reporting errors; difficult to obtain reliable data on small unincorporated enterprises owned by HHs. - Survey aggregates must be adjusted for typical biases (e.g., underreporting of expenditure) and to be consistent with macro data; sectoral financial statements for HHs are sourced from SNA financial accounts. ### Households (HHs) — Income and expense - Table 5.6 provides a simplified sectoral financial statement for HHs for additional FSIs. - Main income sources: - Wages and salaries (gross of any income tax) from employment (cash or in kind) as component of compensation for employment. - Property income receivable (interest, dividends, rent) and current transfers (including from general government). - Other income: operating income from production activity (gross of consumption of fixed capital). - Gross disposable income: - Above income sources less current taxes on income and wealth, contributions for social insurance (e.g., old‑age insurance paid by HHs to general government), and other current transfers (e.g., fines, penalties, NPISH subscriptions). ### Households (HHs) — Balance sheet - Nonfinancial assets: - Mainly real estate, consumer durable goods, and other nonfinancial assets. Unincorporated enterprises may own other fixed assets but tend to be small relative to housing. - Financial assets and liabilities: - Correspond broadly to series defined in Table 5.1. - Insurance, pensions, and standardized guarantee schemes: - Represent contributions from HHs to life insurance, annuity, and pension entitlements — claims of HHs on ICs and PFs. - Household debt: - Total household debt comprises all loans to HH sector, including mortgage loans, consumer loans, credit card debts, and other debts. - Countries without HH debt data from SNA may consider mirror data from financial corporations sector and indicate so in metadata. *Source: 2019 Financial Soundness Indicators Compilation Guide — section 5.109 Summarized sectoral financial statements* ### 5.157 Net worth is defined as the value of the assets ### 2019-fsi-guide - 5.157 Net worth is defined as the value of the assets ### Definitions and memorandum series - 5.157 Net worth is defined as the value of the assets owned by HHs less their liabilities. - Memorandum series entries include: - 5.158 Household debt-service and principal payments are the debt service payments made by HHs on outstanding debt liabilities within a specified period of time. Such payments always reduce the amount of debt outstanding. - For long‑term debt instruments, interest costs paid periodically are defined as those to be paid by the debtor to the creditor annually or more frequently; for short‑term instruments, that is, with an original maturity of one year or less, interest costs paid periodically are defined as those to be paid by the debtor to the creditor before the redemption date of the instrument. - Debt collateralized by real estate covers all debt for which real estate is used as a form of collateral. This includes borrowing for the purchase, refinancing, or construction of buildings and structures (including alterations and additions to such), and for land. - Production within the HH sector takes place within enterprises that are directly owned and controlled by members of HHs, either individually or in partnership with others. When members of HHs work as employees for corporations, quasi corporations, or the government, the production to which they contribute takes place outside the HH sector. ### Aggregation, consolidation, and recording concepts - Aggregation: - 6.3 Aggregation refers to the summations of position or flow data. For sector‑level data, aggregation is the sum of the positions and flows of all individual reporting groups/entities within the sector. - Sector and subsector totals equal the sum of their component elements and preserve data on claims and liabilities among groups/entities of the sector, as well as total flows (e.g., all interest payments). - Group‑consolidation: - 6.4 Group‑consolidation refers to the elimination of positions and flows between units that are part of the same reporting group. - For FSIs, data are consolidated by reporting group at various levels; inclusion or exclusion of entities defines the consolidation basis explained in Section IV. - Gross and net recording: - 6.5 Gross recording presents assets and liabilities at full value (claims are not netted against liabilities to the same unit/group). - 6.5 Net recording offsets these assets and liabilities and is not recommended by the Guide; compilation on a net basis may be unavoidable due to lack of source data. - Compilation workflow: - 6.6 FSI compilation involves aggregation of group‑consolidated data. Reporting entities provide group‑consolidated data to the compiling agency, which aggregates these data to produce sector totals for the financial statements and the memorandum series as described in Chapter 5. ### Ownership, control, and reporting groups - Control (IFRS-based): - 6.9 Control exists when an entity is exposed, or has rights, to variable returns from its involvement with the corporation and has the ability to affect those returns through its power over the corporation. - Control is unambiguously established through ownership of more than half of the voting shares; control can also be established with ownership of less than half in exceptional cases (e.g., special legislation, “golden share”, loan arrangements). - Branches, subsidiaries, associates, and equity investment: - 6.10 Branches are operating entities without separate legal status and are integral parts of their parent corporations; a branch of a nonresident DT is identified for statistical purposes as a separate institutional unit. - 6.11 Subsidiaries are entities controlled by another entity; control is transitive through shareholding chains. - 6.12 Associates entail significant influence (usually between 10 and 50 percent of shareholders’ voting power) but not control. - 6.13 Equity investment or minority interest refers to holdings with less than 10 percent of voting power; if an equity stake reaches associate threshold for two successive periods, it is not considered temporary for FSI compilation purposes. - Joint arrangements: - 6.14 Joint arrangements are classified as joint operations (parties recognize their share of assets, liabilities, revenues, expenses) or joint ventures (parties recognize interest using the equity method). - Holding companies: - 6.15 Distinguishes unregulated holding companies (in principle excluded from DT sector and part of OFC sector) from holding companies subject to prudential regulation (treated as regulated parents providing consolidated supervisory data). ### Domestic and foreign control - 6.16–6.19 Definitions: - The Guide uses “domestically incorporated” to refer to both domestic and foreign controlled entities, focusing on jurisdiction of incorporation. - 6.18 Deposit‑taking entities are foreign controlled if subsidiaries or branches are of a foreign parent DT (controlled by non‑resident institutional units); they are domestically controlled if directly or indirectly controlled by resident shareholders. - 6.19 Where a parent is located in both domestic and foreign economies, such subsidiaries are classified as domestically controlled. Branches operating in a different economy than their parent are foreign controlled branches. - Supervisory consideration: - 6.20 If a resident DT is controlled by a non‑resident bank holding company that is subject to banking supervision in that foreign economy, it should be classified as foreign controlled. ### Consolidation basis and recommended practices - Consolidation basis overview: - 6.21 The consolidation basis determines the reporting population for FSI compilation and depends on ownership and control (branch, subsidiary, associate) and domestic/foreign control. - 6.22–6.25 Accounting, supervisory, and macroeconomic statistical frameworks have different consolidation perspectives: - Accounting standards take a conglomerate view (parent plus all subsidiaries). - Financial supervisory standards take a prudential view (often narrower or functionally defined, e.g., BCBS supervisory scope). - Macroeconomic statistical frameworks take an economic activity view at the institutional unit level and generally do not consolidate beyond that unit. - 6.26 The Guide uses different consolidation standards by institutional sector: for DTs and OFCs the standard is closer to financial supervisory approach; for NFCs and households the standard follows macroeconomic statistics. - Consolidation basis for Deposit Takers (DTs): - 6.27 The Guide recommends DT data be compiled on a consolidated group basis. Consolidated group reporting by a resident DT includes its own activities and those of its branches and financial subsidiaries (except insurance corporations), with intra‑group transactions and positions eliminated on consolidation. - Rationale: essential for banking supervision, preserves integrity of capital by eliminating double counting of capital (double gearing) and avoids double counting of income and assets from intra‑group activity. - 6.27–6.28 Consolidation for DTs has two fundamental dimensions: cross‑sector and cross‑border consolidation. - Cross‑sector consolidation involves a parent DT and its financial subsidiaries (DT and non‑DT). Inclusion of non‑DT subsidiaries (e.g., a leasing company or a money market fund) in group data is referred to as cross‑sector data and highlights group financial strengths and weaknesses because weak non‑DT subsidiaries might generate stress for DT parents. *Source: 2019-fsi-guide - 5.157 Net worth is defined as the value of the assets* ### 6.29 Cross-border consolidation involves a parent ### 6.29 Cross-border consolidation involves a parent ### Consolidation goals and supervisory alignment - Cross-border consolidation includes a parent DT and its resident and nonresident financial subsidiaries and branches; when such units are included in the group reporting, the data are referred to as cross-border data.13 - The Guide follows supervisory practice in excluding insurance companies from banking group consolidation because banking and insurance have different prudential standards; banking and insurance elements of a group should be reported as separate units.14 - The Guide’s recommended consolidation approaches are designed to be consistent with BCBS guidance on consolidated supervision and application of the same supervisory standards to domestic and foreign‑owned banks.15 ### Recommended consolidation basis: CBCSDI - The Guide recommends cross‑border, cross‑sector, domestically incorporated consolidation (CBCSDI) for compiling FSIs for DTs (paragraph 6.30). - Rationale: - Consistent with BCBS guidance for effective consolidated supervision. - Captures domestically incorporated DTs and their resident and non‑resident branches and subsidiaries as one economic group, providing an indication of financial soundness regardless of where business is undertaken (paragraph 6.33). - CBCSDI comprises: - Domestically incorporated, domestically controlled DTs including domestic branches and DT subsidiaries (D1); domestic financial non‑DTs subsidiaries, excluding insurance companies (D2); and their foreign branches (F1), foreign DT subsidiaries (F2), and foreign financial non‑DT subsidiaries, excluding insurance companies (F3). - Domestically incorporated foreign controlled DTs including domestic branches and DT subsidiaries (D3); domestic financial non‑DTs subsidiaries, excluding insurance companies (D4); and their foreign branches (F4), foreign DT subsidiaries (F5), and foreign financial non‑DT subsidiaries, excluding insurance companies (F6). - Policy recommendation: - For IMF reporting purposes, all relevant FSIs should be compiled using the recommended CBCSDI consolidation basis. - Reporting different FSIs using different consolidation bases may impact analysis of the DT sector’s soundness and should be avoided; where a different basis must be used, this should be clearly indicated in the metadata. ### Alternative consolidation bases and when they apply - Domestic location (DL) — secondary option (paragraph 6.30): - Appropriate for countries where DTs have (i) very few or no foreign branches or subsidiaries, and (ii) very few or no cross‑sector subsidiaries. - Compiling both CBCSDI and DL can help identify potential resilience of parent banks (DL) and vulnerabilities outside parent banks (CBCSDI). - DL includes both domestic‑ and foreign‑controlled, domestically incorporated DTs and domestic foreign bank branches (paragraph 6.35). - DL comprises: - Domestically controlled DTs including domestic branches and DT subsidiaries (D1). - Foreign controlled DTs including domestic branches, DT subsidiaries, and branches of foreign DTs (D3). - DL data generally aligns with supervisory reporting where consolidated reporting is not introduced and excludes cross‑border and cross‑sector entities (paragraph 6.36). - DL covers cross‑border and cross‑sector risks only indirectly via net profit/loss from unconsolidated operations; direct risks and benefits to DTs are not identified. - Cross‑border, cross‑sector, domestically controlled (CBCSDC) (paragraphs 6.31, 6.34): - Appropriate only where there are no material foreign‑controlled DTs. - Focuses on domestically controlled DTs and their ownership‑related entities (domestic and abroad). - CBCSDC comprises: - Domestically controlled DTs and domestic financial Non‑DTs subsidiaries, excluding insurance companies (D1, D2) and their foreign branches and subsidiaries (F1, F2, F3). - Risk: exclusion of foreign‑controlled domestically incorporated DTs can omit significant risks if those entities are material. - Other bases (CBDI, CBDC) and exceptional cases (paragraphs 6.37–6.38, 6.39): - CBDI (cross‑border, domestically incorporated) covers domestically incorporated DTs (both domestic and foreign controlled) and their resident and nonresident branches and deposit‑taking subsidiaries. - Compilers using non‑recommended bases should explain differences from the recommended consolidation basis in metadata. - Different consolidation bases change reporting populations and sectoral data, complicating cross‑country comparisons. ### Sectoral guidance beyond DTs - Other Financial Corporations (OFCs) (paragraphs 6.39–6.42): - FSIs measuring OFC subsectors (MMFs, insurance corporations, pension funds) are calculated on a residency and institutional basis (aggregated resident‑based approach); intra‑group consolidation is not applied. - For OFC with significant cross‑border activities, cross‑border consolidation may be relevant; recommended bases are CBDI or, where foreign‑owned corporations are few and small, cross‑border, domestically controlled consolidation basis (CBDC).19 - MMFs and pension funds: recommended aggregated resident‑based approach (no consolidation). - Insurance subsector: the Guide recommends CBDI consolidation (consolidated data for domestically incorporated, domestic and foreign controlled insurance companies, and their resident and nonresident insurance subsidiaries). - Nonfinancial Corporations (NFCs) and Households (paragraphs 6.43–6.44): - FSIs for NFC and household sectors are compiled using the aggregated resident‑based approach. - Residency‑based approach differs from DL: under residency‑based, headquarters and resident subsidiaries are separate institutional units (no consolidation), whereas DL may include subsidiaries in the parent reporting group. ### Intra‑group consolidation: mechanics and required adjustments - General (paragraph 6.45): - CBCSDI, CBCSDC, DL, and CBDI involve intra‑group consolidation; intra‑group consolidation must be detailed to ensure consistency between consolidated items and units. - FSI compilers typically rely on the reporting group to perform intra‑group consolidation but should understand broad consolidation adjustments, particularly for the DT sector. - A. Income statement consolidation adjustments (paragraph 6.46): - Offset intra‑group items to eliminate intra‑group transactions and gains/losses: - Provisions for accrued interest on nonperforming loans and loan (and other claims) loss provisions. - Fees and commissions receivable and payable. - Gains and losses on financial instruments issued by other entities of the group, including ownership of equity. - The investing DT’s prorated share of the earnings of its subsidiaries in the reporting group. - Any other intra‑group income receivable and expense payable. - Gross interest income and expense should, in principle, be consolidated; however, because net interest income is used in FSIs, consolidation of gross interest income and expense is, in principle, unnecessary if all units consistently record interest income and expense (net should be zero). - B. Balance sheet consolidation adjustments (paragraph 6.47): - Eliminate intra‑group positions for: - Claims on and liabilities to units of the deposit‑taking group: currency and deposits; loans; debt securities; financial derivatives; other claims and liabilities. - Specific provisions on loans to other units of the deposit‑taking group. - Equity investment in other units of the deposit‑taking group. - C. Memorandum series consolidation adjustments (paragraph 6.48): - Required adjustments to offset intra‑group claims/liabilities for memorandum items: - Regulatory capital (CET1, AT1, and Tier 2) should be adjusted for parent DT participation in subsidiaries; financial non‑deposit‑taking subsidiaries’ capital should be harmonized to banking supervisory concepts for consolidation purposes. - Financial instrument positions between group units should be risk weighted and deducted from total risk‑weighted assets of the group. - Nonperforming loans. - Foreign currency denominated loans and liabilities. - Other memo items, except liquid assets and short‑term liabilities (which represent potential for short‑term liquidity drain, even intra‑group). - D. Specific consolidation issues (paragraphs 6.49–6.50): - Complexity arises when the parent owns less than 100 percent of a subsidiary, when consolidating with an associate, or with deposit‑taking parents that have insurance subsidiaries. - Accounting (IFRS 10) generally requires full consolidation for subsidiaries and prorated consolidation for associates; supervisory approaches often diverge, particularly for financial conglomerates with both banking and insurance entities. - Supervisory reporting generally does not consolidate insurance subsidiaries of bank parents; compilers relying on supervisory data will follow national supervisory guidance and thus generally will not consolidate insurance subsidiaries of bank parents. *Financial Soundness Indicators Compilation Guide, section 6.29–6.50.* ### 6.51 When consolidating the activities of less ### Numerical Example on Intra-Group Consolidation (Annex) ### Consolidation principles and scope - Consolidation guidance defers to IFRS 10 for full consolidation of entities controlled by the parent; non‑controlling interests are reported within equity in the consolidated statement of financial position. - IFRS require the equity method to account for associates: the investment is initially recognized at cost and adjusted for the investor’s share of post‑acquisition changes in the investee’s net assets; the investor’s profit or loss includes its share of the investee’s profit or loss. - The example is based on the CBCSDI consolidation basis and includes a population of: - Deposit taker 1 (DT1): foreign controlled (no subsidiaries) - Deposit taker 2 (DT2): domestically controlled (parent) - Deposit taker 3 (DT3): domestic subsidiary of DT2 - Deposit taker 4 (DT4): foreign subsidiary of DT2 - Non‑deposit taker 1 (Non‑DT1): domestic subsidiary of DT2 - Non‑deposit taker 2 (Non‑DT2): foreign subsidiary of DT2 - CBCSDI includes all listed institutions. Examples of alternative bases: - CBCSDC basis would exclude DT1 (foreign controlled). - CBDI basis would exclude Non‑DT1 and Non‑DT2 (non‑deposit takers). ### Aggregation steps and table structure - The consolidation example uses three tables: - Table 6.1: Consolidation of Income and Expense Statements - Table 6.2: Consolidation of Balance Sheets - Table 6.3: Consolidation of Memorandum Series - Columns in the tables: - Columns A–E: DT2 group members (DT2, DT3, DT4, Non‑DT1, Non‑DT2) - Column F: DT2 group consolidated data (Step 1) — aggregated data minus consolidation adjustments - Column G: DT1 (no consolidation required) - Column H: Sectoral data (Step 2) = F + G ### Income and expense statement adjustments (Table 6.1) - Adjustments required to eliminate intra‑group transactions and related gains/losses among DT2 group members include: - Provisions for accrued interest on nonperforming assets (among entities in DT2 group) - Fees and commissions receivable/payable (among entities in DT2 group) - Gains and losses on financial instruments (among entities in DT2 group) - Prorated earnings (among entities in DT2 group) - Other income (among entities in DT2 group) - Noninterest expenses (among entities in DT2 group) - Provisions (among entities in DT2 group) - Selected exact figures from Table 6A.1 (Millions of US dollars): - Interest income (Step 1: DT2 Group Consolidated Data) = 1,919; DT1 = 859; Sectoral = 2,778 - Gross interest income (DT2 group consolidated) = 1,975; DT1 = 880; Sectoral = 2,855 - Interest expense (DT2 group consolidated) = 1,151; DT1 = 490; Sectoral = 1,641 - Net interest income (DT2 group consolidated) = 836; DT1 = 291; Sectoral = 1,137 - Noninterest income (DT2 group consolidated) = 2,227; DT1 = 533; Sectoral = 2,760 - Gross income (DT2 group consolidated) = 2,995; DT1 = 902; Sectoral = 3,897 - Noninterest expenses (DT2 group consolidated) = 2,527; DT1 = 840; Sectoral = 3,367 - Provisions (net) (DT2 group consolidated) = 326; DT1 = 0; Sectoral = 326 - Net income after tax (DT2 group consolidated) = 188; DT1 = –221; Sectoral = –33 - Retained earnings (DT2 group consolidated) = 188; DT1 = –221; Sectoral = –33 ### Balance sheet adjustments (Table 6.2) - Adjustments required to eliminate intra‑group financial assets and liabilities among DT2 group members include: - Deposits (among entities in DT2 group) - Interbank loans (among entities in DT2 group) - Non‑interbank loans (among entities in DT2 group) - Debt securities (among entities in DT2 group) - Equity and investment fund shares (among entities in DT2 group) - Financial derivatives and employee stock options (among entities in DT2 group) - Other financial assets (among entities in DT2 group) - Liability capital and reserves (among entities in DT2 group) - Selected exact figures from Table 6A.2 (Millions of US dollars): - Total assets (DT2 group consolidated) = 48,023; DT1 = 19,357; Sectoral = 67,380 - Nonfinancial assets (DT2 group consolidated) = 4,636; DT1 = 1,125; Sectoral = 5,761 - Financial assets (DT2 group consolidated) = 43,387; DT1 = 18,232; Sectoral = 61,619 - Currency and deposits (DT2 group consolidated) = 6,741; DT1 = 3,270; Sectoral = 10,011 - Loans (after specific provisions) (DT2 group consolidated) = 28,407; DT1 = 11,799; Sectoral = 40,206 - Gross loans (DT2 group consolidated) = 28,942; DT1 = 12,029; Sectoral = 40,971 - Specific provisions (DT2 group consolidated) = 765; DT1 = 0; Sectoral = 765 - Debt securities (DT2 group consolidated) = 6,192; DT1 = 2,660; Sectoral = 8,852 - Equity and investment fund shares (DT2 group consolidated) = 1,263; DT1 = 135; Sectoral = 1,398 - Total liabilities (DT2 group consolidated) = 41,897; DT1 = 16,960; Sectoral = 58,857 - Debt (DT2 group consolidated) = 41,086; DT1 = 16,912; Sectoral = 57,998 - Capital and reserves (DT2 group consolidated) = 6,126; DT1 = 2,397; Sectoral = 8,523 ### Memorandum series adjustments (Table 6.3) - Adjustments offsetting claims on and liabilities to entities of the group include: - Regulatory capital: Common Equity Tier 1 (CET1), Additional Tier 1 (AT1), Tier 2, and Tier 3 capital (participation of parent DT in subsidiaries’ regulatory capital) - Risk‑weighted assets: intra‑group claims deducted from total risk‑weighted assets of the group - Memorandum assets and liabilities (loans, debt securities, equity and investment fund shares, financial derivatives and employee stock options) deducted from group totals - Selected exact figures from Table 6A.3 (Millions of US dollars): - Tier 1 capital less corresponding supervisory deductions (DT2 group consolidated) = 4,103; DT1 = 1,925; Sectoral = 6,028 - Common Equity Tier 1 capital less corresponding supervisory deductions (DT2 group consolidated) = 2,714; DT1 = 1,348; Sectoral = 3,621 - Additional Tier 1 capital less corresponding supervisory deductions (DT2 group consolidated) = 1,829; DT1 = 578; Sectoral = 2,407 - Tier 2 capital less corresponding supervisory deductions (DT2 group consolidated) = 1,555; DT1 = 420; Sectoral = 1,975 - Total regulatory capital (after intragroup adjustment) (DT2 group consolidated) = 5,658; DT1 = 2,345; Sectoral = 8,003 - Risk‑weighted assets (after intragroup adjustment) (DT2 group consolidated) = 36,909; DT1 = 15,862; Sectoral = 52,771 - Value of large exposures (after intragroup adjustment) (DT2 group consolidated) = 1,394; DT1 = 620; Sectoral = 2,014 - Liquid assets (DT2 group consolidated) = 21,217; DT1 = 9,479; Sectoral = 30,696 - Short‑term liabilities (DT2 group consolidated) = 20,633; DT1 = 10,698; Sectoral = 31,331 - Nonperforming loans (after intragroup adjustment) (DT2 group consolidated) = 875; DT1 = 241; Sectoral = 1,115 - Residential real estate loans (DT2 group consolidated) = 4,320; DT1 = 2,220; Sectoral = 6,540 - Commercial real estate loans (after intragroup adjustment) (DT2 group consolidated) = 3,640; DT1 = 1,200; Sectoral = 4,840 - Foreign currency loans (after intragroup adjustment) (DT2 group consolidated) = 6,514; DT1 = 1,350; Sectoral = 7,864 - Foreign currency liabilities (after intragroup adjustment) (DT2 group consolidated) = 12,300; DT1 = 5,200; Sectoral = 17,500 - Total net open position in foreign currency (after intragroup adjustment) (DT2 group consolidated) = –2,333; DT1 = –1,400; Sectoral = –3,733 - Addendum: Geographical distribution of loans (selected exact figures, Millions of US dollars): - Total loans to nonresidents (DT2 group consolidated) = 6,176; DT1 = 1,080; Sectoral = 7,256 - Advanced economies (DT2 group consolidated) = 2,574; DT1 = 570; Sectoral = 3,144 - Emerging market and developing economies (DT2 group consolidated) = 3,602; DT1 = 510; Sectoral = 4,112 - Emerging and developing Asia (DT2 group consolidated) = 1,701; DT1 = 170; Sectoral = 1,871 - Middle East and Central Asia (DT2 group consolidated) = 1,350; DT1 = 285; Sectoral = 1,635 ### Aggregation and final compilation - Once consolidation adjustments are applied for income and expense, balance sheet and memorandum series, DT2 group consolidated data appear in Step 1 (column F). - Sectoral data used to compile FSIs appear in Step 2 (column H), aggregating the DT2 group consolidated data (column F) and DT1 data (column G). - The example demonstrates that the consolidation adjustments (eliminating intra‑group claims, liabilities, income, expenses, and capital participations) are necessary to derive sectoral series that are the basis for calculating FSIs. ### Relevant accounting principles for FSIs (Chapter 7 reference) - Underlying principles to apply when compiling series for FSIs: - Record transactions and positions on an accrual basis; recognize only existing actual assets and liabilities (paragraphs 4.10–4.13). - Valuation: market value preferred; for positions not designated for trading or available for sale, defer to IFRSs. - Provisions for loan losses comprise specific provisions created to cover identified non‑performing loans. - Convert foreign currency transactions/positions into a single unit using the market exchange rate (paragraphs 4.53–4.55). - Short‑term maturity is defined as three months or less (or payable on demand) (paragraph 5.93). - FSIs are compiled at the aggregated sector level as ratios where numerator and denominator are the sum of each DT group’s underlying series; they represent weighted averages for the whole financial system. *Source: IMF staff estimates.* ### 7.6 Most FSIs consist of ratios of two underlying ### 7.6 Most FSIs consist of ratios of two underlying series ### Data consistency, metadata, and compilation practice - FSIs are ratios of two underlying series; numerator and denominator must use data with the same periodicity and appropriate timing (flows recognized during the period, end‑period, or average period positions). - Definitions of underlying series may differ across countries; dissemination of FSI data should be accompanied by extensive metadata to ensure transparency and cross‑country comparability. - Unless otherwise stated, “line” comments refer to financial statements and memorandum items of Table 5.1 in Chapter 5. Annex 7.1 summarizes concepts, calculation methods, source data, and compilation issues of the core FSIs for DTs. - The Guide recommends compilation of 17 core FSIs for DTs as a minimum set covering the most critical measures of financial soundness. ### Regulatory Capital to Risk‑Weighted Assets (RWA) - Purpose: gauges DTs’ capital strength to withstand shocks and absorb unexpected losses. - Numerator and denominator: - Numerator: total regulatory capital (line 39). - Denominator: on‑ and off‑balance‑sheet assets weighted by risk (RWA) (line 40). - Definitions and source data: - Total regulatory capital and RWA defined in paragraphs 5.75–5.81 and paragraph 5.82, respectively; use regulatory standards and concepts that do not correspond directly to balance sheet capital and assets. - Compilers rely on national supervisory definitions of capital components and specification of risk weights. - Metadata should identify: (i) which version of the Basel Capital Accord has been implemented; (ii) use, if any, of national discretion elements in the Basel standards; and (iii) any variations from the applicable Basel standard (other than specified elements of national discretion). - Regulatory capital composition notes: - Regulatory capital is a supervisory definition developed by the BCBS and differs from accounting capital and reserve items. - Current year results generally are excluded; undisclosed reserves and valuation adjustments can be included in supplementary regulatory capital subject to restrictions. - Goodwill is deducted from regulatory capital. - The definition adds specified subordinated debt instruments and general provisions up to prescribed limits; supervisory deductions are applied to components of regulatory capital. - RWA calculation: - RWA covers credit, market, and operational risks and off‑balance‑sheet exposures. - The adopted regulatory framework (Basel I, II, or III) determines the specific calculation method: - Basel I: five pre defined factors for credit risk. - Basel II: additional factors, revised risk weightings in the Standardized Approach, and advanced approaches using internal models. - Basel III: more granular risk weights and alternatives to external ratings in the Standardized Approach. - Minimum requirements: - BCBS prescribed minimum regulatory capital of 8 percent of RWA for internationally active banks. - Basel III effectively raises this minimum to 10.5 percent through the introduction of the 2.5 percent capital conservation buffer. - National supervisors may require a higher ratio and have leeway in establishing standards. ### Interpretation and caveats (Box 7.1) - Changes in the Regulatory capital to RWA ratio can arise from: - Increasing capital (numerator), or - Reducing RWA (denominator) by restructuring portfolios toward less risky assets (for example, reducing lending and increasing holdings of low risk‑weight securities). - Example summary (graphical): Country A increased the ratio mainly by increasing total regulatory capital while exposures increased; Country B increased the ratio mainly by reducing exposure and switching to less risky assets (see Figure 7.1). ### Tier 1 Capital to Risk‑Weighted Assets - Purpose: focuses on core capital (Tier 1) and measures the most freely and immediately available resources to absorb losses. - Numerator and denominator: - Numerator: Tier 1 capital (line 33). - Denominator: RWA (line 40). - Definitions and standards: - Tier 1 and RWA defined in paragraphs 5.76, 5.77, and paragraph 5.82. - Under Basel I and II, minimum Tier 1 requirement is 4 percent of RWA; Basel III increased it to 6 percent. - Source data: - Consolidated Tier 1 capital and consolidated RWA of each DT group in the reporting population, based on supervisory concepts. - Metadata should describe national treatment of equity investments in other banks, other financial institutions, and insurance corporations, and indicate elements of national discretion or variations from the applied capital accord. ### Common Equity Tier 1 (CET1) Capital to RWA - Purpose: measures capital adequacy based on highest‑quality capital defined by Basel III (CET1). - Applicability: countries that have not adopted Basel III are not required to compile this indicator. - Numerator and denominator: - Numerator: CET1 capital (line 34). - Denominator: RWA (line 40). - Definitions and minimum: - CET1 concepts explained in paragraphs 3.27 and 3.32–3.35; defined in paragraphs 5.77 and 5.82. - Basel III established a minimum of 4.5 percent for the CET1 to RWA ratio. - Source data: consolidated CET1 capital and consolidated RWA of each DT group in the reporting population, based on supervisory concepts. ### Tier 1 Capital to Assets and the Basel III Leverage Ratio - Purpose: indicates financial leverage—extent to which assets are funded by other than own funds—and serves as a supplementary measure to risk‑based capital requirements. - Tier 1 capital to assets FSI: - Numerator: Tier 1 capital. - Denominator: total (nonfinancial and financial) balance sheet assets (unweighted). - Concepts of Tier 1 capital and total assets defined in paragraphs 5.76–5.77 and paragraphs 5.33–5.35. - Basel III leverage ratio: - For jurisdictions implementing Basel III, indicator should use the Basel III leverage ratio (paragraph 3.46). - Numerator: Tier 1 capital. - Denominator: Basel III aggregate “exposure”, which comprises all balance sheet assets (with add‑ons for potential future exposures of derivatives and securities financing transactions) and off‑balance‑sheet exposures (Supervisory‑based memorandum series). - Off‑balance‑sheet exposures include commitments, unconditionally cancellable commitments, direct credit substitutes, acceptances, standby letter of credit, trade letters of credit, failed transactions, and unsettled securities. - Items deducted from capital are also deducted from the measure of exposure. - Data sources: - Tier 1 capital source data discussed in the Tier 1 capital to RWA section. - Total assets data available from DTs’ balance sheets. - Capital measure required by the Basel III leverage ratio can be obtained from supervisory sources. ### Nonperforming Loans (NPL) ratios: concepts and calculation - Definitions: - Loans are nonperforming when payments of principal and interest are past due by 90 days or more, or interest payments corresponding to 90 days or more have been capitalized, refinanced or rolled over. - NPLs should also include loans with payments less than 90 days past due but with evidence classifying them as nonperforming (for example, debtor files for bankruptcy). - After classification as nonperforming, a loan (or any replacement loan) remains so until written‑off or payments are received on this or replacement loans. - Data on loans should exclude accrued interest on NPLs and lending among DTs in the reporting population that are part of the same group. - Specific provisions: - Provisions are defined as specific loan loss provisions against NPLs (line 18.ii). - Specific provisions refer to expected loss for loans classified as impaired under IFRS 9 or an approach consistent with national supervisory guidance. - Provisions for accrual of interest on NPLs should not be included under loan loss provisions. - The Guide relies on national practices to identify specific provisions; these practices should be documented in metadata. - Nonperforming Loans Net of Provisions to Capital - Purpose: gauges potential impact on capital of NPL portion not covered by specific provisions. - Calculation: - Numerator: NPLs (line 49) less specific loan loss provisions against NPLs (line 18.ii). - Denominator: total regulatory capital. - Capital measure: total regulatory capital (line 39; defined in paragraphs 5.75–5.80). In sector‑wide capital measurement, intra‑sector equity investments are deducted to avoid double counting; goodwill excluded. - Data sources: NPLs and specific provisions typically available from supervisory sources; national definitions may vary and should be documented. - Caveats: - The indicator requires use of specific provisions when netting from NPLs. Jurisdictions not distinguishing specific and general provisions (consistent with IFRS 9 ECL) may obtain negative values if total provisions exceed outstanding NPLs. - Where ECL is not allocated to specific and general provisions, use the subset ECL for non‑performing loans, if available, to calculate the FSI. - Nonperforming Loans to Total Gross Loans - Purpose: identifies problems with asset quality in the loan portfolio; increasing ratio signals deterioration in credit-portfolio quality. - Use together with NPLs net of provisions to capital and Provisions to NPLs for proper interpretation. - Nature: a lagging indicator, but useful to monitor trends over time and benchmark across jurisdictions. - Calculation: - Numerator: NPLs (line 49). - Denominator: total loans (including NPLs, before deduction of specific provisions) (line 18.i). - Denominator should exclude lending among DTs in the reporting population that are part of the same group. - Definitions and exclusions: - Total loans correspond to balance sheet concept after consolidation within the banking group, include loans to resident and non‑resident institutional units, and should exclude accrued interest on NPLs. - Deposits with the central bank and other financial institutions should not be part of the denominator even if national regulations classify them as loans. *Source: 2019 Financial Soundness Indicators Compilation Guide (selected excerpts).* ### 7.38 Information on loans should be available from ### 2019-fsi-guide - 7.38 Information on loans should be available from ### Information sources for loans and NPLs - Information on loans should be available from the consolidated balance sheet of the reporting group and supervisory sources. - Information on NPLs for the reporting population is typically available from supervisory sources, although national definitions on NPLs can vary. - Different legal frameworks may influence the length of time that NPLs must be kept on‑balance sheet, distorting cross‑country comparisons. - Example consequence: if banks are not allowed to write‑off loans—even when fully provisioned and losses already absorbed—until a legally established time has lapsed, balance sheets will indicate a more vulnerable situation than if those loans had been taken off‑balance sheet, without any effect on the solvency of the institutions. - Metadata availability is crucial where national frameworks differ. ### Provisions to Nonperforming Loans (FSI) - Purpose: gauges the extent to which NPLs are already covered by specific provisions; complements other NPL FSIs by measuring the amount of future losses that would be incurred if all NPLs were written‑off. - Calculation: - Numerator: specific provisions against NPLs (line 18.ii). - Denominator: NPLs. - NPLs and specific provisions are defined in paragraphs 5.94–5.96 and paragraph 5.48, respectively. - IFRS 9 considerations: - Loan loss allowance derived from IFRS9 are allocated to specific provisions and general provisions in line with national supervisory guidance. - In jurisdictions that treat all ECL as specific provisions, the subset ECL for non‑performing loans should be used for calculating the FSI. - This treatment should be documented in the metadata. - Compilation notes: - Source data and compilation issues are discussed also in the FSI nonperforming loans net of provisions to capital section. - Due to different national standards for classification of NPLs and constitution of loan loss provisions, disseminated data should be supplemented with detailed metadata on national supervisory rules for treatment of collateral in determining required provisions. - The previous discussion on general provisions applies equally here. ### Loan Concentration by Economic Activity (FSI) - Purpose: gauges credit risk associated with excessive concentration of credit in a specific domestic sector or activity; signals vulnerability if large aggregate credit exposure is concentrated. - Definition and classification: - Ratio of DTs’ lending to the largest three economic activities as a proportion of total gross loans to nonfinancial corporations. - Lending by economic activity based on ISIC Rev.4 at its higher level; if ISIC information is not available, use an equivalent national classification and indicate it in metadata. - Data on loans are gross (before deducting specific loan loss provisions) and include NPLs. - Additional information on the three economic activities with largest exposure helps interpretation. - Numerical example (Box 7.2): - Country A loans: Agriculture 170; Mining 155; Manufacturing 90; Total 1,000. - FSI_A = (170 + 155 + 90) / 1,000 = 415 / 1,000 = 41.5% - Country B loans: Mining 250; Construction 200; Accommodation 70; Total 1,000. - FSI_B = (250 + 200 + 70) / 1,000 = 520 / 1,000 = 52% ### Return on Assets (ROA) (FSI) - Purpose: provides information on DTs’ profitability relative to total assets and indicates asset management efficiency. - Calculation: - Quotient of net income and total (financial and nonfinancial) assets. - Preferred net income: before taxes (line 8) to facilitate cross‑country comparability. - Total assets (line 14) are not risk weighted and correspond to balance sheet concept. - Compilation guidance: - ROA is a ratio of a flow (income) to a stock (assets); compilers should report income annualization choice in metadata. - Denominator should be the average of stock of total assets during the reporting period; minimum: average of beginning and end‑period positions, encouraged: use most frequent observations available. - Net income composition and treatment: - Net income includes gains and losses on financial instruments valued at fair value through profit and loss, and gains and losses from the sales of fixed assets measured as difference between sale value and previous period balance sheet value. - Guide recommends interest income not include accrual of interest on nonperforming assets (paragraph 5.14). - Encourages inclusion of realized and unrealized gains and losses during each period on all financial instruments valued at FVTPL. ### Return on Equity (ROE) (FSI) - Purpose: measures DTs’ efficiency in using capital; indicates ability to internally generate capital via retained earnings and attractiveness for equity investment. - Calculation: - Quotient of net income (flow) and total capital and reserves (stock). - Compilers should report income annualization choice in metadata. - Recommendation: - Guide recommends net income after taxes (line 10) as it indicates net operating income available for capitalization and profit distribution. - Capital measure: - Total capital and reserves (line 31) defined in paragraphs 5.70–5.72. - Interpretation note: - Differences in capital structure and business mix across countries affect bank performance; higher leverage generally produces higher ROE, so ROE should be analyzed alongside other operating ratios. ### Interest Margin to Gross Income (FSI) - Purpose: measures share of net interest income within gross income; gauges importance of intermediation business. - Calculation: - Numerator: net interest income (line 3). - Denominator: gross income (line 5). - Net interest income and gross income definitions in paragraphs 5.13–5.16. - Guide recommends accumulating the flows from beginning of year until end of reporting period for both numerator and denominator. - Data sources and composition: - Data should be available from income statements and supervisory sources, subject to national accounting practice. - Interest income should not include accrual of interest on nonperforming assets (paragraph 5.14). - Gross income includes net interest income and other gross income (including realized and unrealized gains/losses on instruments at FVTPL). - Gains and losses on sale of an associate or subsidiary are excluded from gross income (paragraph 5.19). ### Noninterest Expenses to Gross Income (FSI) - Purpose: measures relation between non‑intermediation expenses (operating expenses) and gross income; often called the efficiency ratio. - Calculation: - Numerator: noninterest expenses (line 6, Table 5.1). - Denominator: gross income (line 5). - Recommendation: accumulate flows from beginning of year until end of reporting period. - Scope: - Noninterest expenses cover all expenses other than interest expenses; provisions are not included in noninterest expenses but separately identified (line 7). - Data considerations: - Data availability to supervisory sources may depend on national commercial accounting practice. ### Liquid Assets to Total Assets (FSI) - Purpose: indicates liquidity available to DTs to meet expected and unexpected cash outflows. - Calculation: - Numerator: liquid assets (line 47). - Denominator: total assets (line 14). - Liquid assets defined in paragraphs 5.90–5.92; nonfinancial and financial assets in paragraphs 5.33 and 5.35. - Data sources: - Data on liquidity should be available from supervisory sources; national approaches may vary and may require aggregation to calculate numerator and denominator. ### Liquid Assets to Short-Term Liabilities and Liquidity Coverage Ratio (LCR) (FSI) - Purpose: captures liquidity mismatch and extent to which DTs could meet short‑term withdrawals; jurisdictions with Basel III should compile both liquid assets to short‑term liabilities and LCR. - Liquid assets to short‑term liabilities calculation: - Numerator: liquid assets (line 47). - Denominator: short‑term liabilities (line 48). - Short‑term liabilities defined in paragraph 5.93: short‑term element (within three months or less) of DTs’ debt liabilities (line 28) plus net market value of financial derivatives position (liabilities line 29 less assets line 21); includes liabilities to other DTs in the reporting population. - Any positions within the same reporting group should be excluded. - Data challenges: - Short‑term liabilities are often available on original maturity but not always on remaining maturity basis; remaining maturity data might be available from supervisory sources. - Data on financial derivatives should be available from accounting records and supervisory sources; include net market value position (liabilities less assets) rather than gross liability position. - LCR specifics: - LCR measures ability to survive a 30‑day liquidity stress scenario. - Numerator: High Quality Liquid Assets (HQLA) (line 42, paragraph 5.85). - Denominator: net cash outflows calculated applying supervisor‑prescribed run‑off rates and funding availability assumptions (line 43, paragraph 5.86). - Jurisdictions should aggregate HQLA and total net cash outflows for each reporting group to derive system ratio. - Implementation challenges: scarcity of highly rated assets that meet Basel HQLA may produce national variations in HQLA definition; prescribed run‑off rates and funding assumptions may not suit all jurisdictions. - Metadata should note any national differences from the Basel LCR requirement. - Scope note: - If LCR applicable only to a subset of DT sector (e.g., large internationally active banks), compile LCR only for that subset; still compile liquid assets to short‑term liabilities for whole DT sector. ### Net Stable Funding Ratio (NSFR) (FSI) - Purpose: replicates Basel III NSFR; indicator of banks’ ability to withstand market disruption over a one‑year time horizon. - Calculation: - Numerator: available stable funding (ASF) (line 44, paragraph 5.87). - Denominator: required stable funding (RSF) (line 45, paragraph 5.87). - BCBS minimum requirement: this ratio should be equal to at least 100 percent on an ongoing basis. - ASF: - Portion of capital and liabilities expected to be available to fund operations over one year. - Calculated by applying supervisor‑prescribed factors reflecting stability of liabilities and capital. - Five buckets with stability factors ranging from 100 percent (capital and borrowings with residual maturities of more than one year) to 0 percent (highly volatile funding such as derivative liabilities). - RSF: - Measured based on liquidity risk profile of assets and off‑balance‑sheet exposures. - Calculated by applying supervisor‑prescribed factors approximating amount of each asset type and off‑balance‑sheet exposure that would have to be funded over one year. - Factors range from 0 percent (assets self‑funded such as central bank reserves) to 100 percent (assets encumbered for one year or more). *Source: IMF staff estimates.* ### 7.76 Source data for numerator and denominator ### 7.76 Source data for numerator and denominator ### Net Stable Funding Ratio (NSFR) — source data and compilation - NSFR elements are supervisory series reported in jurisdictions that have implemented Basel III. - If the NSFR has only been applied to a subset of the sector (for example, large internationally active banks), the NSFR should be compiled only for that subset. - For the compilation of the aggregated indicator: - Data on ASF and RSF calculated for each reporting group should be added, obtaining a ratio for the whole system. - As with the LCR, elements of NSFR may be subject to national variations. - Metadata should indicate if any elements vary from the Basel standard. - Annex 7.3 contains a numerical example on how to calculate the NSFR for one institution. ### Net Open Position in Foreign Exchange to Capital — purpose and interpretation - Intended to identify DTs’ exposure to exchange rate risk relative to capital. - Measures the mismatch (open position) of foreign currency asset and liability positions to assess the potential vulnerability of the DT sector to exchange rate movements. - Even if the sector as a whole does not have an open foreign exchange position, individual DTs or groups of DTs may have significant positions. - A matched currency position protects a DT against loss from movements in exchange rates, but it will not necessarily protect its capital adequacy ratio: if the domestic currency depreciates, a DT’s capital/asset ratio can fall even with completely matched foreign currency assets and liabilities. ### Numerator and denominator definitions and compilation guidance - Numerator: - Either the net open position in foreign exchange for on-balance-sheet items (line 55) or the preferred approach using total (including off-balance-sheet items) net open position in foreign currency (line 56). - Supervisory standards generally require inclusion of off-balance-sheet items, so the total (line 56) will generally be available to compilers from supervisory sources. - When disseminating data, it should be made clear which measure of the net open position is being employed. - Denominator: - Total regulatory capital (line 39). - Aggregation: - Data for the net open position in foreign exchange and total regulatory capital from each reporting group should be aggregated to estimate the indicator for the whole system. ### Components and measurement of the net open position - Calculation should follow BCBS guidance and includes: - The sum of the net position of on-balance-sheet foreign currency debt instruments. - Net positions in financial derivatives. - On-balance-sheet holdings of foreign currency equity assets. - Net future foreign currency income and expenses not yet accrued but already fully hedged. - Foreign currency guarantees and similar instruments that are certain to be called and are likely to be irrecoverable. - Depending on national commercial accounting practice, any other item representing a profit/loss in foreign currencies of the foreign currency positions set out in a single unit of account. - The Guide describes the sum of the first three items as the “net open position in foreign exchange for on-balance-sheet items.” - The extent to which the national approach to measuring the net open position varies from BCBS guidance should be disclosed in the metadata. ### Definition of foreign currency items and treatment of gold - Foreign currency items: - Those payable (receivable) in a currency other than the domestic currency (foreign currency denominated). - Those payable in domestic currency but with the amounts to be paid linked to a foreign currency (foreign currency linked). - Gold: - Although gold held by DTs is by definition a non-financial asset, due to its volatility and because DTs manage it similarly to foreign currency assets, the BCBS regards gold as foreign exchange when calculating this indicator. ### Aggregation method and shorthand calculation (BCBS) - To calculate the overall net open position: - The nominal amount of the net position for each foreign currency and gold is first converted into the reporting currency using the spot rate. - The overall net open position is then measured by adding the sum of the net short positions or the sum of the net long positions, whichever is greater, plus the absolute value of the net position in gold. - Example (from Table 7.1): - Net long positions by currency: 100 in yen + 200 in euro + 300 in pound sterling = 600. - Net short position in U.S. Dollar: −360. - Absolute value of net short position in gold: 70. - Overall net open position: 600 + 70 = 670. - Notes on method: - This method is the BCBS “shorthand” method; at supervisory discretion, DTs could use internal models. - This calculation method supersedes the 2006 Guide recommendation, which netted positive and negative open positions in foreign currencies and gold. - Table 7.1 (Example of Measuring the Net Open Position in Foreign Exchange) - Yen: +100 - Euro: +200 - Pound Sterling: +300 - U.S. Dollar: −360 - Gold: −70 - Net Open Position: +670 *Source: IMF Staff estimates.* ### 7.92 Under profit and loss sharing (PLS) arrange‑ ### 7.92 Under profit and loss sharing (PLS) arrangements ### Description of PLS arrangements - Resources of the IDTs and investors are often pooled to undertake commercial ventures and total returns are shared among the IDTs and the investors based on a predetermined profit sharing arrangement. - Profits earned could be disbursed during the life of the venture or upon its conclusion. - PLS arrangements can be generated by issuing securities called PLS certificates (often classified as “other Shariah‑compliant securities” – that is ‘other’ than Sukuk) that do not provide for either capital certainty or pre‑fixed positive returns. ### Role of PLS in the Islamic finance business model (context from 7.90–7.94) - The basis of Islamic finance is risk‑sharing between the parties in an underlying asset‑based transaction; profit and loss sharing activities are a distinguishing feature of IDTs. - IDTs are prohibited to pay interest and are funded by: - non‑promised ex‑ante return instruments (e.g., Qard, Wadiah, Amanah), - profit sharing investment accounts (PSIA) where returns are determined ex post by the profitability of the IDT or the pool of assets financed by these accounts. - On the asset side, IDTs engage in financing in the form of sales, lease, profit and loss‑sharing financing, and fee‑based services rather than interest‑based lending. - On the treasury side, derivatives and hedging instruments tend to have limited and slowly developing markets in many jurisdictions (see note in 7.90–7.93). ### Three broad modes of finance (7.93) - (a) Sale‑based contracts: - IDTs provide immediate delivery of goods or services; customers promise a series of deferred payments equal to cost plus a markup. - (b) Lease‑based contracts: - IDTs purchase assets and lease them to customers for instalments reflecting the cost of holding and maintaining the assets. - (c) Equity‑based or PLS contracts (Mudaraba and Musharaka): - IDTs provide funds to an enterprise in return for a share of the profits generated. - Mudaraba: enterprise operates the contract; IDT remuneration based on pre‑agreed profit/loss distributions. - Musharaka: more fully partnership arrangements in which the IDT can participate in enterprise decision making. ### Classification and instruments (refs to boxes 7.3 and 7.4) - Islamic financial instruments include (inter alia): Qard, Wadiah, Amanah; Mudaraba (Unrestricted and Restricted); Participation term certificates; Profit and loss sharing certificates and investment deposit certificates (such as Mudaraba certificates); Sukuk; Wakalah. - Key classification points (as presented in Box 7.3): - Qard, Wadiah or Amanah: typically classified as Transferable deposits/Other deposits (L.6). - Unrestricted Mudaraba: - Accepted without time frame → classified as Other deposits (L.6). - Accepted for a fixed period → classified as Other deposits (L.2). - Accepted for fixed terms via negotiable instruments (Mudaraba certificates) → classified as Debt security or Equity (L.2 if Debt security or L.12 if Equity). - Participation term certificates: Other deposits or Equity (L.2 if Other deposits or L.12 if Equity). - Profit and loss sharing certificates and Mudaraba certificates: Other deposits or Debt security (L.2). - Sukuk: Debt security or Equity (L.2 if Debt security or L.12 if Equity); generally classified as debt securities for FSI compilation unless owner has claim on residual value. - Wakalah: Off‑balance sheet (L.6) if agent does not bear risk and funds are not comingled. - Note: AAOIFI FAS terminology and Task Force of the IFSB positions inform these classifications; specific line item correspondences align with Table 5.1 in Chapter 5. ### Capital adequacy and regulatory treatment (7.95–7.99) - Computation of capital adequacy ratios (CAR) is similar to the BCBS formulae but with important variations in recognition of eligible capital, risk‑weighted assets, and treatment of PSIA; the IFSB has provided comprehensive guidance. - Eligible capital: - PSIA are analogous to deposits and should not be included in capital because they do not meet the requirement to constitute additional Capital (Tier 2). - Investment equalization reserves (IRR) and a portion of profit equalization reserves (PER) that belong to the equity of investment account holders (IAH) are not part of the capital of IDTs. - Any portion of a PER that is part of the IDT’s reserves should also not be treated as part of regulatory capital, since PER’s purpose is to smooth profit payouts and not to cover losses. - Some types of Sukuk might qualify for inclusion in regulatory capital: - Subject to Shariah approval, Musharaka Sukuk may be included as Additional Tier 1 if they meet loss‑absorbency requirements. - Mudaraba or Wakala Sukuk may qualify as Tier 2 capital if the underlying assets are convertible into common equity at the point of non‑viability or insolvency. - Risk‑weighted assets: - Islamic financial instruments are asset‑based (Murabaha, Salam, Istisna’a), equity‑based (Musharaka, Mudaraba), leasing‑based (Ijara), or Sukuk. - Asset‑based instruments bear market risk on underlying assets and credit risk in respect to counterparties. - When an asset is sold to its customer (Murabaha), risk exposure transforms from market risk to credit risk. - Risk‑weighting for equity‑based instruments: credit risk basis if loan‑like, market risk basis if equity‑like. - Sukuk risk‑weighting may differ by approach: trading‑book Sukuk subject to credit and market‑risk weighting aligned with conventional instruments; banking‑book Sukuk subject to supervisory discretion on the IRB measurement approach. - Profit Sharing Investment Accounts (PSIA) treatment: - Major difference from conventional DTs relates to PSIA loss absorbency: unless the IDT is guilty of misconduct or negligence, IAH are expected to bear losses of earnings or investments made with their funds, while the IDT bears operational costs and may experience net profit or loss. - For CAR calculation, the IFSB standard provides two formulas: standard and discretionary. - Standard formula: risk‑weighted assets (RWA) exclude assets financed by PSIA. - Supervisory discretionary formula: designed to account for displaced commercial risk (DCR) as determined at the supervisor’s discretion. - DCR arises when an IDT is under pressure to pay IAH a rate of return higher than would be payable under the “actual” terms of the investment contract to remain competitive and retain customers. - IDTs have discretion to set aside portions of profits under special reserves, namely PER and IRR (references to 35–36 for reserve purposes). *Source: IMF staff compilation from 2019 FSI Guide (section 7.92–7.99 and Box 7.3).* ### Box 7.4 Uses of Funds ### Box 7.4 Uses of Funds ### Mapping of Islamic financial instruments to balance sheet and income statement classifications - Qard - Description: A non-remunerative financing that is offered to needy individuals or for some social purpose. Debtor repays only the principal; debtor may at discretion pay Hibah as token appreciation. - Equivalent classification in the balance sheet: Loan - Classification of associated income in the income statement: L.1 - Murabaha - Description: Per AAOIFI FAS No. 2, a sale of goods at cost plus an agreed profit margin. IDT purchases goods on behalf of client; client makes deferred payments covering costs and agreed profit margin; disclosure of cost necessary. Resembles collateralized loans. - Equivalent classification in the balance sheet: Loans - Classification of associated income in the income statement: L.1 - Bai Muajjal - Description: Financing by supplying commodities or services with deferred payments; supplied commodities/services are from third parties. - Equivalent classification in the balance sheet: Loan - Classification of associated income in the income statement: L.1 - Bai Salam - Description: Per AAOIFI FAS No. 7, a short-term agreement where an IDT makes full prepayments for future delivery of specified goods on a specified date (e.g., farmers selling crops prior to harvesting). - Equivalent classification in the balance sheet: Loan - Classification of associated income in the income statement: L.1 - Istisna’a - Description: Per AAOIFI FAS No. 10, a partnership where IDT finances manufacture/construction and places an order; typically goods/buildings are for ultimate purchaser. If produced goods/buildings are for IDT’s own use, classify as trade credit and advance within Other accounts receivables. - Equivalent classification in the balance sheet: Loan/Other accounts receivables - Classification of associated income in the income statement: L.1 - Ijarah - Description: Lease-purchase; two types per AAOIFI FAS No. 8: Operating Ijarah (title not transferred; ownership risks borne by IDT) and Financing Ijarah (Ijarah Muntahia Bittamleek or Ijarah Wa Iktina — lease then transfer of ownership). - Equivalent classification in the balance sheet: Operating lease (Operating Ijarah); Financing lease—Loan (Financing Ijarah) - Classification of associated income in the income statement: L.4 (Operating lease), L.1 (Financing lease) - Musharaka - Description: Per AAOIFI FAS No. 4, a partnership where both IDT and enterprise contribute capital and share profits/losses per agreed ratios. Can be structured as (i) financing (IDT provides working capital without claim on residual value) or (ii) equity participation. - Equivalent classification in the balance sheet: Loan/Equity - Classification of associated income in the income statement: L.1 - Mudaraba - Description: Per AAOIFI FAS No. 3, a partnership where IDT provides capital and client provides skillful labor; profits shared per agreement; losses borne by IDT unless due to client misconduct. Has fixed-term nature and represents a fixed-term claim. - Equivalent classification in the balance sheet: Loan - Classification of associated income in the income statement: L.1 - Tawarruq (commodity Murabaha) - Description: Buyer purchases commodity from IDT on deferred basis and sells same commodity to third party on spot basis; effectively the buyer borrows cash. Also used on deposit side (Reverse Tawarruq). - Equivalent classification in the balance sheet: Loan - Classification of associated income in the income statement: L.1 ### Income and expense statement mapping for Islamic Deposit Takers (IDTs) - 1. Financing and investment income - i. Gross financing and investment income - o/w: sale-based (Murabaha, Bai Muajjal, Bai salam, Istina’a) - o/w: lease-based (Ijarah Muntahia bettamleek) - o/w: equity-based (Musharaka) - Investments on sharia-compliant securities - o/w Sukuk - ii. Less Provisions for accrued profit on nonperforming assets - 2. Expenses accrued on funding and investment - o/w: share of income attributable to on-balance sheet PSIA. - o/w: share of income taken as PER. - o/w: expense on Shariah-compliant securities issues - 3. Net financing and investment income (= 1 minus 2) - 4. Other income - i. Fees and commissions receivables - o/w: bank’s income for Wakala contract. - ii. Gains or losses on financial Shariah compliant instruments - iii. Prorated earnings - iv. Other income - o/w: rents from Ijarah - o/w: bank’s income as Mudarib from off-balance sheet RPSIAs - 5. Gross income (= 3 + 4) - 6. Expenses not related to funding and investment - i. Personnel cost - ii. Other expenses - o/w: depreciation - o/w: hibah - 7. Provisions (net) - i. Provision on financing, and receivable - ii. Other financial asset provisions - iii. Provision on non-performing investment - 8. Net income (before taxes) (= 5 – (6 + 7)) - 9. Income tax - 10. Net income after tax (= 8 – 9) - 11. Other comprehensive income (loss) net of tax - 12. Dividends payable on Shariah compliant instruments - 13. Retained earnings (= 10 – 12) ### Balance sheet mapping for Islamic Deposit Takers (IDTs) - 14. Total assets (= 15+16 = 23+31) - 15. Nonfinancial Assets - o/w: fixed assets held against Ijarah contracts - 16. Financial assets (= 17 through 22) - 17. Currency and deposits - o/w: Wadiah or Amanah - o/w: PSIA - 18. Financing (after specific provisions) - i. Gross financing (18.i – 18.ii) - i.i. Interbank financing - i.i.i. Resident - i.i.ii. Nonresident - i.ii. Noninterbank financing - i.ii.i. Central bank - i.ii.ii. General government - i.ii.iii. Other financial corporations - o/w: sale-based (Murabaha, Bai Muajjal, Bai salam, Istina’a) - o/w: lease-based (Ijarah Muntahia bettamleek) - o/w: equity-based or PLS contracts (Musharaka, Mudaraba) - i.ii.iv. Nonfinancial corporations (same items as reported for other financial corporations) - i.ii.v. Other domestic sectors (same items as reported for other financial corporations) - i.ii.vi. Nonresidents - ii. Specific provisions (same items as reported for other financial corporations) - 19. Debt securities - i. o/w: Sukuk holding - ii. o/w: Participation term certificates - 20. Equity and investment fund shares - 21. Financial derivatives - 22. Other financial assets - 23. Liabilities (= 28+ 29 + 30) - 24. Currency and deposits - i. Customer deposits - o/w: Qard, Wadiah and Amanah, - o/w: PSIA - ii. Interbank deposits - ii.i. Resident (same items as reported for customer deposits) - ii.ii. Nonresident (same items as reported for customer deposits) - iii. Other currency and deposits (same items as reported for customer deposits) - 25. Financing - o/w: Tawarruq/commodity murabaha - o/w: Other funding - 26. Debt securities - o/w: Sukuk issuances - o/w: Participation term certificates - 27. Other liabilities - 28. Debt (=24+25+26+27) - 29. Financial derivatives and employee stock options - 30. General and other provisions - 31. Capital and reserves - o/w PER attributable to owner’s equity - 32. Balance sheet total (=23+31 =14) ### Memorandum series and supervisory-based series required for FSIs - Memorandum Series for Balance Sheet IDTs (selected items) - 33. Tier 1 capital less corresponding supervisory deductions - Tier 1 capital is defined as mentioned in Chapter 5. - 34. Common Equity Tier 1 (CET1) capital less corresponding supervisory deductions - PSIA and PER allocated to shareholders are excluded. ### Key compilation and classification guidance and terminology - For FSI purposes, the term adopted to distinguish Islamic returns from conventional interest is “financing and investment income.” - Some core FSIs for DTs (e.g., margin between interest receipts and payments) do not apply to IDTs; profits from loan- and deposit-like instruments and Shariah-compliant securities are analogous to interest income/expense for mapping purposes. - The IFSB developed PSIFIs (Prudential and Structural Islamic Financial Indicators) and provided a PSIFI Compilation Guide (Revised Compilation Guide on Prudential and Structural Islamic Financial Indicators, March 2011) with a supplement issued in November 2014. - Classification notes: - Murabaha, Bai Muajjal, Bai Salam, Tawarruq, Mudaraba, Musharaka generally classified as Loans (L.1) for FSIs unless specific circumstances dictate otherwise. - Ijarah: Operating Ijarah treated as operating lease; Financing Ijarah treated as financing lease (Loan). - Istisna’a may be classified as Loan or Other accounts receivables depending on whether goods/buildings are for IDT’s own use. - Supervisory discretion and national standards: - Compilers should rely on national standards for FSI computation and document departures in metadata. - At time of publication, Islamic banks operate under Basel I, Basel II, or Basel III — the standard used should be described in metadata. *Source: IMF staff.* ### 35. Additional Tier 1 (AT1) capital less corresponding supervisory deductions ### 2019-fsi-guide - 35. Additional Tier 1 (AT1) capital less corresponding supervisory deductions ### Scope and specific capital items - "Additional Tier 1 (AT1) capital less corresponding supervisory deductions" — "Musharaka Sukuk may be included." - "Tier 2 capital less corresponding supervisory deductions" — "Mudaraba or Wakala Sukuk may be included in Tier 2." - "Risk-weighted assets" — "The risk-weights should be adjusted for the assets funded by PSIA." - Acronyms: IRR = investment risk reserve; PER = profit equalization reserve; PSIA = profit sharing investment accounts. ### Purpose and context - The Table provides guidance for national compilers preparing for the IDTs the Table 5.1 of Chapter 5. - Line-item series in this table are equivalent to those reported in Table 5.1 of Chapter 5 and are required to be reported by national compilers. - Details of calculation are in Annex 5.2 of the Monetary and Financial Statistics Manual and Compilation Guide. - Note: In some jurisdictions, net income should also exclude Zakah payment; its treatment should be analogous to tax. - Only selected memorandum series are shown from Table 5.1 Chapter 5 that require additional guidance for IDTs. ### Introduction to Additional FSIs for Deposit Takers (DTs) - This chapter explains calculation of additional FSIs for DTs referenced to Table 5.1. - "12 additional FSIs for DTs are recommended by the Guide" (listed in Table 1.1 and discussed in the chapter). - Annex 8.1 summarizes concepts, calculation methods, source data, and compilation issues for these additional FSIs. ### Large Exposures to Capital - Purpose: identify vulnerabilities from concentration of credit risk and potential negative impact on institutions’ capital when few counterparties default. - Calculation: - Numerator: value of large exposures (line 46). - Denominator: Tier 1 capital (line 33). - BCBS definitions and limits: - A large exposure is equal to or larger than "10 percent of its Tier 1 capital as defined in Basel III." - BCBS exposure limit to a single counterparty or group of connected counterparties: "25 percent of Tier 1 capital." - Aggregation guidance: - For sector aggregate, numerator is sum of large exposures after eligible credit risk mitigation techniques of each DT group; denominator is aggregated Tier 1 capital of all reporting DT groups. - Supervisory data are the source; national variations from BCBS should be disclosed in metadata. - Netting: large exposures are "Net of specific provisions." - BCBS reporting note: "Banks have to report their largest 20 exposures." ### Geographical Distribution of Loans to Total Gross Loans - Purpose: monitor geographical distribution of gross loans by regional grouping to assess cross-country credit risk exposures. - Calculation: - Numerator: loans to different geographical regions (gross loans to regional grouping of countries). - Denominator: total gross loans. - Reference to balance sheet: total loans described in paragraph 7.38; gross loans (line 18.i of Table 5.1) defined in paragraphs 5.41–5.43. - Residency and allocation rules: - Claims attributed on basis of residency of the entity on which DTs have claims (economic territory concept). - For cross-border consolidated data, lending attributed based on residence of the domestic reporting entity; foreign branches/subsidiaries' local lending classified as lending to nonresidents. - For domestic location consolidation, exclude intra‑group DT lending among reporting population; include DT branches and subsidiaries abroad as lending to nonresidents. - Suggested regional grouping (following IMF World Economic Outlook): - Advanced economies (Euro area; Major advanced economies (G7)) - Emerging market and developing economies (Emerging and developing Asia; Emerging and developing Europe; Latin America and the Caribbean; Middle East and Central Asia; Sub-Saharan Africa) - Compilers encouraged to track other significant regional groupings (examples: EAC, GCC). - Annex 8.2 maps countries to regional groupings; Box 8.1 provides grouping list. ### Gross Asset Positions in Financial Derivatives to Capital - Purpose: gauge exposure of DTs’ asset positions in financial derivatives relative to capital; gross positions provide comparability and capture counterparty risk. - Calculation: - Numerator: market value of financial derivative assets (line 21 in Table 5.1). - Denominator: capital measured as total regulatory capital (line 39). - Coverage: forwards, futures, options and swaps of currency or interest rates, swaptions, and combined derivative instruments. - Data sources: accounting records and supervisory sources; capital sources discussed in paragraphs 7.9–7.12. - Financial derivatives defined in paragraphs 5.55–5.65. ### Gross Liability Positions in Financial Derivatives to Capital - Purpose: gauge exposure of DTs’ liability positions in financial derivatives relative to capital; mirror of the gross asset positions indicator. - Calculation: - Numerator: market value of financial derivative liabilities (line 21). - Denominator: total regulatory capital (line 39). - Data and coverage considerations mirror those for gross asset positions. ### Trading Income to Gross Income - Purpose: capture share of DTs’ income generated from financial market activities (including currency trading) to assess business-model risk concentration. - Flow-based FSI: accumulate income from beginning of year until end of reporting period. - Calculation: - Numerator: gains or losses on financial instruments (line 4.ii of Table 5.1). - Denominator: gross income (line 5). - Definitions and coverage: - Gains and losses on financial instruments defined in paragraphs 5.19–5.21. - Gross income defined in paragraph 5.16. - Guide recommends inclusion of gains and losses during each reporting period on all financial instruments valued at market or fair value through profit and loss; excludes certain equity in associates/subsidiaries and designated FVOIC where no recycle is allowed per IFRS 9. - Numerator should be a net value (gains and losses netted). ### Personnel Expenses to Noninterest Expenses - Purpose: measure incidence of personnel costs in total noninterest (operating/overhead) expenses as an indicator of management efficiency. - Calculation: - Numerator: personnel costs (line 6.i in Table 5.1). - Denominator: noninterest expenses (line 6). - Definitions: noninterest expenses and personnel costs defined in paragraphs 5.25–5.26. - Data sources: accounting records; national practices affect conformance with Guide definitions. - Treatment of employee stock options: Guide recommends treating them as an increase in equity with corresponding expense equal to fair value when granted (see paragraph 5.63). ### Spread between Reference Lending and Deposit Rates (SLDR) - Purpose: indicator of intermediation income for DT sector; informs on pricing behavior and trends in net interest income. - Measurement: - Expressed in basis points. - Defined as difference between weighted average loan rate and weighted average deposit rate, excluding loans/deposits between DTs. - Two recommended measurement options: - Option 1 (preferred): calculate weighted average of all lending and deposit interest rates (excluding inter-DT) at highest available frequency during reference period (month or quarter); report the spread. - Option 2 (approximation, less computationally intensive): approximate weighted averages using: - interest income (line 1 of Table 5.1) divided by non‑interbank gross loans (line 18.i.ii of Table 5.1) for lending rate approximation; and - interest expense (line 2 of Table 5.1) divided by customer deposits (line 24.i of Table 5.1) for deposit rate approximation. - Compilers should note chosen approach in metadata. ### Spread between Highest and Lowest Interbank Rates - Purpose: indicator of perceived risk of lending among DTs; captures risk premium in interbank market. - Calculation: spread between highest and lowest interbank rates, measured in basis points. - Data-frequency guidance: - Interbank rates are usually short-term (overnight or weekly). - Guide encourages daily or weekly compilation of interbank rates for loans of the same maturity and averaging them for the reporting period (month or quarter) because perceptions can change quickly. *Source: IMF staff.* ### 8.27 The source of these data is usually interbank ### 8.27–8.46 Selected Additional Financial Soundness Indicators for Deposit Takers ### Customer Deposits to Total (Non‑interbank) Loans - Purpose and interpretation: - Measures the share of DT's gross loans (excluding interbank activity) funded through customer deposits, which are generally presumed to be more stable than wholesale funding through the inter‑bank market (paragraph 8.28). - A low value indicates greater reliance on non‑deposit funding and greater funding risk; more nuanced analysis requires detail on the customer deposit base to assess stability of deposit types (paragraph 8.31). - Calculation: - Numerator: customer deposits (line 24.i in Table 5.1) (paragraph 8.29). - Denominator: non‑interbank loans (line 18.i.ii) (paragraph 8.29). - Definitions and compilation guidance: - Customer deposits defined in paragraph 5.40; loans defined in paragraphs 5.41–5.43 (paragraph 8.29). - Supervisory sources typically provide data to compile customer deposits consistent with the Guide; sources for total loans follow those for the NPLs to total gross loans indicator; loans to other DTs should be available from supervisors (paragraph 8.30). - The Guide recommends depositor type as the primary factor in defining customer deposits. Customer deposits include all deposits (from residents and nonresidents) except those placed by other DTs and OFCs (resident or nonresident) (paragraph 8.32). - Customer deposits considered more stable include current accounts, time deposits with remaining maturity over one year, and deposits covered by deposit insurance schemes (paragraph 8.32). ### Foreign‑Currency‑Denominated Loans to Total Loans - Purpose and interpretation: - Measures one aspect of DTs’ exposure to exchange rate risk; particularly relevant where foreign‑currency lending is a significant share of total lending (paragraph 8.33). - High ratios increase credit risk for residents lacking foreign currency earnings; risk ameliorated when borrowers’ earnings are in foreign currency (paragraph 8.33). - Calculation: - Numerator: foreign‑currency and foreign‑currency‑linked part of gross loans (line 53 in Table 5.1) to residents and nonresidents (paragraph 8.34). - Denominator: gross loans (line 18.i) (paragraph 8.34). - Currency definitions and treatment: - Domestic currency is legal tender issued by the monetary authority for that economy; any other currency is foreign currency (paragraph 8.35). - In economies using a foreign currency as only legal tender, the FSI could be compiled excluding borrowing in, and linked to, that foreign currency (paragraph 8.35). - Foreign‑currency‑linked instruments payable in domestic currency but linked to a foreign currency should be considered as if denominated in that foreign currency (paragraph 8.35). - Foreign‑currency‑linked loans are included in the numerator because domestic exchange rate movements affect their domestic‑currency value; use the market (spot) exchange rate prevailing on the reference date for conversion, with the midpoint between buying and selling rates preferred (paragraphs 8.38, 4.55 reference). - Data sources and compilation issues: - Data should be available from supervisory sources, though foreign‑currency‑linked loans may be reported as domestic currency and not always separately identified (paragraph 8.36). - For cross‑border consolidated data, whether a currency is foreign is determined by the residence of the parent entity of the consolidated group; currency composition is determined by denomination of future payments (paragraph 8.37). - See paragraph 7.38 for sources on total loans (paragraph 8.36). ### Foreign‑Currency‑Denominated Liabilities to Total Liabilities - Purpose and interpretation: - Measures the relative importance of funding in foreign currency within total liabilities; should be considered together with foreign‑currency‑denominated loans to total loans (paragraph 8.39). - High reliance on foreign‑currency borrowing may increase exposure to exchange rate movements and funding reversals, or reflect residents’ mistrust in the domestic currency (paragraph 8.39). - Extensive foreign currency lending funded by borrowing in same currency can reduce DTs’ foreign exchange exposure; DTs remain exposed if domestic borrowers lack foreign currency income (paragraph 8.39). - Calculation: - Numerator: liabilities denominated in foreign currency (line 54 in Table 5.1) (paragraph 8.40). - Denominator: total debt (line 28) plus financial derivative liabilities (line 29) minus financial derivative assets (line 21) (paragraph 8.40). - Data sources and compilation issues: - Data on foreign‑currency‑denominated liabilities should be available from supervisory sources; total liabilities (line 23) may be sourced from accounting or supervisory data (paragraph 8.41). - If foreign‑currency‑linked loans comprise a significant volume of credit, data should be available from supervisory sources (paragraph 8.41). - Definitions of foreign currency, foreign‑currency‑denominated, and foreign‑currency‑linked instruments and exchange rate conversion are in paragraphs 4.52–4.56; foreign currency liabilities defined in paragraph 5.101; financial derivatives in paragraphs 5.55–5.62; liabilities in paragraph 5.35 (paragraph 8.42). - For total liabilities, the Guide recommends including the net market value position (liabilities less assets) of financial derivatives rather than gross liability position (paragraph 8.43). - In the special case where an economy uses a foreign currency as only legal tender, compile the ratio excluding positions in, and linked to, that currency (paragraph 8.43). ### Credit Growth to Private Sector - Purpose and interpretation: - Intended to capture emerging systemic risks and serve as a forward‑looking indicator of potential asset quality problems and vulnerabilities in the DT sector (paragraph 8.44). - Rapid credit expansion may exceed banks’ capacity to assess credit risks, leading to reduced asset quality and increased probability of default; can signal deteriorating underwriting standards (paragraph 8.44). - Excessive credit growth, especially if concentrated in a few sectors, indicates potential vulnerabilities; cross‑country empirical studies suggest banking crises tend to be preceded by credit booms (paragraphs 8.45–8.45 footnote reference) and the indicator can be used as input for macroprudential policies (paragraph 8.45). - Calculation: - Year‑over‑year growth rate of total credit to the nonfinancial private sector: difference between stocks of total credit at the end of the reporting period and 12 prior months, divided by the stock a year earlier; reported on a percentage basis (paragraph 8.46). - Definitions and data: - Credit to the private sector (line 57) defined in paragraph 5.103 and includes gross loans extended by DTs to the nonfinancial private sector, plus debt securities issued by private NFCs and held by DTs (paragraph 8.47). - Total credit is calculated on a gross basis, excluding provisions for doubtful loans or debt securities (paragraph 8.47). - Information typically available from accounting records and supervisory sources (paragraph 8.48). ### Box 8.2 — Co‑circulation (Dollarization) and FSIs - Co‑circulation description: - Occurs when a foreign currency is used in parallel with the domestic currency as means of payment and store of value; common foreign currencies include the United States dollar and euro (Box 8.2 opening). - Factors affecting degree of co‑circulation include legal framework, inflation variability, interest rate differentials, and exchange rate expectations (Box 8.2). - Some countries prohibit foreign currency deposits and loans; others accept them de jure or de facto; extreme cases adopt a foreign currency as only legal tender (Box 8.2). - Relation to FSIs: - Both FSIs on foreign‑currency‑denominated loans to total loans and foreign‑currency‑denominated liabilities to total liabilities may serve as gauges of co‑circulation (Box 8.2). - High ratios for these FSIs can also reflect high proportions of tourism or foreign trade in the economy (Box 8.2). - Empirical illustration: - Graphs constructed from data reported by countries for publication on the IMF’s FSI website show sample country evolutions of FC Loans to Total Loans and FC Liabilities to Total Liabilities (Box 8.2; figures and axes labels present in the source). *Italicized source attribution: 2019 Financial Soundness Indicators Compilation Guide (selected paragraphs 8.27–8.48, Box 8.2).* ### 8.51 Under accrual accounting, interest costs accrue ### 2019-fsi-guide - 8.51 Under accrual accounting, interest costs accrue ### Accrual accounting and interest rate measurement - Under accrual accounting, interest costs accrue continuously on debt instruments, thus matching the cost of funds with the provision of funds. - The rate at which these costs accrue is known as the interest rate; for deposits and loans it is typically established by contractual arrangement. - For compiling the SLDR, annualized interest rates should be calculated. - Contracted interest rates (i.e., price data) can be used to calculate weighted average interest rates for a given reference period, using the loan amounts as weights. ### Weighted‑average rate calculation and SLDR methodology - Method: divide accrued amount of interest income on loans reported by DTs for a given period (numerator) by the average position of loans (denominator) for the same period to obtain a weighted average lending rate. - Analogous method for deposits: divide interest expense on deposits (numerator) by the average position of deposits (denominator) for the same period to obtain the weighted average deposit rate. - Positions should be averaged using the most frequent observations available; frequent observations minimize mismatch between numerator and denominator. - Example for averaging positions: - If end‑month observations for December (200), January (100), February (200), and March (300) are used, then S_t is the sum of the four observations (800) and T is the number of observations (4), so the denominator would be 800/4 = 200. - SLDR based on end‑period rates: - Can be directly measured and, with appropriate metadata, provides reliable information. - Such a spread is calculated as the difference between the weighted averages of end‑period interest rates for the different types of loans and the different types of deposits (i.e., three‑month and six‑month). - Weights for each type of loan and deposit are calculated using end‑period position data. - The amount of accrued interest in the numerator depends on the time over which the associated loans are outstanding (e.g., a loan issued midway through the quarter: numerator should capture accrued interest over one and one‑half months only). ### Coverage, denominations, and valuation issues - Guide recommendation: compile at a minimum an SLDR for outstanding business, defined as the stock of deposits placed with DTs and the stock of loans extended by DTs, excluding deposits from, and loans to, other resident DTs. - Compilers need to ensure the numerator and the denominator cover the same set of DTs. - If loans or deposits in the denominator are valued at fair value, the implicit interest rate will move in line with changes in market rates. - This method could minimize reporting burden on DTs if data on accrued amounts of interest on loans and deposits are readily available from DTs’ accounting systems, given regular balance sheet reports to central banks. ### Treatment of nonperforming loans (NPLs) and prescribed lending - Guide recommendation on NPLs: - Interest should no longer accrue on nonperforming loans, resulting in an implicit interest rate of zero (Chapter 5). - Preferred approach for SLDR: include NPL positions (less specific provisions against NPLs) in the denominator and include zero interest in the numerator. - Benefit: reflects the adverse impact on DTs’ yield on assets of high volumes of NPLs. - Prescribed lending to priority sectors: - Guide prefers inclusion of such loans and the interest that accrues in the SLDR calculation, because excluding them could give a misleading indication of profitability. - If significant, another SLDR could be calculated that excludes prescribed lending and the average interest rate received; in such circumstances, also report the total amount of such lending. ### SLDR variants and subcategories - The Guide recommends, at minimum, SLDR for all outstanding business (excluding among DTs), but suggests supplementing with subcategory SLDRs where relevant: - both the nonfinancial corporations sector and the household sector; - both short‑term and long‑term (original maturity) interest rates; - peer groups, to ascertain pricing behavior of different subgroups within the total resident DTs; - both domestic and foreign currency business. - Countries could also compile an SLDR for new business (deposits placed with DTs and loans extended by DTs during the reference period, including rolled over or renewed loans and deposits) to reflect current market developments and DTs’ pricing behavior. ### Other Financial Corporations (OFCs) — indicators and consolidation basis - Chapter scope: defines FSIs for the OFCs sector and three subsectors (MMFs, ICs, PFs), calculation, data sources, and compilation issues. - Recommended consolidation/presentation: - Calculated on a residency and institutional unit basis; present aggregated resident‑based approach (unless cross‑border consolidation is relevant). - For ICs, compile additional FSIs consolidating parents with domestic and foreign branches and subsidiaries using a cross‑border, domestically incorporated (CBDI) consolidation basis. - For MMFs and PFs, compile additional FSIs following an aggregated resident‑based approach. - Two OFC sector size indicators: - OFCs’ assets to total financial system assets. - OFCs’ assets to GDP. - OFCs’ assets to total financial system assets: - Numerator: OFCs’ total assets. - Denominator: total financial system assets, excluding the central bank (includes DTs and OFCs, with specific table line references for subsector totals). - For subsectors (MMFs, ICs, PFs) the numerator is their total assets; denominator remains total financial system assets, excluding the central bank. - Data sources: aggregated balance sheets of resident institutions, estimates from supervisory authorities, or flow of funds accounts if necessary. - OFCs’ assets to nominal GDP: - Numerator: total assets of the OFCs sector. - Denominator: nominal GDP. - Source data: same numerator sources as paragraph 9.13; nominal GDP from national accounts. - Data compilation notes: - Aggregated total DT assets used here may differ from totals used when other consolidation bases are applied (e.g., CBCSDI, CBCSDC). - Data for OFC subsectors may be unavailable if units are unregulated or not required to submit information; compilers should coordinate with other agencies and seek formal arrangements for data transmission. ### Money Market Funds (MMFs) — key FSIs and risks - MMFs characteristics and systemic relevance: - Investors are shareholders entitled to receive value of each share with accumulated income; yield is not predetermined. - MMFs compete with banks for funds; investments generally not covered by deposit insurance. - MMFs invest in high‑quality, short‑term instruments (treasury bills, commercial paper, certificates of deposits, repurchase agreements). - MMFs can provide short‑term funding to DTs; runs on MMFs could impact DTs’ short‑term liquidity. - Some MMF assets may have maturities > 90 days while share accounts may be withdrawn on demand. - Guide recommends compiling two FSIs for MMFs to gauge credit and liquidity risk: - sectoral distribution of investments; and - maturity distribution of investments. - Sectoral distribution of MMFs’ investments: - Presents MMFs investments broken down into domestic economic sectors and non‑residents, following SNA sector groupings: central bank, DTs, OFCs (all, including MMFs), general government, and nonfinancial corporations. - Investment by sector is presented as a ratio to total MMFs’ investments. - Source data: sectoral balance sheets of MMFs identifying financial investments by counterpart economic sector; total investment calculated from the asset side of sectoral balance sheet (see Table 5.2). - If counterpart sectors are not identified, memorandum series must be compiled on sectoral distribution. - Sectoral analysis is a general measure of credit risk but does not provide intra‑sectoral risk detail (e.g., by industry within nonfinancial corporations). - Data availability: - Data for MMFs may vary by jurisdiction; compilers may obtain data from regulatory authorities or directly from MMFs; similar coordination considerations apply as for other OFC FSIs. *Source: 2019 FSI Guide (excerpts provided in the content unit).* ### 9.33 The FSI maturity distribution of MMFs’ ### 9.33 The FSI maturity distribution of MMFs’ ### Purpose and relevance - Provides a measure of the liquidity of MMFs’ investments by breaking down the maturity structure of assets of the MMF sector. - Highlights maturity transformation: MMFs’ assets typically have longer maturities than their liabilities, which may be withdrawn on demand. - Notes potential amplification of liquidity problems if DTs also have investments in MMFs, since DTs may withdraw funds from their share accounts with MMFs to avoid potential losses. - Useful beyond short‑term analysis to show how the maturity of MMFs’ assets is evolving through time, serving as an early warning of possible problems when the term structure is deteriorating. ### Definition and calculation - The FSI is defined as the distribution of MMFs’ assets in three maturity brackets: - 1 to 30 days, - 31 to 90 days, - and more than 90 days (see Table 5.2, line 25 i–iii). - Presented as a ratio: numerator = volume of assets invested in each maturity bracket; denominator = total investments of MMFs. ### Source data and compilation guidance - Requires additional information not contained in the sectoral balance sheet of MMFs (Table 5.2); memorandum series need to be reported by MMFs, breaking down their investments by maturity in the three brackets required for this indicator. - Compilers will need to rely on supervisory data or data collected directly from MMFs. - Coordinating reporting and data sharing of these supplementary series with the relevant supervisory authority is necessary, if any. - Preferred maturity measure is remaining maturity of MMFs’ asset holdings; if remaining maturity is not available, original maturity can be reported but this should be explained in the corresponding metadata. ### Extension to Non‑MMF Mutual Funds - Much of the earlier provided discussion also pertains to Non‑MMF Mutual Funds. - Countries are encouraged to compile similar FSIs for Non‑MMF Mutual Funds when they are significant domestically. - Non‑MMF Mutual Funds may present a wider range of financial stability issues because of: - diversity of their investments, - wide maturity range, - currency mix, - possible use of derivatives, - and possible withdrawal restrictions. --- ### Insurance Corporations (ICs) — overview and recommended FSIs ### Industry types and risks - Main types of insurance: life or long‑term insurance; and nonlife insurance (including reinsurance). - Guide recommends compiling specific FSIs separately for life and nonlife ICs. - ICs face two main types of risks: - (i) technical risks (actuarial/projection errors leading to insufficient premiums and understated liabilities; solvency and liquidity problems), - (ii) investment risks (market risks from interest rate, exchange rate, asset price changes; and counterparty credit risks). - Reinsurance is common and often cross‑border; it must be appropriately accounted for. ### FSIs to compile for ICs - Six FSIs to be compiled covering two broad categories separately for life and nonlife ICs: (i) capital adequacy and (ii) earnings and profitability. ### Shareholder equity to invested assets (life and nonlife) - Measures capital adequacy and leverage using a balance sheet measure. - Guide uses capital and reserves (line 30 in Table 5.3) defined as total assets (line 14) minus Liabilities (line 24) as numerator. - Denominator: sum of ICs’ holdings of currency and deposits, loans, debt securities, equity and investment fund shares, other financial assets, and financial derivatives (line 16 in Table 5.3), plus nonfinancial assets held for investment purposes (line 15.ii in Table 5.3). - Notes: unlike banking capital ratios, there is no accepted international standard for insurance capital adequacy; regional/national frameworks commonly require a ratio of 100 percent or above. - Source data: sectoral balance sheets of life and nonlife ICs on a CBDI consolidation basis (positions of domestically incorporated ICs vis‑à‑vis resident and nonresident IC subsidiaries should be eliminated). - Shareholder equity measured as accounting concept of capital and reserves (line 30 in Table 5.3); for CBDI consolidated data, investment in resident and nonresident subsidiaries is deducted to avoid double counting. - Denominator excludes nonfinancial assets not held for investment purposes and reinsurance claims. - Compilers will likely require supervisory data and should coordinate with the insurance supervisor if not the lead agency for FSIs. ### Combined ratio (nonlife insurance) - Calculated only for nonlife ICs. - Measures profitability of a given year’s insurance underwriting: combined ratio = (net incurred losses + underwriting expenses) / net earned premiums, expressed as a percent. - Interpretation: for nonlife insurers operating in a healthy market, this ratio should be less than 100 percent; combined ratios consistently over 100 percent signal risk mispricing and incentives to invest in riskier assets. - Calculation uses the sectoral income and expense statement of domestically incorporated nonlife ICs on a CBDI consolidation basis (eliminating intra‑group flows with resident and nonresident IC subsidiaries). - Components: - Net claims = total claims (line 2.i in Table 5.3) − claims paid by reinsurance (line 2.ii in Table 5.3). - Underwriting expenses = component of other operating expenses (line 7.ii in Table 5.3). - Net premium earned = gross premium earned (line 1.i in Table 5.3) − premium ceded to reinsurers (line 1.ii in Table 5.3). - If claims on reinsurance or premium ceded are not presented, supplementary memorandum series should be requested. - This FSI is a ratio of two flows; numerator and denominator should accumulate flows from the beginning of the year until the reporting period to avoid sudden fluctuations and improve cross‑country comparability. ### Return on assets (life insurance) - Intended to measure efficiency of life ICs in using their stock of assets. - Defined as a ratio: numerator = net income; denominator = total assets. - Preferred net income = net income before taxes (line 10 in Table 5.3) for comparability. - Denominator = total assets (line 14 in Table 5.3). - Source data: consolidated sectoral income and expense statement for net income and consolidated sectoral balance sheet for total assets; CBDI consolidation requires elimination of intragroup positions. - Net income includes: premiums earned (line 1) and investment income (line 8) as main sources; also gains/losses on revaluation of financial assets and liabilities (line 9); gains/losses from sales of fixed assets (line 5.iii); and net change in technical reserves (line 3). - Guide recommends investment income exclude accrual of interest on nonperforming assets and include realized and unrealized gains and losses on financial instruments valued at market or fair value through profit and loss, excluding equity in associates, subsidiaries, and reverse equity investments. - Being a flow-to-stock ratio, net income should be annualized; denominator should be an average stock of total assets over the annualization period or from the beginning of the calendar year until the reporting period, using the most frequent possible observations. ### Return on equity (life and nonlife insurance) - Calculated separately for life and nonlife insurance to reflect different capital structures. - Measures efficiency in using capital and ability to internally generate capital through retained earnings. - Defined as a ratio: numerator = net income; denominator = total capital (equity = capital and reserves, line 30 in Table 5.3). - For life insurance, net income is the same concept as for ROA. - Source data: consolidated sectoral income and expense statements and sectoral balance sheets; intragroup positions eliminated for CBDI consolidation. - Guide recommends using net income after taxes (line 12 in Table 5.3) as the numerator for ROE to measure sustainability and provide cross‑country comparability for investors. - Net income flows should be annualized; equity should be averaged over the annualization period or from the beginning of the year until the reporting period, using the most frequent observations available. --- ### Pension Funds (PFs) — recommended FSIs ### Role and risks - PFs hold large amounts of financial assets; sizable reallocations (e.g., between fixed income and equities) could have macrofinancial implications. - Guide recommends compiling two indicators to measure potential risks for PFs. ### Liquidity ratio - Intended to assess adequacy of liquid assets held by PFs to meet financial obligations arising from pension payments over a one‑year time horizon. - Defined as a ratio: numerator = PFs’ liquid assets (line 31 in Table 5.4); denominator = estimated pension payments for the next 12 months (line 32 in Table 5.4). - Pension payments are based on actuarial calculations. - Liquid assets: assets readily available to meet a demand for cash; must be convertible into cash at short notice, in large volumes, without substantially affecting price. - For this indicator, liquid assets are defined in paragraph 5.132. - Whether an instrument is considered liquid depends on judgment and market conditions; for securities, liquidity depends on the breadth of secondary markets. - Compilation issues for PF liquid assets are the same as those discussed for DT liquidity measures in Chapter 7 (see paragraph 7.66). ### Return on assets (PFs) - Indicates yield on investments net of costs of managing the fund. - Management costs are generally small relative to investment returns; ROA for PFs provides little insight into efficiency. - Interpretation: - For defined benefit schemes, a sound ROA—reflecting appropriately balanced risk and return—indicates PFs will be able to fulfill future pension obligations. - For defined contribution schemes, ROA affects the level of future benefits to be paid by PFs. *Specification of Financial Soundness Indicators for Other Financial Corporations* ### 9.76 This FSI is a ratio where the numerator is the ### 9.76 This FSI is a ratio where the numerator is the net income and the denominator is total assets of PFs ### Pension Funds’ Return on Assets — definition and recommended series - Definition: Ratio where the numerator is net income and the denominator is total assets of PFs. - Recommended numerator: net income before taxes (line 7 in Table 5.4). - Recommended denominator: balance sheet measure of total assets (line 11 in Table 5.4). - Total assets comprise financial and nonfinancial assets (sourced from the sectoral balance sheet of PFs compiled using a resident‑based approach). ### Pension Funds — source data and compilation specifics - Source data for net income: - Resident‑based sectoral income and expense statement of PFs (not consolidated). - Net income before taxes is calculated as: net investment income (investment income from own financial and nonfinancial assets less investment expenses) plus other income less total administrative expenses and plus the net actuarial gains or losses of the period. - Total assets source: - Sectoral balance sheet of PFs compiled using a resident‑based approach. - Accounting and supervisory approach: - Net income is calculated on an accounting and supervisory approach. - Long‑term assumptions on actuarial gains or losses are subject to supervisory approval, including changes in benefits. - Annualization and averaging conventions (parallel to ICs; see paragraph 9.63): - Net income should be accumulated from the beginning of the year until the end of the reporting period and then annualized. - Average total assets should make use of the most frequent available observations. ### Compilation issues and practical considerations for PFs - Resident‑based compilation (aggregation of individual financial statements without intragroup consolidation) is emphasized. - Availability and quality of data on net actuarial gains or losses may depend on supervisory approvals and long‑term assumptions. - Use of most frequent observations for average total assets is recommended to improve accuracy. ### Summary excerpts of related OFC indicators (contextual definitions and data notes) - Other Financial Corporations’ Assets to Total Financial System Assets: - Definition: Ratio of OFCs’ total assets to total financial system assets. - OFC subsectors include money market funds (MMFs), other investment funds, insurance companies, pension funds, other financial intermediaries, and financial auxiliaries. - Source: Aggregated sectoral balance sheets. - Compilation issues: total financial and nonfinancial assets provide more comprehensive coverage; data availability if some subsectors are unregulated or do not report financial information; coordination and data sharing with other supervisory agencies. - Other Financial Corporations’ Assets to GDP: - Definition: Ratio of OFCs’ total assets to gross domestic product. - Sources: Aggregated sectoral balance sheets; National accounts, for nominal GDP. - Compilation issues: indicator is a ratio of a stock divided by a flow; data availability and coordination issues as above. - Sectoral Distribution of MMFs’ Investments: - Definition: Percentage distribution of MMFs’ assets between central bank, deposit takers, OFCs (including MMFs), general government, nonfinancial corporations, and nonresidents. - Source: Sectoral balance sheets of MMFs; memorandum items may be needed if counterpart sector not identified. - Compilation issues: indicator does not measure risk within a sector; coordination with supervisory agencies or industry; data availability if MMFs unregulated. - Maturity Distribution of MMFs’ Investments: - Definition: Percentage distribution of MMFs’ assets into maturity brackets: 1–30 days; 31–90 days; and more than 90 days. - Source: Supplementary information directly provided by MMFs; remaining maturity recommended (original maturity can be used if remaining maturity unavailable). - Insurance Corporations’ Shareholder Equity to Total Invested Assets (life and nonlife insurance): - Definition: Ratio of insurance corporations’ shareholder equity to total invested assets. - Source: Consolidated sectoral balance sheet of insurance corporations. - Compilation issues: cooperation with supervisory agencies may be required; for CBDI data, investment in resident and nonresident subsidiaries has to be deducted from capital; total invested assets include nonfinancial assets held for investment purposes. ### Nonfinancial sectors — NFCs: purpose and data sourcing - Scope: Nonfinancial sectors comprise nonfinancial corporations (NFCs), households, and real estate markets. - Compilation approach for NFCs and households: resident‑based approach (data cover only resident institutional units without intra-group consolidation adjustments). - Data sources for NFC FSIs: - National accounts‑based data (flow of funds accounts or similar). - Specific surveys covering a representative sample of the sector (see Box 10.1 example of the European Central Balance Sheet Data Offices). - Limitations: compilers normally do not have access to accounting records of individual NFCs; frequency and timeliness challenges; series may not eliminate intra‑group positions and flows unless sourced on a consolidated basis (to be noted in metadata). ### Key NFC FSIs — definitions, numerators, denominators, and source notes - Total Debt to Equity: - Purpose: measures corporate leverage (debt as a share of capital and reserves). - Numerator: debt (line 26 in Table 5.5) — outstanding amount of actual current and non‑contingent liabilities (paragraph 5.69). - Denominator: capital and reserves (line 29 in Table 5.5) — accounting concept defined in paragraph 5.144. - Source: resident‑based data from national accounts or representative samples; equity investments in associates and subsidiaries recorded on investor’s proportionate share basis (not market value). - External Debt to Equity: - Purpose: measures NFCs’ exposure to nonresident creditors. - Numerator: total debt to nonresidents (line 32 in Table 5.5). - Denominator: capital and reserves (line 29 in Table 5.5). - Sources: external debt statistics (full‑sector breakdown) or the International Investment Position (IIP); if sourced from IIP, identify liabilities by instrument and deduct OFC items where necessary. - Compilation note: if FSI and external statistics are compiled by different agencies, data sharing arrangements are encouraged. - Foreign Currency Debt to Equity: - Purpose: gauges NFCs’ total debt in foreign currency to residents and nonresidents relative to capital and potential foreign currency risk exposure. - Numerator: total debt in foreign currency (line 33 in Table 5.5). - Denominator: capital and reserves (line 29 in Table 5.5). - Definitions referenced: debt (paragraph 5.69); capital and reserves (paragraph 5.144); foreign currency (paragraph 5.37). - Source guidance: external debt statistics, IIP, and IMF standardized report forms (SRFs) for monetary and financial statistics can be useful where applicable. - Compilation note: FSIs for NFCs are compiled on a resident‑based approach; foreign currency debt among resident group members is included. *Source: 2019 FSI Compilation Guide (excerpts from paragraphs 9.76–9.80, annex listings, and Chapter 10 excerpts).* ### 10.22 The FSI for NFCs total debt to GDP is ### 10.22 The FSI for NFCs total debt to GDP is ### Purpose and interpretation - Intended to measure the overall level of NFCs’ indebtedness (both in domestic and foreign currency, to both residents and nonresidents) compared to the size of the economy. - Should be analyzed together with other FSIs on NFCs’ debt (see the previous three FSIs for NFCs). - A high level of corporate debt in relation to gross domestic product (GDP) is a signal of increased vulnerability of corporations to shocks, which may impair their repayment capacity. - This FSI is one of several measures of the NFCs’ level of debt, which is also used to determine NFCs’ debt sustainability (see Box 10.3 for an application of this ratio). ### Calculation - Numerator: debt (line 26 in Table 5.5). - Denominator: annual GDP. - Debt data should be end-period stock and are defined in paragraph 5.69. - Regardless of which frequency is used to compile this FSI, the annualized GDP should be used as the denominator. ### Data sources and compilation issues - Issues on source data for total debt are discussed in paragraphs 10.09–10.12. - If total debt data are obtained from a sample of financial statements, results must be extrapolated to estimate the value for the whole sector. - GDP data should be obtained from national accounts sources (2008 SNA, paragraph 2.138 for a definition of GDP is referenced). - Both underlying data series for this indicator already exist for compiling other FSIs on debt—e.g., “total debt” is the numerator for compiling total debt to equity for NFCs, while GDP is the denominator for compiling several FSIs for OFCs. - For data availability issues, compilers might obtain monetary statistics from monetary statistics compilers in their respective countries through a well-established data sharing arrangement; balance sheet databases are noted as another source for NFCs’ foreign currency debt. ### Analytical notes and usage - The ratio can be split by type of financial instrument to enhance analysis of corporate solvency risks (Box 10.3: Nonfinancial Corporations Debt to GDP by Instrument). - Loans account for more than two‑thirds of total debt in most of the countries illustrated in Box 10.3, implying focus on the adequacy of buffers in the banking system (provisions and capital). - Both numerator and denominator series are used in other FSIs; documentation of data sources and methods in metadata is implied. ### Practical guidance for compilers - Use end-period stock for debt series. - Use annualized GDP as denominator even when compiling at higher frequency. - When compiling from sampled financial statements, apply extrapolation to estimate sector totals. - Document data sources in metadata, especially when alternative sources (financial sector data versus national accounts) are used. *Source: 2019-fsi-guide - 10.22 The FSI for NFCs total debt to GDP is* ### 10.57 Household debt should be measured as out- ### Household debt should be measured as outstanding stock at the end of the reporting period, whereas the denominator is the households’ annualized gross disposable income ### Measurement of household debt and income - Household debt: measured as outstanding stock at the end of the reporting period. - Denominator: households’ annualized gross disposable income. - Compilers should report the income annualization choice in the metadata. ### Real estate markets: importance for macroprudential analysis - Real estate price indexes are highly desirable because deposit takers (DTs) may have large exposures (both direct and indirect) to real estate and may be affected by volatile price movements. - Real estate assets are a major component of private sector wealth and a determinant of private consumption and economic activity. - Sharp drops in real estate prices affect DTs negatively through: - impact on the value of collateral and increase in the real estate loan to value ratio; - negative wealth effect on debtors and deterioration in DTs’ loan portfolio quality. - Rapid increases in real estate prices (bubbles) and excessive lending are early indicators of an impending financial crisis; exposure can lead to a mutually reinforcing downward spiral when conditions reverse. - DTs’ exposure channels to real estate prices include: 1. ownership of real estate; 2. loans collateralized by real estate; 3. risk of prepayment; 4. holding of pass-through (or asset-backed) securities backed by real estate (mortgage) loans; 5. exposure to households and corporations affected by servicing costs of real estate borrowing or price movements. ### Why real estate prices are potentially volatile - Real estate markets are illiquid; final prices are negotiated individually and have high transaction costs. - Supply is inelastic in the short-term due to planning and construction lags, making markets cyclical. - Development can be subject to legal or other restrictions (e.g., shortage of urban land). - International capital flows and domestic credit provision and cost can rapidly and unpredictably affect sales and prices. ### Measuring real estate prices: guidance and challenges - International guidance on representative real estate price indices is limited; the Handbook on Residential Property Prices Indices (RPPIs) was published in 2013; a Practical Guide on the Compilation of the RPPI was planned for 2019. - Real estate markets are highly heterogeneous; prices observed only upon transactions; constructing a real estate price index is substantially more difficult than general price indices. - Key challenges in constructing indices: - Dwellings are not homogeneous; no uniform market price for real estate. - Need to gather wide-ranging data to represent market segments; access and technical sophistication challenges. - Representative prices in residential and commercial markets may be hard to measure accurately due to disparate prices and volatility. - Transactions of the same dwelling are infrequent. - Particular difficulties in acquiring representative source data for commercial real estate across the economy. - Compilers should be aware of factors when developing indices: 1. wide range of differences among properties, difficulty identifying “a standard real estate unit”; 2. mix of transactions by type complicates construction of weights; 3. different methods of compiling real estate price indices. - The Guide advocates, at a minimum, quarterly compilation of data to capture price trends. - Metadata describing content, coverage, and conceptual approach underlying any price index disseminated is essential. ### Residential property price indices (RPPIs) - Objective: construct a constant quality RPPI controlling for differences in property characteristics so RPPI changes measure only price changes. - Important characteristics to account for include: 1. location of the property; 2. property type (e.g., detached house or apartment); 3. size of the property (structure or plot); 4. age of the structure; 5. materials used in construction; 6. any other price determining characteristics. - Methods to calculate RPPIs (enumerated, per Eurostat Handbook on Residential Property Prices Indices): 1. simple mean or median indices; 2. stratification or mix adjustment methods; 3. hedonic regression methods; 4. repeat sales methods; 5. appraisal-based methods. - FSI compilers rely on other agencies or data providers for source data; index quality depends on quality, coverage, and detail of data. - Ideal RPPI characteristics: - cover a large number of transactions nationally rather than a subset; - reflect actual transaction prices; - be timely, accurate, and continuously available over time. - If multiple RPPIs are disseminated, compilers should acknowledge trade-offs between frequency, timeliness, accuracy, and coverage; frequency should be at least quarterly. - Metadata on data sources and compilation methods must be disseminated. ### Commercial property price indices (CPPIs) - Principles for RPPIs apply to commercial real estate but with additional complexities. - Commercial real estate comprises four types: offices, retail, industrial, and residential (if developed for commercial purposes); each category is heterogeneous and transactions irregular. - Retail property values depend heavily on occupant business profits and fluctuate with the economic cycle. - Statistical systems often miss the relatively small number of commercial transactions and changing patterns of new construction; CPPIs often based on localities (e.g., big cities), potentially unrepresentative of the whole economy. - Commercial real estate can be characterized by square meters of commercial space with rental/use values; rental rates often expressed as annual cost per unit of space (commonly per square meter). - Two main approaches for constructing CPPIs: 1. appraisal-based indices; 2. transaction-based indices. - Data availability problems: data on commercial real estate are sparse and sometimes unavailable for some property types (especially industrial); many indices are provided by private sector organizations and may not disclose methodology, introducing comparability and bias concerns. - Same considerations for frequency, timeliness, and coverage apply as for RPPIs; extensive metadata on the CPPI used is needed. ### Financial Soundness Indicators (FSIs) for real estate markets - The four FSIs for real estate markets are: 1. residential real estate prices (a core FSI); 2. commercial real estate prices; 3. residential real estate loans to total gross loans; 4. commercial real estate loans to total gross loans. Residential real estate prices (FSI) - Purpose: gauge DTs’ exposure in case of rapid increases in residential real estate prices followed by sharp declines when credit conditions deteriorate. - Calculation: percentage change in the residential real estate price index during the 12 months prior to the reporting period. - FSI compilers must rely on source data from third parties; ideal index coverage includes geography (country-wide or largest cities), property type (detached homes, townhomes, apartments), and price-range coverage. - Compilers should be aware of advantages and disadvantages of the four main RPPI methods and ensure comparable data collection, storage, and compilation. - If a comprehensive aggregated index is not available, compilers should choose the most representative narrower index; metadata on data sources and compilation methods must be disseminated. Commercial real estate prices (FSI) - Purpose: gauge DTs’ exposure in case of rapid increases in commercial real estate prices, which can be followed by sharp declines during downturns or tighter credit conditions. - Calculation: percentage change in the commercial real estate price index during the 12 months prior to the reporting period. - FSI compilers must rely on indices produced by other public or private agencies; shortcomings in geographical coverage and types of properties surveyed may affect quality. - Main data sources for CPPIs are often private sector organizations, raising potential bias concerns; financial institutions active in lending to the commercial real estate market may be another source. - Differences among property types (offices, retail, industrial, residential-for-commercial-use) compound measurement difficulties. - Same frequency, timeliness, coverage, and metadata requirements as for RPPIs apply. Residential real estate loans to total loans (FSI) - Purpose: gauge DTs’ exposure to the residential real estate market; real estate booms often accompanied by mortgage lending booms, increasing vulnerability when prices collapse. - Calculation: - Numerator: residential real estate loans (line 50 in Table 5.1). - Denominator: gross loans (line 18.i in Table 5.1). - Residential real estate loans defined as all loans collateralized by real estate (see paragraph 5.97); loans defined in paragraphs 5.41–5.43. - Alternative numerator: household debt collateralized by real estate (line 23 in Table 5.6). - The definition requires data on all loans collateralized by residential real estate, regardless of loan purpose; national practices may differ on classification. - Required series are not available from the consolidated balance sheet of DTs and will need to be provided by DTs as supplementary memorandum series; total loans can be sourced from the consolidated balance sheet of the DTs. - For cross‑border consolidated data, residential real estate loans by subsidiaries abroad may need to be requested if not available from supervisory sources and aggregated. - For domestic location consolidation, residential real estate loans may be available from monetary and financial statistics with industrial classification of lending by economic activity; otherwise additional data requests may be necessary. *Source: Specification of Financial Soundness Indicators for Nonfinancial Sectors (excerpts).* ### 10.89 The consistent application by DTs of a defi- ### 2019-fsi-guide - 10.89 The consistent application by DTs of a defi- ### Residential real estate lending: definition and compilation (paras 10.89, 10.95) - The consistent application by DTs of a definition of residential real estate is central (10.89). - Residential real estate should include houses, apartments, and other dwellings (e.g., houseboats and mobile homes)—and any associated land—intended for occupancy by individual households (10.89). - All DTs should follow the Guide’s recommended definition of residential real estate loans: not only residential real estate loans but also any other loan collateralized by residential real estate regardless of the purpose of those loans (10.89). - Regarding the denominator “total loans,” issues for compilers are the same as for other core and additional FSIs for DTs where they are used as denominator, as discussed in Chapter 7 (10.89). ### Commercial real estate loans to total loans: purpose, definition, and compilation issues (paras 10.90–10.95) - Purpose: - The FSI commercial real estate loans to total loans provides a metric to gauge the DTs’ exposure to the commercial real estate market (10.90). - Definition and calculation: - Numerator: loans collateralized by commercial real estate, loans to construction companies, and loans to companies active in the development of real estate (line 51 of Table 5.1) (10.91). - Denominator: gross loans (line 18.i) (10.91). - Commercial real estate loans are defined in paragraph 5.98 and loans are defined in paragraphs 5.41–5.43 (10.91). - Data requirements and sources: - The definition requires data on loans for commercial real estate and all loans collateralized by commercial real estate, plus loans to construction companies and corporations active in real estate development; these series are not available from the consolidated balance sheet of DTs and will need to be provided by DTs as supplementary memorandum series (10.92). - For cross‑border consolidated data, data on commercial real estate loans by subsidiaries abroad may need to be additionally requested if not available from supervisory sources; available information may need to be aggregated (10.93). - For domestic location consolidation, commercial real estate loans may be available from monetary and financial statistics sources that provide an industrial classification of lending by type of economic activity; lending among resident DTs that are part of the same group should be deducted; otherwise, additional data may need to be separately requested (10.94). - Consistency: - As with residential real estate loans, the consistent application by DTs of a definition of what constitutes commercial real estate lending is central (10.95). - Commercial real estate lending among DTs in the reporting population that are part of the same group is deducted (10.95). - Regarding total loans, issues for compilers are the same as for other core and additional FSIs for DTs where they are used as denominator, as discussed in paragraph 7.38 (10.95). ### FSIs for nonfinancial sectors — selected indicator definitions and source/data issues (annex excerpts) - Nonfinancial Corporations (selected indicators): - Total Debt to Equity: NFCs’ total debt as a percentage of capital and reserves. Source: National accounts. Goodwill should not be deducted from capital and reserves. - External Debt to Equity: NFCs’ debt liabilities to nonresidents as a percentage of capital and reserves. Sources: External debt statistics; International investment position; National accounts. NFCs’ debt liabilities to nonresident subsidiaries are included in external debt. - Foreign Currency Debt to Equity: NFCs’ debt in foreign currency as a percentage of capital and reserves. Sources: External debt statistics; International investment position; National accounts; Standardized report forms (foreign‑currency‑denominated domestic debt). Issues on capital and reserves are as in Total debt to equity. - Total Debt to GDP: NFCs’ total debt as a percentage of GDP. Source: National accounts. For large corporations, data might be sourced from published financial statements. Denominator is annualized GDP. - Return on Equity: NFCs’ net income after taxes as a percentage of average capital and reserves. Source: National accounts. For large corporations, data might be sourced from published financial statements. Indicator is a ratio of a flow divided by a stock. Numerator is annualized net income after taxes. Denominator is average capital and reserves over the same period. - Earnings to Interest and Principal Expenses; Earnings to Interest Expenses: see source and compiler issues (annex). - Households (selected indicators): - Debt to GDP: Total household debt as a percentage of GDP. Sources: National accounts; Monetary statistics (debt to resident financial corporations only). It covers only debt of resident households. Annualized GDP should be used. - Debt-service and Principal Payments to Household Gross Disposable Income: Household debt‑service and principal payments as a percentage of household disposable income. Sources: National accounts; Financial corporations or their regulatory agencies. Coordination with national statistical offices and financial corporation regulatory agencies is essential to obtain source data. - Debt to Household Gross Disposable Income: Total household debt as a percentage of household gross disposable income. Sources: National accounts; Financial corporations or their regulatory agencies. Annual gross disposable income covering the last 12 months ending in the reporting period. Coordination with national statistical offices and financial corporations’ regulatory agencies is essential to obtain source data. - Real Estate prices and loan ratios: - Residential Real Estate Prices: Twelve‑month percentage change in residential property price index. Sources: Official statistics; Real estate agents; Financial institutions active in lending to real estate market. Compilers usually rely on indices produced by other agencies. Coverage of the index might not be sufficiently broad. - Commercial Real Estate Prices: Twelve‑month percentage change in commercial property price index. Sources: Private sector organizations; Financial institutions active in lending to commercial real estate market. Data availability and heterogeneity of property types can hinder comparability. - Residential Real Estate Loans to Total Loans: DTs’ residential real estate loans as a percentage of their total loans. Sources: Supervisory data, when available; DTs’ internal records. Requires consistent application by DTs of a definition of residential real estate loans. - Commercial Real Estate Loans to Total Loans: Sum of DTs’ loans collateralized by commercial real estate plus loans to construction companies and to companies active in the development of real estate, as a percentage of DTs’ total loans. Sources: Supervisory data, when available; DTs’ internal records. Requires consistent application by DTs of a definition of commercial real estate loans. ### Compilation and dissemination governance, resources, and managerial guidance (paras 11.1–11.14, 11.5–11.13) - Institutional responsibilities and legal authority: - The Guide recommends that primary responsibility for calculating and disseminating all FSIs should reside with the central bank, in collaboration with other relevant authorities (11.2). - For DT data, legal powers for imposing source data reporting normally reside in the central bank and the DT supervisor (11.2). - For OFCs and NFCs, responsibilities may involve separate agencies and the national statistical office; these agencies require appropriate legal powers to collect and disseminate required data (11.2). - When multiple agencies are involved, the Guide recommends an MOU to provide a foundation for coordination and cooperation regarding source data collection and compilation (11.3). - Legal authority for data collection should clearly cover the boundaries of responsibilities and include confidentiality protections and, where appropriate, powers to impose penalties to ensure compliance (11.4; compilation and dissemination bullets). - Adequacy of resources and staffing: - National authorities are responsible for allocating resources to compile core and additional FSIs; resources needed include collection, assessment of source data, and dissemination (11.5). - Authorities should develop and retain over time a core contingent of qualified staff knowledgeable in statistical and financial soundness concepts and compilation methods (11.5). - Resource allocation decisions should account for needed improvements in data and possible updating of report forms, questionnaires, or new surveys (11.6). - Data quality and processing controls: - Data quality is multidimensional and supported by strategies/processes emphasizing objectivity, validation checks, outlier detection, revision policies, and clear identification of breaks in series (11.7). - Validation checks should be automated within the compiling agency and ensure consistency between underlying series, indicators’ calculations, and documented methodological choices (11.7). - Revisions should follow a regular, well‑established, and transparent schedule; revisions covering all relevant periods should be introduced during the next dissemination round rather than waiting for specific times; revisions should be analyzed and fully explained to users (11.7). - Addressing source data and coverage issues: - Compilers need procedures to ensure source data concepts and data compiled are consistent with the Guide’s methodology (11.8). - Reporting population coverage should be as comprehensive as possible; trade-offs may be considered if small institutions do not report—cost‑benefit analysis should decide if missing data would materially affect aggregated results (11.9). - The lead agency should maintain close contact with data providers on timing, content, and formats; changes in coverage, definition, or classification should be identified in advance (11.10). - Particular attention should be given to group‑consolidated financial statements; group‑consolidation is recommended for DTs (CBCSDI) and for insurance corporations (CBDI). The lead agency should obtain information about groups that report consolidated and those that do not, and about consolidation approaches (11.11). - Confidentiality arrangements should be incorporated into planning data flows; the lead agency should monitor individual data and may require explanations from data suppliers (11.12). - Arrangements should facilitate formal and informal contacts among staff of different units responsible for FSI data collection and dissemination to deal with problems and avoid duplication (11.13). - Consultation and reporting culture: - Developing a “culture of reporting” is essential. Steps include convening meetings with potential respondents, addressing their concerns, developing report forms that fit existing systems and are not overly complex, and disseminating and promoting FSIs transparently (11.14). - Data reporters should receive benefits from providing data (e.g., information on financial sector conditions relevant for their analysis); efficient collection and compilation and perceived importance of FSIs increase reporter responsiveness (11.14). *Source: selected text from the 2019 Financial Soundness Indicators Compilation Guide.* ### 11.15 Thus, for example, when new data are to be ### 2019-fsi-guide - 11.15 Thus, for example, when new data are to be ### Report form testing, outreach, and institutional memory - Undertake report form testing: obtain feedback from a sample of potential reporters on whether the instructions are clear and workable before they become operational. - Encourage seminars and workshops explaining reporting requirements to both reporters and the compiling agency. - Maintain an electronic register of contacts at data reporting institutions to: - provide information that helps ensure a well-run statistical operation; - develop and maintain institutional memory at the statistical agency. ### Consultation with users - Establish mechanisms to ensure that the FSIs continue to meet the needs of policymakers and other users; feedback collected may warrant a revision of the FSIs and could be shared with the IMF. - Periodically convene meetings with policymakers and other data users to: - review the comprehensiveness of the FSIs; - identify emerging data requirements. - Consult with regional and international organizations, including standard setters. - Discuss new initiatives with policy departments and statistical advisory groups to provide justification for seeking additional resources. - Use outreach programs to promote awareness and understanding of the data and to identify data quality issues and other user concerns. ### Compilation of FSIs: Availability of source data - Identify available source data as a first task in developing systems for compiling new FSIs. - In jurisdictions with good coverage of DT FSIs, data for new and revised DT FSIs likely available from the same supervisory sources. - Obtaining data for FSIs outside the DT sector usually requires coordination among multiple agencies. - Producing a comprehensive list of existing data requires close coordination among potential compiling agencies, particularly for OFCs, NFCs, the household sector, and real estate prices. - Document sources and methods to: - use when problems arise; - ensure continuity when there is staff turnover or absence; - support development of metadata. - Coverage observations: - Coverage of DTs (as defined in Chapter 2) is generally quite good across more than 130 jurisdictions compiling FSIs. - Coverage drops off significantly for OFCs, NFCs, HHs, and real estate markets—data not normally obtained directly from DT supervisory sources by the lead agency. - Guide recommendation: prefer indirect collection of data from other agencies (they generally have legal power and may already have much required data). Common indirect sources include: - relevant financial sector regulators for DTs and selected OFCs; - national statistics offices (NSO) or other government agencies for other OFCs, NFCs, HHs, and real estate markets; - relevant supervisors/regulators or private data sources for securities markets. - If source data are absent, new surveys might be necessary. ### Practical data-sharing and quality considerations - Establish data sharing agreements with relevant agencies, including the NSO. - Ensure smooth and timely flows of data and protect data confidentiality agreements. - Lead agency should establish methods to ensure accuracy and reliability of provided data, including consistency with core FSI concepts (definitions of sectors and instruments, accounting, and valuation rules). ### Dissemination practices and channels - Publication deadlines and periodicity decisions affect compilation processes and resource allocation. - Preferred format for electronic exchange of data is the Statistical Data and Metadata eXchange Standard (SDMX), which is fully supported by the IMF for FSI-related data. - Countries might consider disseminating core and additional FSIs as frequently as possible due to their importance for tracking vulnerabilities. - Guide encourages dissemination on a single centralized website—the website of the lead agency—for simultaneous release, general accessibility, and transparency. - To enhance usefulness, countries could supplement FSI dissemination with: - commentary on main trends in the FSI data series; - detailed metadata to support understanding; - discussions of relevant methodological issues. - Countries are encouraged to regularly report core and additional FSIs for dissemination on the IMF’s website; the IMF web portal functions as a hub facilitating cross-country comparability. ### Frequency and timeliness - Recommended minimum: FSIs be disseminated at least on a quarterly basis with a lag of one quarter. - Strongly encouraged: monthly dissemination with one-month lag. - Availability of information varies among FSIs (e.g., interbank interest rates available more frequently than geographic distribution of lending). - Countries should work toward releasing most core FSIs and as many additional FSIs as possible on a quarterly basis, within one quarter of the reference date. - Compilation and dissemination of additional FSIs depend on national circumstances; Guide recommends quarterly dissemination of additional FSIs, with national option for monthly dissemination. ### Breaks in data series and documentation - Monitor and document breaks in data series because they can affect analysis. - Frequent type of break: changes in the reporting population (e.g., new deposit takers licensed, others closed; mergers). - Compilers should document mergers and any changes in underlying accounting rules affecting continuity of data series; maintain such information over time. - When data are disseminated, provisional data should be clearly indicated and major revisions explained in notes or metadata. - Breaks due to changes in reporting population should be clearly identified and quantified where possible. - At development stage, FSIs calculated from subgroups applying different accounting principles should be highlighted in metadata. ### Financial sector overview and structural indicators - Financial system structure affects range of data available for calculating FSIs and assessments disseminated. - Structural indicators relevant for assessment include: - for deposit takers: number of deposit takers split by type and ownership; branches and subsidiaries; value of assets owned by deposit-taking sector; net number of deposit takers entering or leaving business; spread between deposit and lending rates; number of branch outlets. - distinguish structural information on commercial banks and specialized banks (savings banks, cooperative banks, microfinance institutions) where applicable. - Publication of concentration and distribution measures (CDMs) is recommended to reveal variations within the population of financial institutions (see Chapter 12 guidance). - Countries could disseminate information on deposit insurance schemes because level of depositor coverage can affect economic behavior and financial stability. ### Other financial corporations (OFCs) - Due to heterogeneity within OFC sector, Guide introduces disaggregated reporting for OFCs covering key subsectors. - Compilers should identify source data to compile new FSIs for life and non-life insurance corporations, pension funds, and money market funds, in addition to aggregate OFC data. ### Metadata requirements - Metadata should describe content and coverage of FSIs, accounting conventions, and other national guidelines reflected in the data. - Compilers should assess whether disseminated metadata provide all relevant information needed by public, researchers, and policy officials to understand meaning and limitations. - Metadata should be publicly available along with FSI data and include: - brief descriptions of definitions for numerator and denominator of each FSI, particularly if different from the Guide; - consolidation basis used to compile FSIs; - regulatory framework (Basel I, Basel II, or Basel III); - intra-group consolidation adjustments; - accounting rules (asset/liability valuation, time of recognition); - exchange rates used for conversion of foreign-currency accounts into national currency value; - source data and institutional coverage; - whether numerator and denominator are available with same periodicity and how differences affect use of data; - explanations of any deviations from Guide recommendations. - Provisional data and major revisions should be clearly indicated; breaks in series should be identified and quantified where possible. ### Concentration and Distribution Measures (CDMs) — background and pilot results - Rationale: sector-wide FSIs may hide variations that endanger the financial system; CDMs supplement FSIs to reveal tail risks, concentrations, distribution variations, and volatility over time. - DGI call (2009): IMF to investigate, develop, and encourage implementation of standard measures on tail risks, concentrations, distribution variations, volatility. - Pilot project by IMF Statistics Department assessed feasibility of calculating and regularly reporting CDM data for selected deposit takers’ FSIs to determine: - effectiveness of pilot CDMs in monitoring vulnerabilities; - confidentiality concerns; - reporting burden extent; - procedures and resources IMF would need to gather, compile, analyze, and disseminate CDMs with current FSI data and metadata. - Pilot participation: 35 participants provided data; comprehensiveness varied across countries, indicators, and time periods. - Pilot CDMs comprised: - (1) minimum, maximum, and mean; - (2) weighted standard deviations and skewness; - (3) quartiles and the asset share of the bottom quartile; - a concentration (Herfindahl) index was calculated. - CDMs requested for a subset of six FSIs for DTs: regulatory Tier 1 capital to risk-weighted assets, NPLs to total gross loans, return on assets [ROA], return on equity [ROE], liquid assets to short-term liabilities, and capital to total assets. - Pilot results: - CDM data have analytical value that justifies efforts to compile and report them. - CDMs provide important information not revealed by simple averages and can be starting points for financial stability and performance assessments and monitoring vulnerabilities. - Participating countries did not report any significant resource burden associated with compilation of CDMs. - FSI compilers’ perspective: - IAG agreed IMF should seek further input from FSI reporting countries and potential data users before deciding on collection of FSI CDMs. - April 2017 IMF workshop: 75 participants from 36 countries and 7 international organizations; participants (majority FSI compilers) agreed with benefits of CDM project. - Workshop observations: bank-by-bank supervisory data are often available; data required for CDMs are, in many cases, readily available; CDMs provide valuable insights for financial stability analysis supporting regular compilation and reporting to IMF. - List of CDMs and underlying FSIs were discussed with and agreed upon by workshop participants. *Source: Compilation and Dissemination of Financial Soundness Indicators (excerpt).* ### 12.10 This section provides a set of concrete ### 12.10–12.37 Concentration and Distribution Measures (CDMs) ### Overview and purpose - Provides concrete recommendations and guidelines on the proposed CDM measures and their potential use to harmonize and standardize statistical methodologies (e.g., interpolation, estimation or approximation techniques, and software) to facilitate cross-country comparability, reproducibility, and interpretability. - Discusses addressing confidentiality concerns associated with CDM reporting. - Notes: To facilitate uniform and consistent reporting of the CDMs, the IMF is making available on its FSI website a template for the calculation of these CDMs. ### CDM choice and public dissemination - The technique to compute CDMs may depend on: - Ease of use. - Type of data available. - Type of information sharing agreements for specific institutions. - Some CDMs are particularly useful for public dissemination because they can reveal system vulnerabilities without revealing confidential information on individual institutions. ### Recommended CDMs and frequencies (Table 12.1) - Sector concentration index (Herfindahl index) — Annual - Weighted quartiles — Monthly, quarterly, or annual - Weighted standard deviation — Monthly, quarterly, or annual - Weighted skewness — Monthly, quarterly, or annual - Weighted kurtosis — Monthly, quarterly, or annual ### Sample and consolidation - CDMs should be computed for the same financial institutions for which the selected FSIs are reported according to the consolidation principles described in Chapter 6. - The Guide prescribes a minimum number of DTs to ensure meaningful estimates and to preserve confidentiality (see section V of chapter). ### Concentration: rationale and recommendation - Concentration in the banking sector has continued to increase (e.g., BIS 2018). - Literature notes conflicting effects: - Some studies argue concentration may promote financial stability (e.g., Beck et al., 2006; De Haan and Poghosyan, 2012; Evrensel, 2008) via improved franchise value and less risk taking. - Concentration is also linked to moral hazard—too big‑to‑fail incentives, causing riskier asset acquisition and higher leverage (e.g., Boyd and Runkle, 1993; Mishkin, 1999; O’Hara and Shaw, 1990). - Because evidence is mixed, start with a measure of concentration and interpret results with additional country-specific factors. - The Guide recommends the Herfindahl Index to estimate concentration because of its ease of use and empirical evidence that it does not yield significantly different estimates than more sophisticated approaches. ### Herfindahl concentration index (definition and interpretation) - Formula: H = Σ_{i=1}^N (a_i)^2 - where a_i = Total assets of institution i / Total assets of the entire deposit-taking sector (measured in percent). - Value range: from 1/N to 1.0; higher values indicate greater concentration. - Examples and rule of thumb: - If sector has 100 institutions each with 1 percent share, H = 0.01. - With perfect concentration (one institution 100 percent share), H = 1.0. - Rule of thumb: H below 0.1 indicates limited concentration, and H above 0.18 points to significant concentration. - Illustrative hypothetical example (Table 12.3): For a country of 11 deposit takers, the Herfindahl Index for the top-five DTs is equal to 0.1614. ### Distribution: why dispersion measures matter - Aggregated FSIs may mask idiosyncratic vulnerabilities of individual institutions. - Dispersion measures help identify variability among institutions and blind spots that could signal systemic risk. ### Recommended dispersion measures - Weighted standard deviation - Standard deviation (σ) estimates variability of an FSI among DTs; small σ implies observations tightly bunched around the sectoral average. - Standard deviation can be influenced by outliers and does not account for sample characteristics like relative asset or loan size. - Recommendation: weight the standard deviation by the relative share of the denominator of the relevant FSI ratio (e.g., weight Tier 1 capital to risk‑weighted assets by each institution’s share of risk-weighted assets). - Weighted variance (σw^2) calculation: σw^2 = Σ_{i=1}^N w_i × (FSI_i − FSĪ)^2 - where FSĪ is the sector FSI and w is the weight used to calculate the average sector FSI. - Weighted standard deviation is the positive square root of σw^2. - Weighted quartiles - Standard (unweighted) quantiles treat each institution equally and may miss distribution features driven by large institutions. - Weighted quartiles increase marginal contribution of DTs proportionally to their weights (recommended weight by asset size). - Practical computation (three steps): 1. Sorting: Sort {FSI_k} in ascending order and trace corresponding {A_k} (assets). The sorted sequence is {FSI_j} with assets {A_j}. 2. Threshold identification: - Let T = Σ_{j=1}^N A_j (sum of assets). - Let W_i = Σ_{j=1}^i A_j (cumulative assets). - For quartile Q_p (p = 0.25, 0.50, 0.75) compute P = T × p and find index i such that W_i > P. 3. Derivation: - If W_{i−1} = P, the quartile value is the average of FSI_{i−1} and FSI_i. - If W_i > P and W_{i−1} < P, the quartile value is FSI_i. - Example (Table 12.4 and Table 12.5): For a fictitious sample of 15 DTs: - Unweighted median: 8.1 - Weighted median: 12.2 - Recommendation: weight by asset size for cross-FSI and cross-country comparability. - Measures of shape: weighted skewness and weighted kurtosis - Weighted skewness - Captures asymmetry of FSI distribution relative to sectoral mean; indicates whether outliers tilt left or right. - Recommended computation uses the third moment with the weighting variable being the denominator of the FSI ratio: μ_w_σ_3 = Σ_{i=1}^N w_i × (FSI_i − FSĪ)^3 / σ_w^3 (conceptual representation; Guide frames skewness as function of third moment with weighting). - Interpretation: - Positive skewness: longer right tail; mass concentrated left of the mean. - Negative skewness: longer left tail; mass concentrated right of the mean. - Weighted kurtosis - Estimates tail fatness relative to a normal distribution; recommended with weights constructed using the denominator of the FSI ratio. - Moment coefficient of kurtosis: μ_w_σ_4 = Σ_{i=1}^N w_i × (FSI_i − FSĪ)^4 / σ_w^4 (conceptual representation). - Excess kurtosis = kurtosis − 3 (normal distribution kurtosis = 3). - Positive excess kurtosis: leptokurtic (fatter tails, sharper peak). - Negative excess kurtosis: platykurtic (leaner tails). - Zero excess kurtosis: mesokurtic. - Example: student t-distribution exhibits leptokurtosis. ### FSIs covered by concentration and distribution measures (Table 12.2) - Solvency indicators: - Tier 1 capital to risk‑weighted assets - Nonperforming loans net of specific provisions to capital - Asset quality: - Nonperforming loans to total gross loans - Provisions to nonperforming loans - Profitability: - Return on assets - Return on equity - Leverage: - Tier 1 capital to total assets ### Practical notes and interpretation - Weighted measures use denominators of relevant FSIs as weights (e.g., risk-weighted assets for Tier 1 to RWA; loans for NPL indicators). - Weighted metrics help ensure that quartiles and dispersion measures reflect the economic importance of institutions rather than treating all DTs equally. - Differences between unweighted and weighted measures can be significant (illustrated: unweighted median 8.1 vs weighted median 12.2 for a sample). - Use CDMs alongside country-specific information and other analyses to form a holistic view of stability. *Source: IMF staff — Financial Soundness Indicators Compilation Guide (section on Concentration and Distribution Measures).* ### 12.38 This section illustrates the use of CDMs as ### 2019-fsi-guide - 12.38 This section illustrates the use of CDMs as ### CDMs as an early diagnostic for financial stability - CDMs (concentration and distribution measures) are illustrated as an early diagnostic tool for assessing financial stability with two examples (distribution of Tier 1 Capital to RWA for selected French banks; distribution measures for Return on Assets in a sample of 20 randomly generated bank data). - Use of CDMs can identify: - Improvements in aggregate capitalization. - Widening dispersion across institutions that may merit closer analysis. - Outliers whose performance could signal institution-specific distress with potential systemwide spillovers. ### Distribution analysis — Tier 1 Capital to RWA (Figure 12.3) - The gray band (inter-quartile range) quantifies dispersion; lower and upper limits represent the 25th and 75th percentiles; the black dotted line is the median (50th percentile). - Key empirical observations: - First quartile went from 7.7 percent in 2006 to 12.9 percent in 2016. - The weighted interquartile capital range went from 1.2 in 2006 to 2.2 in 2016. - Interpretation: - Median shows an increasing trend over time, indicating major banks in France built up capital resources since the global financial crisis. - Widening of the interquartile range indicates a wider spread across banks’ capitalization despite overall improvement. ### Distribution analysis — Return on Assets (Figure 12.4) - Sample and summary measures: - Sample: 20 randomly generated bank data. - Weighted mean and median show a cyclical trend around 1.50 and 1.25, respectively (dotted gray = weighted mean; solid black = weighted median). - The mean is larger than the median, indicating the ROA distribution is skewed to the right. - Dispersion and higher-moment measures: - The gray line is the weighted standard deviation; it remains broadly stable, indicating low dispersion of ROAs among banks over the period. - Weighted skewness (dotted black line) is volatile; from 2015 onwards the skewness becomes negative, indicating ROA of one or more banks fall on the left-hand tail. - Outlier example and implications: - Underlying data show one bank’s ROA fell from 0.25 in 2014Q4 to –30.90 in 2015Q4 while the assets declined by close to 300 percent, indicating financial difficulties. - A single large negative ROA can strongly affect the weighted skewness of the sector and warrants further investigation into the bank’s performance, causes of stress, and potential spillovers if large interconnections exist. ### Addressing confidentiality issues in CDM dissemination - Concern: decomposition of aggregated data may reveal individual institutions’ values. - Recommended approaches: - Establish, for each CDM, a minimum number of reporting institutions (reporting threshold) so individual values cannot be derived. - Introduce stricter reporting thresholds for all CDMs to preserve data confidentiality. - Allow flexibility in reporting these measures for countries where financial systems are highly concentrated. - Reporting thresholds (Table 12.6 — Required Minimum Number of Deposit Takers): - Herfindahl concentration index: 7 - Weighted quartiles (weighted by shares of assets in total assets): 28 - Weighted standard deviation: 7 - Weighted skewness: 7 - Weighted kurtosis: 7 ### CDM template (Annex Figure 12.1.1) — measures to compile - Sector Concentration (Herfindahl Index) for indicators including: - Tier 1 Capital to Risk-Weighted Assets - NPLs to Gross Loans - NPLs net of Provisions to Capital - Provisions to NPLs - Return on Assets - Return on Equity - Tier 1 Capital to Total Assets - Weighted Quartiles (weighted): - First Quartile (weighted) - Second Quartile (weighted) - Third Quartile (weighted) - Weighted standard deviation - Weighted skewness - Weighted kurtosis *Source: IMF staff calculations; Fitch Connect; IMF staff estimates; 2019 Financial Soundness Indicators Compilation Guide (selected excerpts).* ### 13.16 A range of macroprudential tools have been ### 13.16 A range of macroprudential tools have been ### Macroprudential tools: types and objectives - Identified options include restrictions on borrowers, instruments or activities; balance sheet restrictions; capital or provisioning requirements. - Objectives: limiting the buildup of risks, or building additional buffers to enhance resilience. - Many tools (for example, restrictions on financial sector balance sheets or capital requirements) are microprudential tools deployed with a systemic perspective (Gadanecz and Jayaram, 2015). ### Decision framework and role of FSIs - No broadly applicable standards or gauges indicate when to deploy macroprudential tools; policy cannot rely on rules and must be based on continuous assessment of evolving risks. - FSI data can: - Contribute to identifying when particular macroprudential tools may be required. - Support ongoing measurement of tool impact and decisions on tightening or relaxing. - Inform expert judgment exercised by authorities with mandates for financial stability. - FSIs are most relevant for surveillance, providing near-contemporaneous indicators of risk and resilience. ### FSIs as indicators of resilience - Key indicators of resilience: - Capital: capacity to absorb unexpected losses. - Liquidity: capacity to deal with market disruption. - Core FSIs for deposit takers include: - total capital to risk-weighted assets, - Tier 1 capital to risk-weighted assets, - Common Equity Tier 1 capital to risk-weighted assets. - Non-performing loans net of provisions to capital provides insight into the banking system’s ability to absorb unexpected losses. - Liquidity Core FSIs historically: liquid assets to total assets, and liquid assets to short-term liabilities. - Basel III liquidity standards introduced two Core FSIs effective January 2018: - Liquidity Coverage Ratio, - Net Stable Funding Ratio. ### FSIs for systemic vulnerability detection - Core asset-quality FSIs: - non-performing loans to total gross loans (build-up of credit risk), - loan concentration by economic activity (risk concentrations), - provisions to non-performing loans (adequacy of provisioning). - Liquidity FSIs also indicate systemic vulnerabilities; absence of healthy liquidity buffers increases vulnerability to liquidity shocks. - Net open position in foreign exchange to capital measures vulnerability to FX shocks. - Additional FSIs include: - leverage (debt to equity) and earnings-to-interest-and-principal expenses for nonfinancial corporations, - debt-service and principal payments to income for households, - residential and commercial property price indices. - These Additional FSIs can detect vulnerabilities long before they appear in earnings, asset quality, and capital indicators of deposit-takers. ### Practical country examples and measures - Hong Kong Monetary Authority (HKMA) case (May 2017): - Relied in part on residential estate prices (then an Additional FSI, now a Core FSI) and rate of turnover suggesting speculation and increased risk from bank competition. - Policy actions: introduced a 25 percent risk weight as a floor for residential mortgage risk weights (increased from the previous 10 percent) for banks using the internal ratings–based approach; reduced maximum allowable loan to value ratio; increased minimum permissible debt-service ratio. - Iceland Financial Supervisory Authority case (July 2017): - Relied in part on residential real estate prices (then an Additional FSI, now a Core FSI), inadequate supply of new housing, and evidence of relaxed underwriting (rise in average loan to value ratio and amortization period). - Policy action: imposed a loan to value limit of 85 percent in general, and 90 percent for first time homebuyers. ### Use of FSIs in IMF work and country practice - FSIs are used by the IMF in FSAPs (initial scoping and preliminary risk-assessment) and as inputs and outputs in stress testing; also used in Article IV consultations. - Most Article IV reports include the Core FSIs and commentary on deposit-taker soundness; absence usually reflects lack of availability from authorities. - FSIs facilitate ongoing monitoring to determine whether more detailed financial stability review is required; detailed commentary typically based on stress testing, recent FSAP or technical assistance, asset quality reviews, or authorities’ financial stability reports. - Country financial stability reports commonly include macroprudential indicators overlapping with FSIs; use ranges from central organizing framework to limited reporting. ### Complementary analytic approaches and empirical evidence - Stress testing: - Can be institution-level (microprudential) or macro-level (top-down or bottom-up). - Top-down stress testing by the IMF is common in FSAPs. - FSIs often serve as inputs (e.g., increases in NPL ratios, declines in liquidity ratios) and outputs (capital adequacy ratios) in stress tests. - Empirical literature and observations: - Early and subsequent studies highlight usefulness of Additional FSIs (nonfinancial corporate and household metrics) for early detection of vulnerabilities. - Research findings: - Čihák and Schaeck (2007) find FSIs provide signals of imbalance buildup and some benefit in timing crises, but data limitations remain. - Babahuga (2007) links selected FSIs to episodes of financial distress; FSIs fluctuate strongly with the business cycle. - Costa Navajas and Thegeya (2013) find correlations between some FSIs and banking crises, but strongest results are contemporaneous or lagged, offering limited lead time for policy action. - Recent work often incorporates FSIs into a broader set of macroprudential indicators, stressing: - importance of filling data gaps (real estate, household and corporate sectors, shadow banking), - use of market-based indicators and high-frequency data, - more granular vulnerability analysis, - interconnectedness and contagion. - The Core FSIs on their own have limited predictive ability but are useful as monitoring tools and as inputs in broader analytic approaches. ### Institutional variations and special frameworks - Islamic Financial Services Board (IFSB) developed Prudential and Structural Indicators for Islamic Financial Institutions (PSIFIs) paralleling Core and Additional FSIs, customized for Islamic banking practices; some countries may maintain two indicator sets (entire banking system and Islamic banking subsector). - National practices: - Only two of the 27 Basel Committee member jurisdictions publishing financial stability reports routinely include the Core FSIs as a table or appendix. - Almost all Basel Committee member jurisdictions use selected FSIs in three contexts: - incorporation into scenario-based or modeling approaches (real estate prices, corporate/household leverage and debt-service), - use of some Core FSIs for deposit-takers (asset quality and sometimes liquidity) in assessing vulnerabilities, - incorporation of Core FSIs (capital, earnings, liquidity ratios) into broader resilience analyses. - European Union: most EU countries report the Core and many Additional FSIs; some are reflected in the European Systemic Risk Board dashboard. - The ESRB risk dashboard organizes indicators into seven categories and includes 6 of 12 indicators closely aligned with FSIs: - return on equity, - return on assets, - cost to income, - net interest income to operating income, - NPLs to total gross loans, - liquid assets to short-term liabilities. *Source: Financial Soundness Indicators Compilation Guide (excerpt).* ### 13.36 Network analysis is a subset or variation ### 13.36 Network analysis is a subset or variation ### Network analysis: purpose and data needs - Network analysis investigates relationships between individual institutions, or in cross-border analysis, relationships between financial systems. - It requires detailed information on bilateral exposures to construct a web or network that provides insights into the structural dimension of systemic risk. - Scenario analysis is used to assess the impact of default by one or more institutions, or financial distress in one or more jurisdictions, on other institutions or jurisdictions in the network. - While based on detailed institutional exposures not captured in the FSIs, outputs of network analysis are frequently expressed as FSI capital or liquidity ratios. - References and notes in the source: 11 ### Role of FSIs in macroprudential analysis - Core FSIs provide measures of: - buildup of risks: asset quality, credit concentration, liquidity stress, foreign currency exposure, residential real estate prices - resilience: capital, leverage and liquidity buffers - Additional FSIs for deposit takers provide further risk insights: risk concentrations, reliance on non-deposit funding, foreign currency exposures. - Additional FSIs for non-financial sectors can identify vulnerabilities—high leverage, high debt-service ratios, and real estate prices—before these are evident in the Core FSIs, offering an opportunity to use macroprudential tools to mitigate risks prior to crystallization into a crisis. ### How FSIs are used across jurisdictions - FSIs have been most widely used as macroprudential indicators and organizing frameworks in jurisdictions that introduced formal financial stability analysis after the introduction of the FSIs. - In other jurisdictions there is often overlap between ongoing macroprudential indicators and the FSIs. - Where data gaps persist and detailed information for network analysis or high-frequency market data are absent, FSIs can play a key role in macroprudential analysis. ### Key challenges to enhance FSIs for macroprudential analysis - Data gaps: - Significant data gaps remain despite more countries disseminating FSIs. - Many countries provide all or most Core FSIs, but availability drops rapidly for Additional FSIs, especially those not derived from supervisory data. - Causes include capacity constraints in national statistics agencies and coordination challenges between supervisory authorities/central banks and statistics agencies. - Data integrity: - Integrity of supervisory data is an ongoing concern; Core FSIs are vulnerable to inadvertent or willful misreporting. - Evidence from FSAPs shows under-reporting of adverse loan classifications and provisions (Andrews, 2017). - Under-provisioning reduces expenses and increases income, distorting profitability and capital-related FSIs as well as asset quality indicators. - Lack of forward-lookingness: - FSIs are historical data, at best providing a picture of the system as it existed three months earlier. - Many financial stability reports rely on current levels of FSIs and trend analysis; ratio-based analysis is often augmented by additional data and qualitative assessments to become more forward looking. - Data extending beyond Core FSIs, and judgment, are required to better identify vulnerabilities and lack of resilience in time to act. - Structural dimension: - FSIs do not provide insights into the structural dimension of systemic risk; other approaches (stress testing, network analysis, qualitative assessments) are needed to assess systemic risks of individual institutions and financial market infrastructures. ### Addressing forward-lookingness with Additional FSIs and indicators - Certain Additional FSIs can provide a foundation to address lack of forward-lookingness: - FSIs for the household and nonfinancial corporate sector can identify vulnerabilities before they show in Core FSIs. - Asset price data, particularly real estate, offers promise as a leading indicator. - The Additional FSI "growth of credit to the private sector" can be used to calculate the credit to GDP gap, one of the few robust leading indicators of financial distress. 12 - Limitations: - As Additional FSIs become more available, they will help detect build-up of systemic risk with lead time for policy action. - Nevertheless, challenges remain that preclude a simple rules-based approach driven solely by empirical models; judgment is still required to determine when to act. - Example: some research suggests the credit to GDP gap tends to continue to rise for some quarters after onset of the crisis, and price to rent and residential property price gaps tend to peak before onset of the crisis (Gadanecz and Jayaram, 2015). ### Priorities and policy implications for less developed financial systems - Improvements in supervisory capacity and data availability should generally be prioritized to lay the foundation for effective macroprudential policy. 13 - A sound microprudential framework can help address concerns over the integrity of Core FSIs. - In bank-dominated financial systems common in low-income countries, few sources of systemic risk exist outside the banking system; sound microprudential supervision and the capacity and will to act when weaknesses are detected are essential for financial stability. ### Recommended methodological mix - FSI analysis should be supplemented by: - stress testing, - other quantitative indicators where available, - qualitative assessments using expert judgment. - Priority data to fill gaps (especially for nonfinancial sectors) include: - nonfinancial corporations: debt to equity, earnings to interest and principal expenses - households: debt-service and principal payments to income - asset prices: residential and commercial real estate price changes - The G20 urged development of multisector balance sheet and accumulation accounts ("flow of funds accounts") to incorporate relevant macroprudential information, though this is a large statistical undertaking that may exceed resources in some countries. *Financial Soundness Indicators Compilation Guide* ### 1996. Amendment to the Capital Accord to Incor- ### 2019-fsi-guide - 1996. Amendment to the Capital Accord to Incor- ### Basel Committee and BIS publications - 1996. Amendment to the Capital Accord to Incorporate Market Risks. Basel, Switzerland: Bank for International Settlements. - Basel Committee on Banking Supervision (BCBS). 2003a. New Basel Capital Accord: Third Consultative Paper. Basel, Switzerland: Bank for International Settlements. - Basel Committee on Banking Supervision (BCBS). 2003b. Overview of the New Basel Capital Accord. Basel, Switzerland: Bank for International Settlements. - Basel Committee on Banking Supervision (BCBS). 2006. International Convergence of Capital Measurement and Capital Standards. Basel, Switzerland: Bank for International Settlements. - Basel Committee on Banking Supervision (BCBS). 2011. A Global Regulatory Framework for More Resilient Banks and Banking Systems. Basel, Switzerland: Bank for International Settlements. - Basel Committee on Banking Supervision (BCBS). 2012a. Core Principles for Effective Banking Supervision. Basel, Switzerland: Bank for International Settlements. - Basel Committee on Banking Supervision (BCBS). 2012b. Models and Tools for Macroprudential Analysis.” Working Paper No. 21. Basel, Switzerland: Bank for International Settlements. - Basel Committee on Banking Supervision (BCBS). 2013. Basel III: The Liquidity Coverage Ratio and Liquidity Risk Monitoring Tools. Basel, Switzerland: Bank for International Settlements. - Basel Committee on Banking Supervision (BCBS). 2014a. Basel III: The Net Stable Funding Ratio. Basel, Switzerland: Bank for International Settlements. - Basel Committee on Banking Supervision (BCBS). 2014b. Minimum Capital Requirements for Market Risk (2016). Basel, Switzerland: Bank for International Settlements. - Basel Committee on Banking Supervision (BCBS). 2014b. Supervisory Framework for Measuring and Controlling Large Exposures. Basel, Switzerland: Bank for International Settlements. - Basel Committee on Banking Supervision (BCBS). 2017a. Finalization of Post Crisis Reforms. Basel, Switzerland: Bank for International Settlements. - Basel Committee on Banking Supervision (BCBS). 2017b. Supervisory and Bank Stress Testing: Range of Practices. Basel, Switzerland: Bank for International Settlements. - Basel Committee on Banking Supervision (BCBS). 2017c. Regulatory Treatment of Accounting Provisions–Interim Approach and Transitional Arrangement. Basel, Switzerland: Bank for International Settlements. - Basel Committee on Banking Supervision (BCBS). 2019. Minimum Capital Requirements for Market Risk. Basel, Switzerland: Bank for International Settlements. ### Selected working papers, articles, and books cited - Beck Thorsten, Demirgüç-Kunt Asli, and Levine Ross. 2006. “Bank Concentration, Competition, and Crises: First Results.” Journal of Banking and Finance 30(5): 1581–603. - Bergo, Jarle. 2002. “Using Financial Soundness Indicators to Assess Financial Stability.” Paper presented at Challenges to Central Banking from Globalized Financial Systems, IMF Washington, DC, September 16–17. - Bessis, Joel. 2015. Risk Management in Banking, fourth edition. West Sussex: John Wiley & Sons. - Bluedorn, John, Rupa Duttagupta, Jaime Guajardo, and Petia Topalova. 2013. “Capital Flows Are Fickle: Anytime, Anywhere.” IMF Working Paper 13/183, August, International Monetary Fund, Washington, DC. - Borio, Claudio. 2003. “Towards a Macroprudential Framework for Financial Supervision and Regulation?” BIS Working Papers No 128. Basel, Switzerland: Bank for International Settlements. - Borio, Claudio. 2014. “Macroprudential Frameworks: (Too) Great Expectations?” In Macroprudentialism, edited by Dirk Schoenmaker. London: Centre for Economic Policy Research, pp. 29–46. - Borio, Claudio, and Mathias Drehmann. 2009. “Towards an Operational Framework for Financial Stability: “Fuzzy” Measurement and Its Consequences.” BIS Working Papers No. 248. Basel, Switzerland: Bank for International Settlements. - Borio, Claudio, Mathias Drehmann, and Kostas Tsatsaronis. 2012. “Stress Testing Macro-Stress Testing: Does It Live Up to Expectations?” BIS Working Papers No. 369. Basel, Switzerland: Bank for International Settlements. - Boyd, John H., and David E. Runkle. 1993. “Size and Performance of Banking Firms: Testing the Predictions of Theory.” Journal of Monetary Economics 31(1): 47–67. - Bussière, Matthieu. 2013. “In Defense of Early Warning Signals.” Working Paper No. 420. Paris: Banque du France. - Cabello, Miguel, Jose Lupu, and Minaya Elias. 2017. “Macroprudential Policies in Peru: The effects of Dynamics Provisioning and Conditional Reserve Requirements.” Working Paper No. 2017-002. Lima: Banco Central de Reserva Del Peru. - Carson, Carol. 2001. “Toward a Framework for Assessing Data Quality.” IMF Working Paper 01/25. International Monetary Fund, Washington, DC. - Catalán, Mario, and Dimitri Demekas. 2015. “Challenges for Systemic Risk Assessment in Low-Income Countries.” Journal of Risk Management in Financial Institutions 8(2): 118–29. - Čihák, Martin. 2006. “How Do Central Banks Write on Financial Stability.” IMF Working Paper 06/163. International Monetary Fund, Washington, DC. - Čihák, Martin. 2014. “Stress Tester: A Toolkit for Bank-By-Bank Analysis.” In A Guide to IMF Stress Testing: Models and Methods, edited by Li Ong (Washington, DC: International Monetary Fund). - Čihák, Martin, Sonia Muñoz, Shakira Teh Sharifuddin, and Kalin Tintchev. 2012. “Financial Stability Reports: What Are They Good For?” IMF Working Paper 12/1. International Monetary Fund, Washington, DC. - Čihák, Martin, and Klaus Schaech. 2007. “How Well Do Aggregate Bank Ratios Identify Banking Problems.” IMF Working Paper 07/275. International Monetary Fund, Washington, DC. - Claessens, Stijn. 2014. “An Overview of Macroprudential Policy Tools.” IMF Working Paper 14/214. International Monetary Fund, Washington, DC. - Committee on the Global Financial System. 2010. “Macroprudential Instruments and Frameworks: A Stocktaking of Issues and Experience.” CGFS Paper No. 28. Basel, Switzerland: Bank for International Settlements. - Committee on the Global Financial System. 2016. “Objective-Setting and Communication of Macroprudential Policies” CGFS Paper No. 57. Basel, Switzerland: Bank for International Settlements. - Costa Navajas, Matias, and Aaron Thegeya. 2013. “Financial Soundness Indicators and Banking Crises.” IMF Working Paper 13/263. International Monetary Fund, Washington, DC. - Craig, Sean R. 2002. “Role of Financial Soundness Indicators in Surveillance: Data Sources, Users and Limitations.” IFC Bulletin No. 12. Basel, Switzerland: Bank for International Settlements, pp. 199–209. - Crowley, Joseph, Plapa Koukpamou, Elena Loukoianova, and André Mialou. 2016. “Pilot Project on Concentration and Distribution Measures for a Selected Set of Financial Soundness Indicators.” IMF Working Paper WP/16/26. International Monetary Fund, Washington, DC. - De Haan, Jakob, and Poghosyan Tigran. 2012. “Bank Size, Market Concentration, and Bank Earnings Volatility in the US.” Journal of International Financial Markets, Institutions and Money 22(1): 35–54. - Demirgüç-Kunt, Asli, and Enrica Detragiache. 2005. “Cross-Country Empirical Studies of Systemic Bank Distress: A Survey.” IMF Working Paper 05/96. International Monetary Fund, Washington, DC. - Deutsche Bundesbank. 2006a. Concentration and Risk in Credit Portfolios, Monthly Report, June. - Deutsche Bundesbank. 2006b. Financial Stability Review, November. https://www.bundesbank.de/resource/blob/621872/a0c2a5a4a9bae205a74b7149f7e709b2/mL/2006-finanzstabilitaetsbericht-data.pdf - Drehmann, Mathias, and Mikael Juselius. 2013. “Evaluating Early Warning Indicators of Banking Crises: Satisfying Policy Requirements.” BIS Working Papers No. 42. Basel, Switzerland: Bank for International Settlements. ### Financial stability reports, central bank publications, and regulatory documents - Bundesbank. 2017. Financial Stability Report, Germany. https://www.bundesbank.de/Redaktion/EN/Downloads/Publications/Financial_Stability_Review/2017_financial_stability_review.pdf ?__blob=publicationFile - Central Bank of Argentina. 2017. Financial Stability Report, Argentina. http://www.bcra.gob.ar/Pdfs/PublicacionesEstadisticas/ief0217i.pdf - Central Bank of Brazil. 2017. Financial Stability Report, Brazil. http://www.bcb.gov.br/?fsr201710 - Central Bank of Nigeria. 2016. Financial Stability Report. Accessed December 27, 2017. https://www.cbn.gov.ng/out/2017/fprd/fsr%20december%202016%20(2).pdf - Central Bank of the Republic of Turkey. 2017. Financial Stability Report, Turkey. http://www.tcmb.gov.tr/wps/wcm/connect/6c95b5fe-4815-4064-a9a4-80ff33b51906/fulltext25.pdf ?MOD=AJPERES&CACHEID=ROOTWORKSPACE-6c95b5fe-4815-4064-a9a4-80ff33b51906-m52f977. - Central Bank of Russia. 2017. Financial Stability Report, Russia. http://www.cbr.ru/Eng/publ/Stability/OFS_17-02_e.pdf - European Union. 2017. 2017 Financial Stability Report, European Union. https://www.ecb.europa.eu/pub/pdf/other/ecb.financialstabilityreview201711.en.pdf ?7a775eed7ede9aee35acd83d2052a198 - Hong Kong Monetary Authority. May 19, 2017. “Press Release.” http://www.hkma.gov.hk/eng/key-information/press-releases/2017/20170519-5.shtml. - Hong Kong Monetary Authority. 2018. Financial Stability Report, Hong Kong SAR. http://www.hkma.gov.hk/media/eng/publication-and-research/quarterly-bulletin/qb201803/E_Half-yearly_201803.pdf - De Nederlandsche Bank. 2017. Financial Stability Report, Netherlands. https://www.dnb.nl/en/binaries/OFS_Autumn%202017_tcm47-363954.pdf - Evrensel, Ayşe. 2008. “Banking Crisis and Financial Structure: A Survival-Time Analysis.” International Review of Economics and Finance 17(4): 589–602. - Fjármálaeftirlitið (Iceland Financial Supervisory Authority), Rules on Maximum Loan-to-Value Ratios for Mortgages. July 2017. https://en.fme.is/media/frettir/FME---LTV-Memorandum-July-2017.pdf. ### Methodology, indicators, and measurement tools - Evans, Owen, Alfredo Leone, Mahinder Gill, and Paul Hilbers 2000. Macroprudential Indicators of Financial System Soundness. Occasional Paper 192. Washington, DC: International Monetary Fund. - Gadanecz, Blaise, and Jayaram Kaushik. 2015. “Macroprudential Policy Frameworks, Instruments and Indicators: A Review.” IFC Bulletin No. 41. Basel, Switzerland: Bank for International Settlements. - Galati, Gabriele and Richhild Moessner. 2011. “Macroprudential Policy—A Literature Review.” BIS Working Papers No. 337. Basel, Switzerland: Bank for International Settlements. - Goodhart, Charles. 2014. “The Use of Macroprudential Instruments.” In Macroprudentialism, edited by Dirk Schoenmaker (London: Centre for Economic Policy Research), pp. 11–20. - Gordi, Michael B. 2003. “A Risk Factor Model Foundation of Ratings-based Bank Capital Rules.” Journal of Financial Intermediation 12(3): 199–232. - Grippa, Pierpaolo, and Lucyna Gornica. 2016. “Measuring Concentration Risk—A Partial Portfolio Approach.” IMF Working Paper WP/16/158. International Monetary Fund, Washington, DC. - IFC Bulletin No. 41. 2016. Combining Micro and Macro Statistical Data for Financial Stability. Basel, Switzerland: Bank for International Settlements. - IFC Bulletin No. 46. 2017. Data Needs and Statistics Compilation for Macroprudential Analysis. Basel, Switzerland: Bank for International Settlements. - Craig, Sean R. 2002. “Role of Financial Soundness Indicators in Surveillance: Data Sources, Users and Limitations.” IFC Bulletin No. 12. Basel, Switzerland: Bank for International Settlements, pp. 199–209. - Crowley, Joseph, Plapa Koukpamou, Elena Loukoianova, and André Mialou. 2016. “Pilot Project on Concentration and Distribution Measures for a Selected Set of Financial Soundness Indicators.” IMF Working Paper WP/16/26. International Monetary Fund, Washington, DC. ### Accounting standards, SNA, and international coordination - International Accounting Standards Board. 2004. “Provisions, Contingent Liabilities and Contingent Assets.” International Financial Reporting Standards 37. - International Accounting Standards Board. May 2011. “Fair Value Measurement.” International Financial Reporting Standards 13. - International Accounting Standards Board. July 2014. International Financial Reporting Standards 9. - International Accounting Standards Board. 2018. “Conceptual Framework for Financial Reporting.” Paragraph 4.54. - International Monetary Fund, European Commission, Organization for Economic Cooperation and Development, United Nations, and the World Bank. 2009c. 2008 System of National Accounts. New York. - International Monetary Fund, Financial Stability Board, and Bank for International Settlements. 2016a. Elements of Effective Macroprudential Policies: Lessons from International Experience. https://www.imf.org/external/np/g20/pdf/2016/083116.pdf. *Source: 2019-fsi-guide - 1996. Amendment to the Capital Accord to Incor-* ### Bibliography 185 ### Bibliography — extracted content unit ### Glossary — key definitions and supervisory/accounting concepts - Accrual Accounting: Accrual accounting records flows and changes in the corresponding stocks at the time economic value is created, transformed, exchanged, transferred, or extinguished. Under accrual accounting, flows and positions are recorded when a change in economic ownership takes place. - Additional Tier 1 Capital (AT1): Supervisory concept defined in Basel III, consisting of subordinated instruments with no maturity and neither secured nor covered by a guarantee of the issuer. - Aggregate Resident-Based Approach: Under an aggregate resident-based approach, the headquarters office consolidates its transactions and positions with resident branch offices only, that is, not with any subsidiaries, associates, or nonresident branches. - Aggregation: Refers to the summations of position or flow data. For sector-level data, aggregation is the sum of the positions and flows of all individual reporting groups/entities within the sector. - Amortized Cost: Amount advanced originally plus all accrued but not paid interest, less any repayment of principal, less any allowance for impairment or non-collectability (IFRS concept). - Arrears: When principal or interest payments are not made when due (e.g., on a loan) arrears are created. Arrears should continue to be recorded from their creation date, until they are extinguished, such as when they are repaid, rescheduled, or forgiven by the creditor. - Asset: Store of value, over which ownership rights are enforced and from which their owners may derive economic benefits by holding them over a period of time. - Associates: Corporations over which the investor has a significant degree of influence, being the power to participate in the financial and operating policy decision of the investee; but not control or joint control as is the case of subsidiaries. Significant influence is usually assumed to arise when the investor controls between 10 and 50 percent of the shareholders’ voting power. - Available Stable Funding: Supervisory concept defined in Basel III as the portion of a banks’ capital and liabilities that are expected to remain with the bank in a stress scenario over a one-year horizon. - Balance Sheet: Corresponds to IAS 1 concept of statement of financial position, is the statement of assets, liabilities, and capital at the end of each accounting period. - Basel Committee on Banking Supervision (BCBS): Formulates broad supervisory standards and guidelines and encourages convergence toward common approaches and common standards. - Basel II: The BCBS’s International Convergence of Capital Measurement and Capital Standards—A Revised Framework, released in June 2004; includes three pillars (minimum capital requirements, supervisory review, and market discipline). - Basel III: The BCBS’s A Global Regulatory Framework for More Resilient Banks and Banking Systems and the International Framework for Liquidity Risk Measurement, Standards and Monitoring, released in 2010, together with Basel III: Finalising Post-Crisis Reforms (2017); measures developed in response to the financial crisis of 2007–2009. - Book Value: Value of an asset as recorded in an entity’s balance sheet. - Branches: Operating entities that do not have a separate legal status from their parent corporations and are thus integral part of them. - CAMELS Framework: Grouping of indicators of bank soundness into six categories: (1) capital adequacy, (2) asset quality, (3) management capability, (4) earnings, (5) liquidity, and (6) sensitivity to market risk. - Capital Adequacy Ratio: Analytical construct with regulatory capital as numerator and risk-weighted assets as denominator. The minimum ratio of regulatory capital to risk-weighted assets is set at 8 percent (the core regulatory capital element should be at least 4 percent, increased to 6 percent in Basel III). - Capital and Reserves: Difference between total assets and total liabilities in the balance sheet; represents the equity interest of the owners in an entity. - Capital Conservation Buffer: Extra capital that, under Basel III, a financial institution is required to hold to absorb losses during downturns. - Central Bank: National financial institution exercising control over key aspects of the financial sector; FSIs are not computed for the central bank. - Commercial Real Estate Loans: Loans collateralized by commercial real estate, loans to construction companies, and loans to companies active in the development of real estate (including those involved in multi-household dwellings). - Common Equity Tier 1 capital (CET1): Supervisory concept defined in Basel III as the highest quality capital capable of absorbing losses on a going concern basis; comprises common shares, retained earnings and accumulated other comprehensive income, and other disclosed reserves. - Consolidation: The elimination of positions and flows that occur among institutional units grouped together for statistical purposes. - Contingencies: Contractual financial arrangements that do not give rise to unconditional requirements; contingencies are not recognized as financial assets (liabilities) on balance sheet but can potentially affect financial soundness. - Contingent Liability: Obligation that does not arise unless a particular discrete event(s) occurs in the future. - Countercyclical Capital Buffer: Extra capital charge to be implemented based on national authorities’ assessments of system-wide risks and geographical credit exposure of internationally active banks. - Credit to the Private Sector (for DTs): Gross loans extended by DTs to the private nonfinancial sector, plus debt securities issued by private NFCs and held by DTs; data should be compiled on a domestic consolidated basis. - Credit Risk: Risk that one party to a financial contract will fail to discharge an obligation and thus cause the other party to incur a financial loss. - Cross-Border Consolidation: Involves a parent DT and its nonresident subsidiaries and branches in addition to resident ones; when such units are included, data are referred to as cross-border data. - Deferred Tax Assets: Difference between current tax charges/credits recognized by tax authorities and taxes recorded in financial statements. - Deposit-Taking Corporation (Excludes the Central Bank): Financial corporation with financial intermediation as principal activity, obtaining funds through acceptance of deposits or similar instruments. - Economic Ownership: The institutional unit entitled to claim benefits associated with assets and liabilities by virtue of accepting associated risks. - Exposure at Default: The sum of debt outstanding and irrevocable commitments at the time a counterparty defaults. - External Debt: The outstanding amount of actual current, noncontingent liabilities that require payments of principal or interest by the resident debtor to nonresident creditors at some future point(s). - Fair Value: Market-equivalent value defined as the amount for which an asset could be exchanged or a liability settled between knowledgeable, willing parties in an arm’s length transaction. - Financial Assets: Subset of economic assets that are financial instruments and unconditional creditor claims on economic resources of other institutional units. - Financial Corporation (FC): Corporation principally engaged in providing financial services, including insurance and pension fund services. - Financial Soundness Indicators (FSIs): Referenced throughout the Guide for compilation and dissemination; include core and additional indicators and are used in macroprudential analysis. - Gross Recording: Presentation of assets and liabilities at their full value where claims are not netted against liabilities to the same unit or group. - High-Quality Liquid Assets: Supervisory concept in Basel III as unencumbered assets that can be converted easily and immediately into cash at little or no loss of value. - Leverage Ratio: Relation between Tier 1 capital to all balance sheet assets and off-balance-sheet commitments; to be calculated as the average monthly leverage ratio over the quarter. - Liquid Assets (of DTs): Comprise (1) currency; (2) deposits and other financial assets available on demand or within three months or less; and (3) securities traded in liquid markets that can be readily converted into cash. - Liquidity Coverage Ratio (LCR): Supervisory requirement in Basel III intended to promote resilience to liquidity disruptions over a 30-day horizon. - Loss Given Default: Percentage of exposure lost when a counterparty defaults. - Macroprudential Analysis: Incorporates indicators to measure systemic risks in time and structural dimensions, including aggregate balance sheet and income statement ratios, market-based indicators, and broad macro indicators. - Market Risk: Risk of losses on financial instruments arising from changes in market prices, covering interest rate, foreign exchange, equity price, and commodity price risk. - Memorandum Series: Series required to calculate FSIs that are not directly available from financial statements; include supervisory-based series and series providing further analysis of the balance sheet. - Net Stable Funding Ratio (NSFR): Supervisory requirement defined in Basel III aimed at limiting over-reliance on short-term wholesale funding. - Nonperforming Loans (NPLs): Loans for which (1) payments of interest or principal are past due by 90 days or more; or (2) interest payments equal to 90 days or more have been capitalized or delayed by agreement; or (3) evidence exists to reclassify a loan as nonperforming even in the absence of a 90-day past due payment. - Off-Balance-Sheet Exposures: Contractual financial arrangements not recognized as financial assets or liabilities (e.g., commitments, direct credit substitutes, standby letters of credit) that can be a source of significant leverage. - Regulatory Capital: Equity and subordinated debt meeting specified conditions, defined in tiers under Basel frameworks. - Risk-Weighted Assets: On- and off-balance-sheet exposures weighted according to perceived risk; Basel I assigns predefined risk-weights of 0, 20, 50, or 100 percent. - Settlement Date / Transaction Date: Settlement Date is time of delivery of a financial asset; Transaction Date (also trade date) is time of change in ownership of a financial asset. - Value at Risk: Maximum likely loss in a given period of time in the event of extreme market moves. - Volatility: Tendency of quantities or prices to vary over time, usually measured by variance or annualized standard deviation. ### Index — main topical pointers in the extracted content - Core FSIs and Additional FSIs are cross-referenced with chapters and paragraph ranges for accounting principles, calculation, and underlying series. - Basel frameworks (Basel I, Basel II, Basel III) are tied to regulatory capital, risk-weighted assets, leverage ratio, liquidity standards, and buffers with precise paragraph and table references. - Consolidation bases and approaches (aggregated resident-based, cross-border, cross-sector, domestically incorporated) are cataloged and referenced to specific methodological sections. - Data compilation and dissemination topics include managerial issues, metadata, frequency and timeliness, confidentiality, and dissemination channels with paragraph groupings. - Key sectoral balance sheet and income statement compilation guidance is cross-referenced for deposit takers, other financial corporations, households, nonfinancial corporations, insurance corporations, money market funds, and pension funds. *Source: Extracted pages from the Financial Soundness Indicators Compilation Guide (Bibliography, Glossary, Index sections).* ### Box 8.1 ### Box 8.1 ### Foreign currency and FX exposures - Foreign currency, 7.3, 5.101, 10.17–10.21, Glossary - Foreign currency debt to equity, 10.17–10.21 - Foreign-currency-denominated liabilities, 8.39–8.43, Figure 8.1.2 - Foreign-currency-denominated loans, 8.33–8.38, Figure 8.1.1 - Foreign-currency-linked instruments, 4.53, Glossary - Foreign exchange markets, 2.62, 7.77–7.83, Table 7.1 - Forward foreign exchange contracts, 5.56–5.57 - Futures, forward-type contracts, 5.58 - Net open position in foreign exchange, 7.77–7.83 ### Income, valuation, and gains/losses - Gains and losses: financial assets, 5.116; on financial instruments, 5.19, 8.19; on loan sales, 5.21 - Income: interest income, 5.13; net income, 7.49–7.50; net income after tax, 5.117, 7.53, 9.67, 10.27; noninterest income, 5.16; operating income, 5.113, 5.136, 5.152; other comprehensive income, 3.27, 4.31–4.55, 5.19–5.21, 5.24, 5.30, 5.77; other income, 5.23; prorated earnings, 5.22 - Income and expense statement: 5.5–5.6, Glossary; deposit takers, 5.13–5.32, Table 5.1; households, 5.152–5.153, Table 5.6; IDTs, 7.8, Table 7A.1; intra-group consolidation, 6.46, Table 6A.1; nonfinancial corporations, 5.136–5.138, Table 5.5; other financial corporations, 5.104–5.133; insurance corporations, 5.110–5.118, Table 5.3; money market funds, 5.106–5.108, Table 5.2; pension funds, 5.124–5.127, Table 5.4 - Valuation, accounting principles: 4.35–4.48; amortized cost and fair value, 4.36–4.43; derivatives and hedge accounting, 4.47–4.48; transactions, 4.44–4.46 ### Liquidity, funding, and liquid assets - High quality liquid assets (HQLA), 3.13, 3.49, 5.85, 7.71–7.72, Glossary - Liquid assets, 5.90, 5.132, 7.64–7.72, Glossary - Liquid assets to short-term liabilities, 7.67–7.70, 12.6, 13.20 - Liquidity coverage ratio (LCR), 3.13, 3.49–3.53, 7.67–7.72, 13.20, Glossary - Net stable funding ratio (NSFR), 3.13, 3.49, 3.54–3.55, 7.73–7.76 - Required stable funding (RSF), 3.55, 7.73 - Stable funding, 5.87, Glossary - Total net cash outflows, 5.86, Glossary ### Loans, credit risk, and nonperforming loans - Loans, 5.41; commercial real estate loans, 5.98; concentration by economic activity, 7.43–7.45, Box 7.2; foreign currency loans, 5.101; geographic distribution of loans, 5.100; loss provisions, 5.27; residential real estate loans, 5.97 - Nonperforming loans (NPLs), 5.94–5.96, 13.19, 7.27–7.39, Glossary - arrears, 4.17–4.18 - accrued interest on NPLs, 7.29, 7.30 - classification of, 5.94–5.96 - net of provision to capital, 7.27–7.33 - to total gross loans, 7.34–7.38 - provisions to nonperforming loans, 7.39–7.42 - Specific loan loss provisions, 5.48 - Loss given default (LGD), 3.35, Glossary - Large exposures, 5.88, 8.3–8.6, Glossary ### Capital, regulatory and prudential measures - Regulatory capital, 3.4, 3.16–3.31, 5.75, 5.82; definition, Glossary; accounting equity, 3.17; capital and reserves 5.82; adjustments to regulatory capital, 3.31; Basel Accord, defined, 3.23; intangible assets, 3.20 - Tier 1 capital, 3.23–3.26, 5.76, 7.23–7.26, 12.39, Figure 12.3, Annex 3.1, Glossary - Tier 2 capital, 3.23, 3.24, 3.29, 3.30, 5.78, Annex 3.1, Glossary - Tier 3 capital, 5.79, 6.65, Annex 3.1 - Internal capital adequacy assessment process (ICAAP), 3.9 - Internal ratings-based approach (IRB), 3.35, 3.36, Glossary - Capital adequacy ratios (IDTs), 7.95–7.100 - Prudential and Structural Indicators for Islamic Financial Institutions-PSIFIs, 7.102–7.103, 13.28 ### Insurance, pensions, and investment funds - Insurance corporations (ICs), 1.10, 1.22, 2.47, Glossary; balance sheet, 5.119–5.122, Table 5.3; FSIs, 9.40–9.68; income and expense, 5.110–5.118, Table 5.3; investment risks, 9.44; sectoral financial statements, 5.109, Table 5.3; shareholder equity to invested assets, 9.47–9.53; technical risks, 9.43; types, 2.47 - Life insurance corporations, 2.48; Non-life insurance corporations, 2.49, 9.40, 9.54–9.57 - Pension funds (PFs), 2.51–2.54; autonomous, 2.53; balance sheet, 5.128–5.131; FSIs for OFC, 9.69–9.80; income and expense, 5.124–5.127, Table 5.2; memorandum series, 5.132–5.133, Table 5.2; sectoral financial statements, 5.123, Table 5.2 - Funded pension schemes, 2.52–2.53; Unfunded pension schemes, 2.52; Hybrid pension schemes, 2.54; Non-autonomous pension funds, 2.53 - Money market funds (MMFs), 1.10, 1.22, 2.33, Glossary; investment fund shares, 5.54; sectoral financial statements, 5.106–5.108, Table 5.2 - Non-MMF investment funds, 2.46, 5.54; Non-MMF mutual funds, 9.39, Glossary - Investment account holders (IAH), 7.96; Investment equalization reserves (IRR), 7.96 ### Sectoral, consolidation, and statistical coverage - Institutional sectors, 2.2, 2.3, 2.10–2.11, Glossary - Sectoral financial statements, 5.10–5.149, Table 5.2–5.6; sectoral balance sheet, 5.83, 5.139–5.144, Table 5.1 - Consolidation: group-consolidation, 6.1, 6.4, 11.11, Glossary; intra-group consolidation, 6.27, 6.36; balance sheets, 6.47; income statement, 6.46; issues associated with, 6.49–6.52; memorandum series, 6.48 - Consolidation basis for households, 6.43–6.44; non-financial corporations, 6.43–6.44, 10.4, 10.42–10.44; other financial corporations, 6.39–6.42, 9.4–9.7 - Residency-based approach, 6.44 - Standardized report forms (SRFs), 10.19; International Banking Statistics (IBS), 8.9, Glossary - Metadata, 11.34–11.36; Statistical Data and Metadata eXchange Standard (SDMX), 11.21 ### Market, risk, and statistical measures - Market risk, 3.37–3.43 - Stress testing, 13.14, 13.26, 13.33–13.35; Top-down stress testing, 13.34 - Macroprudential analysis, 13.1–13.46, Glossary; Macroprudential toolkits, 1.29, 13.15 - Macro-financial surveillance, 1.4; Macro indicators, 13.6 - Risk dashboard, 13.30–13.31; Systemically important financial institutions (SIFIs), 13.12; Micro-prudential, 1.28, 13.4, 13.10–13.13, Table 13.1 - Weighted measures and distributional statistics: Weighted standard deviation, 12.20–12.22, 12.42, Figure 12.4; Weighted quartiles, 12.23–12.29, Box 12.1; Weighted medians, Table 12.4; Skewness, 12.31–12.34, Figure 12.1; Kurtosis, 12.35–12.37, Figure 12.2; Tail risk, 1.10, 3.41, 12.2, 12.4 *FINANCIAL SOUNDNESS INDICATORS COMPILATION GUIDE 2019 — Box 8.1* --- _Source: https://www.imf.org/-/media/files/data/2019/2019-fsi-guide.pdf_