## _wp16128

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---

### I. Introduction — motivation and scope
- Banking crises are frequent, highly disruptive, and very expensive.
- Laeven and Valencia (2003) review 147 systemic banking crises between 1970 and 2011 and estimate:
  - median output loss for each occurrence at 23.2 percent of GDP,
  - direct fiscal costs for financial sector rescues reaching 6.8 percent of GDP,
  - the increase in the public debt ratio of over 12 percent.
- In the most severe cases (Indonesia and Argentina), direct fiscal costs exceeded half of GDP.
- Primary objective of the paper:
  - Apply a “national wealth approach” (NWA) to assessment, prevention, and management of banking crises linked to accumulation of nonperforming loans (NPLs) to the corporate sector.
  - Early detection and precise assessment of banking crises as an additional diagnostic tool to improve policy making and contain costs.
- Secondary objective:
  - Contribute to closer integration of financial sector and macroeconomic analysis through reliance on national accounting concepts and formats.
- Relationship to the Balance Sheet Approach (BSA):
  - NWA is a subset of the broader BSA work stream aimed at integrating macro and financial analysis.

### II. Key features of the National Wealth Approach (NWA)
- Components of an NWA:
  - Reliance on national accounting concepts and formats (SNA-based data sets and concepts).
  - Anchoring analysis on the SNA concept of national wealth, its distribution among economic sectors, and how it is affected by banking system and macro developments.
- Purpose:
  - Provide a fully integrated analytical framework incorporating macro and financial developments within consistent data and concepts.

- Reliance on the national accounting framework:
  - The “System of National Accounts-2008” (2008 SNA) is the internationally agreed standard.
  - IMF manuals conceptually rooted in the 2008 SNA include GFSM 2014 and BPM6.
  - The IMF’s 2000 “Monetary and Financial Statistics Manual” was designed primarily for monetary policy, not prudential monitoring.
  - Observed problem: no widespread use of the holistic SNA framework for banking crises analysis; analytical silos persist.
- Core SNA concepts relevant to NWA:
  - Wealth/net worth in SNA = real, nonfinancial assets (financial assets = financial liabilities), plus or minus Net International Investment Position (NIIP).
  - Financial transactions are wealth-neutral.
  - Quadruple-entry SNA vs. double-entry business accounting: SNA invariance of national wealth can be broken in prudential reporting if counterpart entries are omitted.
  - SNA eliminates a standalone concept of “financial losses”; wealth reduction is recorded as changes in real assets or transfers.
- NPLs in SNA:
  - 1993 SNA did not recognize loan impairment until write-off/renegotiation; provisions were not recorded.
  - SNA 2008 recommended two memorandum items: nominal value of NPLs and their market equivalent value; these are partial steps toward fuller recognition.

- National wealth as analytical anchor:
  - Use SNA national wealth to monitor aggregate wealth, sectoral distribution, and impacts from macro/financial developments.
  - Business accounting focuses on individual entities, entitlements, profit, and prudence; SNA provides a sequence of 14 accounts ending in net worth and requires full symmetry in transaction treatment.
  - Operational step: convert financial statements to SNA formats (deposit-taking corporations sub-sector S122), reconcile SNA closing balance sheet/net worth with aggregate banks’ prudential reports, and extend reconciliation to corporate and household sectors to obtain an integrated macro-financial framework.
  - Monitoring: prepare SNA-based national balance sheet at baseline and stress dates; analyze variations in national wealth, distribution, and economic nature of transactions causing changes.

### III. Diagnostic insights from NWA — detection, sequencing, and scale
- NWA as diagnostic device:
  - Normal national-wealth changes are gradual; banking crises show sudden large “losses” under business accounting.
  - NWA reveals timing and severity gaps between prudential data and economic reality that can cause sub-optimal policy responses:
    - Delayed detection of problems originating in other sectors (often corporate).
    - Overestimation of crisis scope leading to overly strong and costly policy measures.

- Delayed and misplaced diagnostics — key insights:
  - Sudden drops in bank net worth often reflect transfers to other entities rather than aggregate wealth destruction.
  - Two main types of transfers reflected in bank “losses”:
    - Outright transfers to other economic entities (examples include strategic borrower default, political loan forgiveness, unilateral changes in loan conditions by authorities, displacement of productive assets during prolonged AMC processes, preferential related-party treatment).
    - Beneficiaries can include other financial institutions, market participants, or counterparties in exchange-rate movements.
  - Many large “losses” are delayed recognition of long-run borrower deterioration (past transfers); misreporting can distort bank and macro data, undermining diagnostics and policy formulation.
  - Sub-optimal investment often misclassified as investment rather than intermediate consumption, with wide-ranging consequences for banks’ positions and macro aggregates.

- Overestimates and overreactions — risks and corrective analytical steps:
  - Double-counting of distress: corporate distress leading to bank provisioning can be misread as simultaneous crises in both sectors; NWA helps sequence the problem.
  - Prudence and provisions: distinguish between provisions reflecting actual decline in borrowers’ net wealth (a transfer) and additional prudential provisions booked under prudence; analytically set prudential excesses apart and temporarily disregard them under NWA to avoid overestimating crisis severity.
  - Distinguish liquidity tensions from net-worth-compromising crises to support lighter policy measures for liquidity events.
  - Routine bank errors (mismatched maturities, repayment timing errors) can precipitate disproportionate supervisory action during distress.

### Box 1 — Perfunctory inadequate financing: example, prevention, and national initiatives
- Case example and systemic consequences (stylized sequence):
  - A six-month bridge loan to a developer becomes overdue due to macro-political turbulence.
  - Prudential classification moves from substandard to doubtful to loss with provisions required at 15, 50, and 100 percent of balance respectively.
  - Authorities take over the bank; asset valuation falls from going concern to liquidation, triggering fire sales and shortfall versus liabilities.
  - Deposit insurance covers small depositors; larger depositors incur losses, triggering further bankruptcies and damaging public confidence and international reputation.
  - NWA perspective: the real asset (plot of land) retains its intrinsic long-term value; national wealth remains unaffected by the described financial-sector loss sequence.

- Prevention: multilateral coordination and national initiatives (overview):
  - NWA can contribute to prevention/containment via a multilateral macro-financial framework implemented nationally with robust international coordination.
  - Global measurement steps:
    - Measure global wealth comprising only real assets and monitor evolution.
    - A global institution with macro, statistical, and accounting expertise should interact with all economies.
    - Provisional definitions and compromises can allow an initial measurement despite technical issues and data gaps.
  - National disaggregation steps:
    - Distribute global real assets across countries.
    - Add financial assets and liabilities to determine each country's net wealth.
    - Disaggregate net wealth across SNA-defined five economic sectors.
  - National initiatives — actionable data and targeted monitoring:
    - Ensure SNA-aligned country- and sector-based accounts are comprehensive and consistent with global measures.
    - Provide supervisors with SNA-based tables and indicators to complement prudential reports and maintain a bridging table explaining material differences.
    - Aggregate sector-level tables suffice normally; upon distress, disaggregate to individual banks of interest.
    - Identify “orphan financial assets” (no reported balancing liabilities) and disregard them when unsupported (examples include certain deferred tax credits).
    - Set up steering committees to design corporate-investment surveys and identify key borrowers for individual SNA-format reviews converting business accounts to SNA to assess viability and possible reclassification of investment as intermediate consumption.

### Box 2 — NWA to financial stability monitoring: methodology, crisis-management uses, and research agenda
- Core methodological steps (summary):
  - Define and measure global wealth (real assets only), disaggregate to countries, add financial assets/liabilities (SNA national balance sheet), disaggregate to sectors, compare sector SNA balance sheets with business/prudential reports to find divergences and “orphan assets,” survey corporate sector for sub-optimum investment, review prominent borrowers, and assess bank impacts.

- Contribution to crisis management — stronger criteria and selection of targets:
  - Pre-qualifications for support: certify institutions in advance as “SNA-solvent” to expedite liquidity support.
  - Distinguish liquidity turbulences from solvency pressures via NWA.
  - Fiscal recoveries: design temporary mechanisms that requalify booked “losses” as transfers (example: “wealth transfer certificate” delivered by banks to borrowers and tax authorities; transfers could become taxable income, aiding investigation and legal footing despite limited recovery prospects).
  - Selection of policy target:
    - Conventional strategy: support banks first, then restructure corporates later.
    - NWA-informed alternative: focus first on corporate borrowers (the source), restore corporate viability so banks can resume normal loan servicing—potentially more efficient and avoiding wealth transfers that create fiscal risk and moral hazard.
  - Crisis communication: NWA helps communicate that problems often originate with borrowers, using SNA concepts easier to understand than abstract prudential terms.

- Future research agenda and unresolved issues:
  - Practical constraints: costs of statistical frameworks, compilation lags and revisions, valuation issues, and lower timeliness/detail versus prudential data.
  - NWA would require shortcuts and assumptions; it serves as a supplementary, order-of-magnitude tool.
  - Legal constraints: prudential legal instruments differ for banks and corporates; NWA-based decisions need legal enforceability.
  - SNA-based expanded ratios and indicators:
    - Develop ratios using global wealth and disaggregated components (e.g., national wealth per capita, distribution by sector, stock-versus-stock ratios such as national/sector wealth vs. banking sector assets).
    - NIIP has strong impact on national-wealth-per-capita measures—suggesting more attention to NIIP in financial stability reviews.
  - Post-crisis reviews:
    - Use systemic banking crisis databases as a starting point for NWA-based systematic reviews of crises and recoveries to check whether crises were overestimated and why.
  - Bank value creation and profitability:
    - Translate bank financial statements into SNA concepts (FISIM, operating surplus, disposable income, net saving) to assess bank value creation and implications of policies restoring interest margins.

### Appendix I — Sub-optimal corporate investment: numerical illustration and policy implications
- Root cause: gradual accumulation of sub-optimum investments (overpayments, underuse/misuse of real assets) can overstate measured national wealth and set the stage for banking crises.
- SNA/NWA technical point:
  - Sub-optimum investments booked wholly as gross fixed capital formation (GFCF) should be split into GFCF (productive part) and intermediate consumption (value-absorbing part).
  - Reclassifying overpayments from GFCF to intermediate consumption reduces measured value added (GDP) and national wealth.

- Numerical illustration — key figures (as presented in Table 1)
  - Production account (As Booked vs Economic Reality)
    - 1 Output (sales): 5,000 vs 5,000
    - 2=3+4 Intermediate consumption: 2,000 vs 2,300
    - 3 Supplies purchased: 2,000 vs 2,000
    - 4 Overpayments on investments: 0 vs 300
    - 5=1-2 Value added (GDP): 3,000 vs 2,700
  - Distribution and use of income account
    - 6 Compensation of employees: 2,600 vs 2,600
    - 7=5-6 Operating surplus: 400 vs 100
    - 8 Interest paid to banks: 120 vs 120
    - 9 Dividends paid: 70 vs 70
    - 10=7-8-9 Balance of primary income: 210 vs -90
    - 11 Taxes on income: 110 vs 110
    - 12=10-11 Savings: 100 vs -200
  - Accumulation account
    - 12 Savings: 100 vs -200
    - 13=14+15 Gross fixed capital formation: 1,000 vs 700
    - 14 Real economic value: 700 vs 700
    - 15 Overpayments on investments: 300 vs 0
    - 16=12-13 Net lending (+)/borrowing (-): -900 vs -900
    - 17 =(-16) Net increase in bank loans: 900 vs 900
  - Balance sheet (NFC)
    - 18 Fixed assets: 1,000 vs 700
    - 19 Bank loans: 900 vs 900
    - 20=18-19 Equity: 100 vs -200
  - Banks' balance sheet
    - 21 Loans to corporations: 900 vs 900
    - 22 Deposits from the public: 800 vs 800
    - 23=21-22 Equity: 100 vs 100
  - National wealth
    - 24 Non-financial corporations: 100 vs -200
    - 25 Banks: 100 vs 100
    - 26=24+25 Total: 200 vs -100

- Mechanism of distortion and propagation:
  - Reclassification of 300 from GFCF to intermediate consumption reduces GDP by 300 and converts reported NFC equity of 100 into economic-reality equity of -200.
  - Bank borrowing remains 900 while part of bank resources funded intermediate consumption rather than real assets.
  - The SNA quadruple-entry principle locates the real economic loss in the corporate sector; aggregate banks’ equity in national accounts remains unchanged, avoiding double-counting.

- Stylized crisis sequence (NWA perspective):
  - Incubation: unrecognized intermediate consumption overstates GDP, corporate equity, and national wealth.
  - Trigger: recognition of sub-optimum investment reveals reduction in national wealth located in the corporate sector.
  - Banking reaction: provisioning booked as “losses” in business accounting represents transfers from banks to corporates in national accounts.
  - Government recapitalization results in transfers from taxpayers to banks without changing national wealth.
  - Final outcome: cost of inefficient investment is first absorbed by banks then by taxpayers.

- Policy implications and operational conclusion:
  - Early action outside the banking sector is required as part of an integrated macro-financial approach.
  - Precise identification of the source and mechanism of distress is essential to prevent delayed or misdirected policy responses.
  - During the incubation period, parallel distortions in financial and macro data can mislead decision makers and prevent timely corrective measures.

*Source: IMF working paper _wp16128 (References, Sections II–V excerpts, Box 1, Box 2, Appendix I).*

### References .............................................................................................................

### _wp16128 - References

### I. Introduction
- Banking crises are frequent and highly disruptive events and are very expensive.
- Laeven and Valencia (2003) identify and review 147 systemic banking crises that took place between 1970 and 2011.
- They estimate:
  - median output loss for each occurrence at 23.2 percent of GDP,
  - direct fiscal costs for financial sector rescues reaching 6.8 percent of GDP,
  - the increase in the public debt ratio of over 12 percent.
- In the most severe cases (Indonesia and Argentina), the direct fiscal costs reached more than half of GDP.
- The stakes for improving prevention, early detection, and resolution of such crises are described as high.

### National Wealth Approach (NWA): Purpose and Objectives
- Primary objective:
  - Apply a “national wealth approach” (NWA) to the assessment, prevention, and management of a sub-set of banking crises—those linked to an accumulation of nonperforming loans (NPLs) to the corporate sector.
  - Early detection and precise assessment of banking crises is the primary objective of the NWA as an additional—rather than a substitute—way of broadening understanding of their nature and dynamics.
  - Aim is to benefit policy makers with a view to containing the cost of such crises.
- Secondary objectives:
  - Contribute to ongoing reflection toward a closer integration of financial sector and macroeconomic analysis through extensive reliance on national accounting concepts and formats.
- Overarching purpose:
  - Strengthen the financial stability policy work agenda.

### Relationship to Balance Sheet Approach (BSA)
- The NWA is described as a sub-set of the wider work stream on a “balance sheet approach” (BSA) to monitoring financial sector and macroeconomic developments.
- The BSA has been under consideration, including in particular by IMF staff, since the early 2000s, and has more recently benefitted from a renewed focus as part of efforts to better integrate macro and financial analytical work.

### Paper Structure (as provided)
- Section II: describes the key features of an NWA.
- Section III: discusses how the NWA can be relied upon as a different way of characterizing banking crises.

*Source: _wp16128 - References .............................................................................................................*

### Section IV covers prevention issues, and Section V how an NWA could also be taken into

### _wp16128 - Section IV covers prevention issues, and Section V how an NWA could also be taken into account for the management of banking crises

### II. KEY FEATURES OF A NATIONAL WEALTH APPROACH
- An NWA includes two components:
  - Reliance on national accounting concepts and formats (SNA-based data sets and concepts) to assess banking sector issues within the integrated macroeconomic analytical framework used by practitioners.
  - Anchoring analysis on the SNA concept of national wealth, its distribution among economic sectors, and how it is affected by banking system and macro developments.
- Purpose: provide a fully integrated analytical framework incorporating macro and financial developments within consistent data and concepts to improve policy making.

### A. Reliance on the National Accounting Framework
- Framework and standards:
  - The “System of National Accounts-2008” (2008 SNA) is the internationally agreed standard for compiling measures of economic activity.
  - IMF manuals conceptually rooted in the 2008 SNA include the 2014 “Government Finance Statistics Manual” (GFSM 2014) and the 2009 “Balance of Payments and International Investment Position Manual, Sixth Edition ” (BPM6).
  - The IMF’s 2000 “Monetary and Financial Statistics Manual” was designed primarily for monetary policy analysis, not prudential monitoring.
- Observations:
  - No widespread use of the holistic SNA framework for banking crises analysis and management to date; enduring analytical silos between macro-economists, national accountants, and financial sector specialists are a major obstacle.
  - The SNA provides a comprehensive sequence of accounts for all sectors, but banking sector analysis has largely remained business-accounting (prudential) driven.
- Core SNA concepts relevant to NWA:
  - Wealth/net worth in SNA equals real, nonfinancial assets (financial assets equal financial liabilities), plus or minus Net International Investment Position (NIIP).
  - Financial transactions are wealth-neutral: when a new financial asset/liability appears, net wealth is not directly changed.
  - Quadruple-entry accounting (SNA) versus double-entry business accounting:
    - SNA requires four entries per transaction (“uses” and “resources”) so national wealth remains invariant to declines in loan values if all entries are recorded.
    - Business prudential double-entry recording can break the SNA equality between net worth and real assets if counterpart entries are omitted.
  - The SNA framework eliminates the standalone concept of “financial losses”; wealth reduction is recorded as changes in real assets (consumption, depreciation, amortization, or “other changes in the volume of (real) assets”) or transfers to other entities.
- Nonperforming loans (NPLs) in SNA:
  - The 1993 SNA did not recognize loan impairment until write-off or renegotiation; provisions were not recorded.
  - IMF staff raised concerns in 2001 about loss of analytical value; SNA 2008 (Chapter 13, Section C) recommended two memorandum items: nominal value of NPLs and their market equivalent value.
  - The memorandum items are a partial step; a more comprehensive formal recognition of NPLs in the SNA would be necessary for monitoring financial distress.

### B. National Wealth as Analytical Anchor
- Rationale:
  - Use the SNA concept of national wealth to diagnose banking sector issues by monitoring aggregate national wealth, its sectoral distribution, and impacts from macro/financial developments.
- Business accounting vs. SNA accounting:
  - Business accounting:
    - Focused on individual entities, entitlements, profit (bottom line), and prudence principle (provisions and asymmetric recognition of unrealized losses vs. gains).
    - Produces income statement and balance sheet targeted to stakeholders and bankruptcy priorities.
  - SNA accounting:
    - Sequence of 14 successive accounts describing production, consumption, savings, investment, and ending in a closing balance sheet with net worth.
    - Designed to support primary economic policy objectives (e.g., “the promotion and maintenance of high levels of employment and real income” per IMF Articles of Agreement, Article I (ii)).
    - Requires full symmetry in transaction treatment; excludes business prudence asymmetry.
  - Result: business and SNA reporting may diverge materially; “profit” as a concept exists in business accounts but not in SNA accounts (SNA uses eight successive accounts for income generation, allocation, redistribution, and use).
- Operational step: financial statements conversion and integration
  - Start from a complete sequence of SNA-based accounts for the banking sector (deposit-taking corporations sub-sector S122 of financial corporations sector S12).
  - Compare SNA closing balance sheet/net worth for the banking sector with the aggregate of banks’ income statements and balance sheets; identify and analyze all material differences.
  - Similar reconciliation for the corporate sector; once all sectors are in the same format, an integrated macro-financial framework with the share of net national wealth held by each sector becomes available.
- Monitoring variations:
  - Prepare SNA-based national balance sheet at a baseline date reflecting broad financial stability and for one or more stress dates; analyze variations in national wealth and its distribution and the economic nature of transactions causing changes.

### III. BANKING CRISES DIAGNOSTIC FROM A DIFFERENT ANGLE
- NWA as a diagnostic device:
  - Under normal conditions, national wealth changes are gradual (driven by production, consumption, net investment, fiscal and external balances).
  - Banking distress/crises manifest as sudden large “losses” under business accounting (loan value reductions, declines in reported net worth).
  - NWA helps reveal timing and severity gaps between prudential data and economic reality that can cause sub-optimal policy responses:
    - Delayed detection of problems originating elsewhere (often corporate sector).
    - Overestimation of crisis scope leading to overly strong and costly policy measures.

### A. Delayed and Misplaced Diagnostic
- Key diagnostic insights:
  - Sudden drops in bank net worth often reflect transfers to other entities rather than aggregate wealth destruction (financial transactions are wealth-neutral).
  - Two main types of transfers reflected in bank “losses”:
    - Outright transfers to other economic entities, e.g.:
      - Write-down/write-off of household mortgage loans when borrowers act as “strategic defaulters.”
      - Blanket loan partial or total forgiveness granted for political reasons to categories of borrowers.
      - Unilateral changes in loan conditions imposed by authorities on banks without full compensation.
      - Displacement of valuable productive assets via corporate holding structures during systemic turmoil and prolonged AMC processes.
      - Preferential treatment granted to related-party borrowers.
    - Beneficiaries can include other financial institutions, market participants, or counterparties in exchange-rate movements.
  - Delayed recognition of past transfers:
    - Many large “losses” are adjustments acknowledging a long-run gradual deterioration of borrower financial condition (delayed recognition of past transfers of wealth to borrowers).
    - Resulting misreporting can distort bank data and macroeconomic data; accumulated distortions may render diagnostics and policy formulation unreliable.
- Role of sub-optimal investment:
  - Many distortions originate from sub-optimal investment when transactions classified as “investment” are in reality “intermediate consumption.”
  - Such misclassification has wide-ranging consequences for banks’ positions and macro aggregates (see numerical example referenced in Appendix).

### B. Overestimates and Overreactions
- Risks of overestimation once distress is visible:
  - Double-counting of distress:
    - Corporate distress causing bank provisioning can be misread as simultaneous crises in both corporate and banking sectors; SNA-based NWA clarifies that the fundamental problem lies in either the corporate or banking sector (sequencing issue).
  - Prudence principle and precautionary provisions:
    - Prudential provisioning (booking provisions based on risk of non-repayment) is appropriate for entity-level assessment but introduces asymmetric changes in aggregate national wealth.
    - NWA recommends analytically decomposing bank provisions into:
      - The share corresponding to an actual decline in borrowers’ net wealth and capacity to repay (a transfer from banks to borrowers).
      - Additional provisions accumulated under prudence that, while maintained for local prudential compliance, should be analytically set apart and temporarily disregarded under an NWA.
    - If large provisions mainly reflect prudence rather than actual borrower net wealth decline, NWA can help avoid overestimation of crisis severity and unnecessary strong policy responses.
  - Temporary liquidity tensions:
    - Liquidity shocks that do not change net worth in the first round are less severe than “real” crises; NWA helps distinguish liquidity events from net worth-compromising crises and supports lighter policy measures where appropriate.
  - Perfunctory inadequate financing:
    - Routine bank errors (e.g., mismatch of maturities, erroneous repayment timing expectations) are ordinarily minor but can have critical impacts during distress, potentially triggering disproportionate supervisory action.
- Conclusion for diagnostics:
  - NWA contributes to a more balanced assessment of banking distress, helping avoid two main pitfalls:
    - Acting too late because underlying problems brewed unnoticed for years.
    - Taking disproportionately strong measures based on overestimation of depth and scope of the situation (discussed further in Section V).

*Source: IMF working paper content provided in the input.*

### Box 1. Perfunctory Inadequate Financing—Dire Consequences in a Crisis Setting:

### Box 1. Perfunctory Inadequate Financing—Dire Consequences in a Crisis Setting: An Example

### Case example and systemic consequences
- A reputable real estate developer acquires an expensive, well-located plot via a six-month bridge loan from a medium-size bank that temporarily disregards its exposure limits.
- The bank expects the large exposure to disappear before the end-of-year closing and to benefit from a longstanding client relationship.
- Macro-economic and political turbulences freeze housing development projects; the six-month loan becomes overdue.
- Prudential classification progresses from substandard to doubtful to loss, with required provisions of 15, 50, and, finally, 100 percent of its balance.
- Because of the loan size, authorities consider the bank insolvent and take it over; asset valuation is downgraded from a going concern to liquidation, triggering fire sales and proceeds falling short of full liabilities coverage.
- Deposit insurance is mobilized to rescue covered small depositors while leaving larger depositors with losses, triggering further corporate bankruptcies.
- Public confidence in the domestic financial system is damaged, exacerbating turmoil in domestic financial markets and raising depositors’ edginess at other banks; the country's and authorities’ international reputation is tarnished.
- From a national wealth perspective, real assets (the plot of land) retain their intrinsic, long-term economic value determined by inhabitants’ aspiration for better housing; national wealth remains unaffected by the financial-sector loss sequence described.

### Prevention: multilateral coordination and national initiatives (overview)
- Preparedness and an adequate crisis resolution framework are essential; prevention is a role where the NWA can be a supplemental contributor.
- At the global level, the NWA may contribute to prevention and containment of financial system distress via a multilateral macro-financial framework starting from the highest level of integration and implemented at the national level.
- Robust international coordination mechanisms should underpin this framework.
- Footnote: The relevant unit in charge of crises within the IMF’s Monetary and Capital Markets Department (MCM) is called “Financial Crisis Preparedness (emphasis added) and Management Division.” (footnote 15)

### A. A multilateral macrofinancial framework — global and national measurement steps
- Global wealth measurement:
  - Develop a measure of global wealth comprising only real assets and monitor its evolution over time as the key first step toward a global system of banking crisis prevention.
  - A global institution with in-house expertise (macro-economists, statisticians, national accounts and financial sector experts) that regularly interacts with all economies would best carry out the exercise.
  - Complex and unsettled technical issues need not be fully resolved to start; provisional agreements and compromises on definitions and methodologies could allow an expeditious first measurement.
  - Data gaps can be temporarily set aside; the essential requirement is availability of a set of definitions—even imperfect ones—applied consistently across countries.
- National level disaggregation of global wealth:
  - Once a global measure for global real assets exists, disaggregate it to preserve consistency with the global measure through cooperative multilateral–national effort:
    - First, distribute global real assets among all countries, identifying the amount of real assets held by each of them;
    - Second, introduce financial assets and liabilities so that, together with real assets, each country’s net wealth is determined;
    - Third, within each country, disaggregate net wealth and its three components for each of its SNA-defined five economic sectors.
  - Both global measurement and national disaggregation are iterative; maintaining consistency across work streams is key rather than immediate accuracy.

### B. National level initiatives — actionable data and targeted monitoring
- Keeping actionable macro-financial data at the ready:
  - Most national statistical authorities already prepare country-wide and sector-based accounts and balance sheets in line with SNA concepts necessary for an NWA; the task is to ensure comprehensiveness and consistency with the global wealth measurement initiative.
  - Progress should be monitored, vetted, and confirmed by a relevant body as an NWA-based step toward preserving financial stability. (This could be, for instance, part of the Article IV consultation between the IMF and its member countries.) (footnote 16)
  - National authorities should ensure sets of actionable macro-financial data, suitable for the country’s circumstances, are permanently available to supplement existing financial stability data.
  - For banking supervisors:
    - Provide a second set of tables and indicators based on SNA concepts to complement standard prudential reports.
    - Prepare and keep updated a bridging table elucidating material differences between prudential reports and SNA-based reports.
    - Aggregate sector-level tables suffice under normal circumstances; upon signs of distress, disaggregation down to individual banks of special interest should be carried out.
    - SNA-based balance sheet items could be arranged operationally, for example by distributing them based on assessed financial robustness of counterparties.
- The problem of orphan financial assets:
  - Identify macro-financial reporting discrepancies, including “orphan financial assets” (assets with no reported balancing liabilities), which can cause misleadingly inflated national wealth numbers due to duplicate claims on the same real assets.
  - Identification should be guided by a multi-disciplinary team: national accountants, statisticians, macro-economists, and financial sector experts.
  - Preserve full consistency between aggregate numbers and their disaggregation at the sector or individual entity level at each stage.
  - Compare SNA numbers for net wealth and components with other reported data by sector:
    - Government: reliance on the IMF GFSM 2014 will limit scope, as most relevant numbers should already be available in an SNA-based framework;
    - Households: compare SNA-based data with surveys or similar research;
    - Banks: thoroughly compare aggregate sector-wide prudential income statements and balance sheets with SNA-based numbers; consider disaggregation to individual institutions when relevant;
    - Corporate sector: produce aggregate sector-wide income statements and balance sheets based on business accounting, using country-specific data sources where available (corporate financial statements databases, credit registries, stock exchange, rating agencies, surveys). Data gaps should be filled through extrapolations and reasonable assumptions, prioritizing comprehensiveness over accuracy to yield actionable order-of-magnitude information.
  - Supervisors should identify and raise awareness of meaningful divergences with SNA-based data and should disregard “orphan assets,” including deferred tax credits on banks’ or corporations’ books that are not explicitly part of the government’s liabilities.
- Monitoring corporate investment:
  - Accumulation of sub-optimum corporate investment can distort macro and financial data and lead to banking crises; early detection is essential.
  - Countries could set up a steering committee (macro-economists, statisticians, national accountants, banking supervisors) to design specialized surveys to monitor and assess corporate investment quality, provide guidance for interpreting findings, and guide corrective actions.
  - International coordination would facilitate sharing country experiences and the emergence of relevant international standards.
- Individual reviews of key borrowers:
  - The steering committee could identify a subset of bank borrowers of special interest for individual reviews based on size of bank indebtedness, robustness of financial condition, and prominence in the national economy.
  - Reviews would convert business income statements and balance sheets into SNA formats, permitting review of investments over several years and possibly retroactive reclassification of part of investments as intermediate consumption.
  - This process would assess borrowers’ viability in terms of adjusted capacity to create added value (in the SNA production account) sufficient to generate an operational surplus after compensation of employees and other uses in the SNA’s “generation of income account.”

*Source: Box 1, “Perfunctory Inadequate Financing—Dire Consequences in a Crisis Setting,” from the supplied IMF document.*

### Box 2. A National Wealth Approach to Financial Stability Monitoring

### Box 2. A National Wealth Approach to Financial Stability Monitoring

### Core methodological steps
- Define and measure global wealth based on the SNA (real assets only).
- Disaggregate global real assets to the country level.
- Add financial assets and liabilities for each country (SNA-based national balance sheet).
- Disaggregate the SNA-based national balance sheet to the sector level.
- Compare sector-level SNA balance sheets with any available similar reports based on business or other standards and formats; elucidate materials divergences between the two sets of documents, looking in particular for “orphan financial assets.”
- Conduct surveys of the corporate sector to look for accumulation of sub-optimum investment that should be reclassified as intermediate consumption.
- Review the SNA-defined value generation capacity of individual prominent corporate borrowers.
- Assess the impact on concerned banks and take appropriate corrective measures.

### Contribution to crisis management
- The NWA may bring a broader perspective to rules for support to distressed banks, selection of policy targets, and related communication strategy.

Stronger criteria for crisis support to banks
- Use NWA to develop pre-qualifications for support (e.g., certify individual financial institutions in advance as “SNA-solvent,” qualifying them for more expeditious liquidity support in case of stress).
- For the banking system as a whole, assess pressures from the NWA perspective to distinguish liquidity turbulences that justify system-wide liquidity support.
- Fiscal recoveries: exploit SNA treatment (which encompasses transfers not “losses”) to design temporary mechanisms that requalify booked “losses” as transfers. Example procedure described:
  - When writing down NPLs, banks could deliver to the concerned borrowers a “wealth transfer certificate,” with a copy to the tax authorities.
  - Those transfers could, in principle, become taxable income of the beneficiaries.
  - Authorities would then have firmer basis to investigate the true source of the losses and their final beneficiaries, possibly with an added “tax pursuit mechanism.”
- Acknowledge that prospects for actual tax recoveries might be limited, but the NWA can improve the investigative and legal footing.

Selection of the target for policy response
- NWA clarifies when distress originates among corporate borrowers and then contaminates banks: there is one problem, not two.
- Two possible strategies:
  - Conventional: support banks first through emergency assistance, then restructuring/resolution, with corporate restructuring later.
  - NWA-informed alternative: focus first on corporate borrowers (the source), resolving them to financial viability so banks can resume normal loan servicing—potentially more efficient and avoiding wealth transfers from banks to corporates that create fiscal risk and moral hazard.

More effective crisis communication
- Public support to banks is often misunderstood and politically fraught.
- NWA-based communication advantages:
  - Demonstrates problems originate with borrowers rather than banks.
  - Uses SNA-based core concepts that are easier to understand than abstract prudential concepts.
  - Frames the issue in terms of corporations’ capacity to produce value sufficient to distribute to employees and stakeholders; when value added is insufficient, policy response is warranted to minimize risks posed by inefficient corporations to stakeholders including employees, banks, and depositors.

### Future research agenda

Unresolved practical issues hindering wider reliance on the SNA and the NWA
- Recognized SNA limitations constrain operational use:
  - Costs of setting up strong statistical frameworks, often beyond means of numerous countries.
  - Compilation lags and constant data revisions.
  - Valuation issues.
  - SNA data will never be as timely and detailed as prudential data for individual banks.
- Implementing the NWA would require significant shortcuts and broad assumptions; it would remain a supplementary information source providing orders of magnitude rather than precise estimates.
- Further research needed to address SNA shortcomings while preserving operational relevance.
- Legal dimension: established prudential approaches include legal instruments for resolving troubled banks that do not apply identically to corporate borrowers. For operational usefulness, NWA-based decisions need to be legally enforceable.

SNA-based expanded set of ratios and indicators
- Develop NWA-based ratios using global wealth and its disaggregated components at country, sector, and entity levels.
- Examples and potential insights:
  - Measure of national wealth per capita showing wide cross-country variation; NIIP level has strong impact, suggesting more focus on NIIP in financial stability reviews.
  - Distribution of national wealth among sectors.
  - Supplement standard flow-versus-stock ratios (e.g., GDP vs. banking system assets) with stock-versus-stock ratios (e.g., national and sector-based wealth vs. banking sector assets) to measure intermediation and financial depth.
  - Analyze how much wealth is held directly or indirectly through financial assets.
  - International comparisons of these new ratios to identify sources of weaknesses and financial fragilities.

Reviews of past banking crises, including the recovery process
- Use the database of systemic banking crises (see footnote 17 in source) as a starting point for systematic review and analysis using an NWA.
- Examine processes and mechanisms through which NPLs decline in recovery phases when banks often report quick reductions in volume.
- Compare evolution of net worth of formerly troubled borrowers with their NPLs as reported by banks to check if past crises were overestimated at their peak and why.
- Post-mortem analyses from the NWA perspective could yield insights for more precise assessment and management of future crises.

Bank value creation and profitability issues
- Use NWA for prudential review of bank value creation and profitability within financial stability analysis.
- In SNA terms, banks create value mainly through intermediation services indirectly measured (FISIM in 2008 SNA).
- Compare items in business income statements (closing with “net profit”) with SNA concepts:
  - “operating surplus” (generation of income account),
  - “disposable income” (secondary distribution of income account),
  - “net saving” (use of disposable income account).
- Information-rich anomalies (e.g., negative output in the “production account” when converting bank financial statements to SNA formats) warrant further review for macro-financial implications (see Frécaut (2004) in source).
- Comparing SNA and business-based bank profitability data can:
  - Quantify to what extent policies supporting wide interest margins to restore bank health impair investment and growth.
  - Clarify that bank capital increases either by transfers that deplete net worth of other sectors (redistribution of national wealth) or gradually through economic surplus accumulation within banks, which reduces other sectors’ capacity to invest.

### Concluding remarks
- The paper explores how a National Wealth Approach (a subset of the balance sheet approach) could aid identification, prevention, and management of banking crises, focusing on crises arising from deterioration in banks’ loans to corporate borrowers.
- Highlights that the SNA is an underutilized, comprehensive analytical framework and internationally accepted standard for macroeconomic analysis; a broader reliance on the SNA via an NWA could help advance a unified macro-financial analytical framework.
- Key insights from NWA:
  - Banking crises involve transfers among economic sectors, not only “losses” within a sector.
  - Mechanism of crisis accumulation: sub-optimum investment treated in economic reality as value-absorbing intermediate consumption.
  - Such crises might be detected late and later prone to overestimation of scope and severity.
- NWA enables reinforced monitoring of corporate sector developments, potential policy responses aimed at the source of problems, and improved communication strategies.
- The paper outlines avenues for future research to operationalize and extend the NWA.

*Source: Box 2, "A National Wealth Approach to Financial Stability Monitoring" (excerpt).*

### Appendix I. Sub-Optimal Corporate Investment as a Root Cause of Banking Crises:

### Appendix I. Sub-Optimal Corporate Investment as a Root Cause of Banking Crises: A Numerical Illustration

### Root cause and conceptual framing
- Banking crises can be the final symptomatic manifestation of adverse economic developments that occurred elsewhere in the economy and in the past.
- A root cause identified is the gradual accumulation of sub-optimum investments in the corporate sector.
- Sub-optimum investment includes:
  - Overpayments (for instance, commissions paid to intermediaries and other facilitators).
  - Misuse or underuse of newly produced real assets (for instance, buildings with lower than normal occupation levels or a factory functioning well below capacity).
- Causes of sub-optimum investment can include an investment glut at a later stage of the economic cycle, poor governance and business practices, or technical difficulties.
- From an SNA-based NWA perspective, sub-optimum investment leads to overestimating national wealth and economic growth and, if material, sets the stage for a future banking crisis.

### SNA/NWA technical point
- Sub-optimum investments are booked wholly as “gross fixed capital formation” (GFCF) but economically should be split:
  - The sound, effectively productive part recognized as GFCF.
  - The remainder booked as “intermediate consumption,” absorbed in production without creating accumulated value.
- Reclassifying overpayments from GFCF to intermediate consumption reduces measured value added (GDP) and national wealth.

### Numerical illustration — key figures (Table 1)
- Production account (As Booked vs Economic Reality)
  - 1 Output (sales): 5,000 vs 5,000
  - 2=3+4 Intermediate consumption: 2,000 vs 2,300
  - 3 Supplies purchased: 2,000 vs 2,000
  - 4 Overpayments on investments: 0 vs 300
  - 5=1-2 Value added (GDP): 3,000 vs 2,700
- Distribution and use of income account
  - 6 Compensation of employees: 2,600 vs 2,600
  - 7=5-6 Operating surplus: 400 vs 100
  - 8 Interest paid to banks: 120 vs 120
  - 9 Dividends paid: 70 vs 70
  - 10=7-8-9 Balance of primary income: 210 vs -90
  - 11 Taxes on income: 110 vs 110
  - 12=10-11 Savings: 100 vs -200
- Accumulation account
  - 12 Savings: 100 vs -200
  - 13=14+15 Gross fixed capital formation: 1,000 vs 700
  - 14 Real economic value: 700 vs 700
  - 15 Overpayments on investments: 300 vs 0
  - 16=12-13 Net lending (+)/borrowing (-): -900 vs -900
  - 17 =(-16) Net increase in bank loans: 900 vs 900
- Balance sheet (NFC)
  - 18 Fixed assets: 1,000 vs 700
  - 19 Bank loans: 900 vs 900
  - 20=18-19 Equity: 100 vs -200
- Banks' balance sheet
  - 21 Loans to corporations: 900 vs 900
  - 22 Deposits from the public: 800 vs 800
  - 23=21-22 Equity: 100 vs 100
- National wealth
  - 24 Non-financial corporations: 100 vs -200
  - 25 Banks: 100 vs 100
  - 26=24+25 Total: 200 vs -100

### Mechanism of distortion and economic propagation
- The accumulation account should reflect that GFCF booked at 1,000 is reduced to 700 because 300 are overpayments reclassified as intermediate consumption.
- Consequences of this reclassification:
  - Intermediate consumption rises by 300 to 2,300 in the production account; value added and GDP fall by 300.
  - Components of the distribution and use of income account are unaffected individually, but its balance falls; savings become negative in the example.
  - Bank borrowing by NFC remains 900, but a portion of bank-provided resources funds intermediate consumption rather than creating real assets.
  - The NFC balance sheet shifts from reported positive equity of 100 to negative equity of -200 in economic reality.
  - National wealth is reduced by the amount reclassified from investment to consumption.
- The SNA principle of quadruple-entry accounting implies the equity position of banks remains unchanged in the aggregate accounts; real economic losses are located in the corporate sector, not double-counted in both corporate and banking sectors.

### Stylized crisis sequence (NWA perspective)
- Incubation phase:
  - Part of corporate investment expenses are unrecognized as intermediate consumption; value added, GDP, corporate equity, and national wealth are overestimated.
- Trigger and recognition:
  - A trigger leads to recognition of sub-optimum investment; previously distorted data are corrected and the reduction in national wealth becomes visible and is located in the corporate sector.
- Banking sector reaction:
  - Banks categorize some corporate borrowers as nonperforming and build provisions, labeled as “losses” in business accounting and prudential analysis.
  - As national wealth remains unchanged, this reflects a transfer of wealth from banks to the corporate sector (even if not explicitly booked by beneficiaries).
- Government recapitalization:
  - If banks are recapitalized by the government, national wealth remains unaffected and there is a transfer from the taxpayer to the banks.
- Final outcome:
  - The cost of inefficient corporate investment is first absorbed by the banks and then by the taxpayer.

### Policy implications and operational conclusion
- To preserve financial stability, action is needed earlier and outside the banking sector as part of an integrated macro-financial approach.
- This requires more precise identification of the source of the problem and of the precise mechanism through which it develops.
- During the incubation period, parallel distortions in financial and macro data can mislead decision makers and prevent adequate and timely policy responses.

*Source: Appendix I. Sub-Optimal Corporate Investment as a Root Cause of Banking Crises: A Numerical Illustration (IMF).*

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