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Continuous Improvement: Measuring UK Private Non-Financial Corporations' Overseas Deposits and Loans

Current Methodology Flow Chart

Abstract

This article launches a new way in which users will be kept informed of the reviews and improvements being taken forward across ONS. This first article focuses on the measurement of deposits and loans held by UK Private Non-Financial Corporations (PNFCs).

Introduction

The ONS is committed to being the place where people come first for trusted statistics. To meet this aim it is important that users understand the quality of these statistics, their fitness for purpose and their relevance for decision making. At the same time, it is vital that ONS continuously reviews and, where appropriate, improves data sources, methods and systems used to produce the statistics to ensure that they remain relevant.

This article launches a new way in which users will be kept informed of the reviews and improvements being taken forward across ONS. This first article focuses on the measurement of deposits and loans held by UK Private Non-Financial Corporations (PNFCs). Further articles, covering a range of developments, will follow.

Background and Purpose of Article

Estimates of PNFCs’ overseas bank deposits and borrowings are currently based on data from the Bank for International Settlements (BIS). BIS, which is an international organisation of central banks, produces the most authoritative statistics on cross-border banking activity (the data collected covers 43 countries and includes the most significant international banking centres). However, a breakdown of overseas deposits and loans held by UK non-banks into the institutional sectors required for national account purposes is not available. In the existing method for producing such estimates, the large majority (80 per cent) of the BIS UK non-bank total (after some adjustments, please see Annex A) is apportioned to PNFCs; the remainder is split equally between the household sector (10 per cent), and the insurance and pension funds sector (10 per cent).

Since 2002, PNFCs have consistently run a financial surplus. During this period the overseas deposits (and to a lesser extent loans) held by this sector have increased considerably, reflecting a rise in the BIS data on which they are based.

The extent of this rise in PNFCs’ overseas deposits has attracted interest and this article explores the work being conducted to improve the measurement of PNFCs’ borrowings from and deposits with overseas banks. In doing this, it:

  • examines the recent trends in the financial position of UK PNFCs as shown in the latest published UK National Accounts (Blue Book 2012), which provides a context to the issues under discussion

  • describes the current measurement of PNFCs’ overseas deposits and loans, and the challenges that surround it

  • discusses the work being conducted to improve the measurement of PNFCs’ overseas deposits and loans

  • outlines the next steps

Recent trends in the financial position of UK PNFCs

Net lending/ borrowing position

Since 2002, the PNFC sector has been acting as a net lender (Figure 1). In other words, the sector has accumulated financial surpluses, which have been either used to purchase assets or pay down debt. These financial surpluses have arisen because earnings in the sector have outpaced expenditure, such as taxes, dividends and capital spending.

Figure 1: The net lending/borrowing position of UK PNFCs, 1987 to 2011

Chart showing the net lending/borrowing position of UK PNFCs, 1987 to 2011

Figure 1 Download (19.5 Kb Excel sheet)

How is the net lending/borrowing position calculated in the national accounts?

The net lending/borrowing position of PNFCs is calculated in the national accounts in two ways:  using the non-financial accounts and financial account of the sector.

Non-financial accounts (income and capital): the net lending/borrowing position is calculated by bringing together the earnings (e.g. gross operating surplus and property income) and expenditure of the sector (e.g. taxes, interest, dividends and capital spending); the balancing item shows whether the sector has been acting as a net lender (i.e. running a financial surplus) or a net borrower (i.e. running a financial deficit).

Financial account: the net lending/borrowing position is calculated by bringing together the net acquisition of assets (e.g. deposits and shares) and liabilities of the sector (e.g. loans and equity); the balancing item gives us the net lending/ borrowing position of the sector. The figure calculated here should theoretically be equal to the figure calculated in the non-financial accounts. However, because they are calculated independently using different data sources, an adjustment called the statistical discrepancy is used to align them.

When looking at the two types of account, it is helpful to remember that each non-financial transaction is mirrored by a financial transaction; thus the balancing items in the two types of account should theoretically be equal. 

Net lending/borrowing position in the non-financial (income and capital) accounts

The non-financial accounts of the PNFC sector show how the recent trend of a financial surplus is accounted for in terms of changes in the earnings and expenditure of the sector. A positive net lending/borrowing position arises in the non-financial accounts when the gross saving (retained earnings) of PNFCs exceeds their capital spending. Gross saving is defined as profits after the payment of taxes, interest and dividends to shareholders, while capital spending comprises mainly gross fixed capital formation.

Figure 2: Net lending/borrowing position of UK PNFCs and its components in the non-financial accounts, 1987 to 2011

Figure 2: Net lending/borrowing position of UK PNFCs and its components in the non-financial accounts, 1987 to 2011

Figure 2 Download (21 Kb Excel sheet)

Figure 2 shows that the PNFC sector moved into a net lending position (or financial surplus) in 2002 as capital spending stayed broadly flat while gross saving increased. After 2005, the financial surplus of PNFCs declined with growth in capital spending outpacing that of gross saving. However, this reversed in 2008, due to the 2008/09 recession having a considerably more negative impact on capital spending than gross saving.

Net lending/borrowing position in the financial account

The financial account of the PNFC sector brings together the financial transactions of the sector. These transactions take place with the other sectors of the economy and the rest of the world. They show how the financial surplus (or deficit) of PNFCs in the non-financial accounts has been financed through the net acquisition of financial assets and liabilities.

Figure 3: Net lending/borrowing position of UK PNFCs and its components in the financial account, 1987 to 2011

Figure 3: Net lending/borrowing position of UK PNFCs and its components in the financial account, 1987 to 2011

Figure 3 Download (21 Kb Excel sheet)

Figure 3 shows that the recent PNFC surpluses have not generally been associated with reductions in the net acquisition of financial liabilities. Indeed, between 2002 and 2007, the net acquisition of financial liabilities by PNFCs actually increased steadily from £85 billion to £220 billion. This was explained by growth in loans to the sector from both UK and overseas banks. Nevertheless, the net acquisition of financial assets was consistently higher in this period, re-affirming the financial surplus in the non-financial accounts. On the financial assets side, PNFCs built up large deposits, particularly with overseas banks. During the 2008/09 recession there was a net disposal of financial liabilities (i.e. the payment down of debt) by PNFCs.

Balance sheet position

The picture of the financial position of PNFCs is not complete without looking at the balance sheet position of the sector (Figure 4).

Figure 4: The Financial balance sheet position of UK PNFCs, 1987 to 2011

Figure 4: The Financial balance sheet position of UK PNFCs, 1987 to 2011

Figure 4 Download (20.5 Kb Excel sheet)

In aggregate, the financial liabilities of PNFCs grew at a faster pace than their financial assets between 2002 and 2006, leading to the net liability position of the sector reaching a record high of £1,967 billion in 2006. Since then, the net liability position has slightly reduced to £1,743 billion in 2011. It should be noted that the balance sheet, unlike the financial account, is influenced by price movements and exchange rate fluctuations. It should also be noted that a large part of PNFCs liabilities can be attributable to their share capital value (valued at market prices).

PNFCs’ overseas deposits and loans

The analysis shown in the previous section provided an overview of the financial position of PNFCs as shown currently in the National Accounts. One area that has attracted particular interest is the large rise in the deposits held by the sector with overseas banks (Figure 5).

Figure 5: Balance sheet levels of UK PNFCs deposits by type, 1987 to 2011

Figure 5: Balance sheet levels of UK PNFCs deposits by type, 1987 to 2011

Figure 5 Download (20.5 Kb Excel sheet)

Between 2002 and 2011, PNFCs increased their total level of deposits from £240 billion to £720 billion. This was in large part as a result of significant increases in the level of deposits held with overseas banks, which increased from £65 billion to £421 billion.  In 2010, total UK PNFCs deposits as a share of Gross Domestic Product (GDP) were 46 per cent compared with 18 per cent in France and Germany. A majority of the total UK PNFCs deposits in 2010 were held in overseas banks (54 per cent).

This growth in overseas deposits, particularly in relation to deposits held in UK banks, has led ONS to review the measurement of PNFCs’ overseas deposits and loans.

Measurement of PNFCs’ overseas deposits and loans: current approach

Estimates of PNFCs’ overseas deposits and loans are currently based on the international locational banking statistics produced by the BIS. These statistics are the most authoritative source on cross-border banking activity. The methods used to produce them are also consistent with concepts used in the UK National Accounts and Balance of Payments.

The reporting population of the BIS international locational banking statistics comprises countries with the most significant international banking centres. There are currently 43 reporting countries / centres (see table 1 below).  The reporting institutions are deposit-taking banks (or similar financial institutions) resident in the reporting countries.

PRT Table 1

Reporting countries providing locational banking data 4
Australia (1997) Curacao (2010)2 Isle of Man (2001) Panama (2002)
Austria (1987) Cyprus (2008) Italy (1977) Portugal (1997)
Bahamas (1983)1 Denmark (1977) Japan (1977) Singapore (1983)
Bahrain (1983) Finland (1983) Jersey (2001) South Africa (2009)
Belgium (1977) France (1977) Luxembourg (1977) South Korea (2005)
Bermuda (2002) Germany (1977) Macao SAR (2006) Spain (1983)
Brazil (2002) Greece (2003) Malaysia (2008) Sweden (1977)
Canada (1977) Guernsey (2001) Mexico (2003) Switzerland (1977)
Caymen Islands (1983) Hong Kong SAR (1983) Netherlands (1977) Turkey (2000)
Chile (2002) India (2001) Netherlands Antilles (1983)3 United Kingdom (1977)
Chinese Taipei (2000) Ireland (1977) Norway (1983) United States (1977)

Notes:

  1. Reports semi-annual data only.

  2. Does not report locational by nationality statistics.

  3. No longer exists from Q4 2010. Replaced by reporting from Curacao.

  4. Brackets show the date the country started first reporting. 

The BIS international locational banking statistics provide quarterly information on all balance sheet positions that represent financial claims or liabilities vis-à-vis non-residents. There are breakdowns by currency, by sector and by country of residence of the counterparty. All reporting authorities, usually a central bank, use the same reporting structure to report the information required for compiling the locational banking statistics, which ensures in principle the internal consistency of the data. Reporting gaps are typically filled by BIS estimates based on supplementary information provided by reporting central authorities.

Although the BIS international locational banking statistics are the most reliable source on cross-border banking activity, reporting countries are required only to breakdown the international claims and liabilities of banks by whether their counterparties are banks or non-banks. This limitation creates the challenge of trying to allocate the total UK non-bank overseas deposits and loans to the various non-bank sectors of the economy (e.g. households, PNFCs, insurance and pension funds, and other financial intermediaries).

In the existing method, the large majority (80 per cent) of the BIS UK non-bank total (after some adjustments, please see Annex A) is apportioned to the PNFC sector; the remainder is then apportioned to the household sector (10 per cent) and the insurance and pension funds sector (10 per cent).

Figure 6: Balance sheet levels of UK non-bank and PNFCs overseas deposits and loans, 1989 to 2011

Figure 6: Balance sheet levels of UK non-bank and PNFCs overseas deposits and loans, 1989 to 2011

Figure 6 Download (20.5 Kb Excel sheet)

Figure 6 shows the considerable growth in the BIS UK non-bank total over the past decade and the corresponding rise in PNFCs’ overseas deposits and loans.

As mentioned in the previous section, this increase in overseas deposits, particularly in relation to deposits held in UK banks, has led ONS to review the measurement of PNFCs’ overseas deposits and loans. 

One theory is that the considerable growth in the underlying BIS data might be explained by the activity of Other Financial Intermediaries (OFIs) such as hedge funds and private equity, which proliferated over the past decade and engage in significant international financial activity.

The above possibility means it is sensible that the existing allocation of total UK non-bank overseas deposits and loans is reviewed. In particular, whether the allocations to the OFI sector should be increased and PNFCs reduced. The ONS does not currently survey hedge funds, however the Financial Services Authority (FSA) runs two regular surveys. Although the FSA surveys are not designed to provide data for national accounts purposes, ONS is investigating how they might be used to help with the allocation of BIS data.

It should be noted that the quality of the overall BIS data is not in question, only how it is apportioned between sectors. It is expected that the BIS data will continue to be used for estimates of overall non-bank deposits and borrowings with the Rest of the World banks. From 2014 onwards, changes being made to the BIS statistics will mean that the sectoral allocation of UK non-bank overseas deposits and loans will no longer be necessary as these will then be available.

Review of the allocation of BIS data on UK non-bank overseas deposits and loans

ONS has established a working group which is examining the challenges related to the allocation of the BIS data on UK non-bank overseas deposits and loans, and are investigating possible solutions. The working group includes representatives from HM Treasury, the Department for Business, Innovations and Skills, Bank of England and Office for Budget Responsibility.

An important area of investigation being considered by the working group, until the additional sectoral breakdown from BIS is available, is the use of additional data sources in the method of allocating BIS data. One option is the use of the ONS Financial Assets and Liabilities Survey (FALS). FALS is a quarterly financial survey which collects data on a selection of financial assets and liabilities held by the largest PNFCs (by number of employees) in the UK. Information from the survey on Treasury bills, Gilts, Commercial Paper, Certificates of Deposits, Bonds and Shares is used to compile the asset holdings of PNFCs. PNFCs are also asked about their balance sheet levels of deposits and loans with overseas banks; however this information is not currently used.

It should be noted that a new method of allocating the BIS data will raise a number of challenges that will have to be resolved before it can be implemented. For example:

  • a change in the allocation of UK non-bank overseas deposits and loans to PNFCs will impact the net lending/borrowing position calculated in the sector’s financial account (and the net worth position in the balance sheet). If this leads to a large discrepancy with the net lending/borrowing position calculated in the non-financial account (which is also indirectly affected through changes to interest flows) in any period, then this would need to be resolved as it is important that the internal coherence of the sector accounts is preserved.

  • a change in the allocation of UK non-bank overseas deposits and loans to PNFCs will affect other non-bank sectors, as allocations would have to balance the BIS UK non-bank total. As mentioned before, one theory is that OFIs such as hedge funds and private equity may explain the growth in UK non-bank overseas deposits and loans. So, it is possible that a change in PNFCs overseas deposits and loans would also mean a change in OFIs’ overseas deposits and loans.

Next steps

The working group established by ONS will produce recommendations for improving the sectoral allocation of the BIS data, including in particular the methods underpinning the measurement of PNFCs’ overseas deposits and loans. The results of this will then go through the standard processes of national accounts methodological assessment and approval. It is hoped that an improved method can be incorporated into Blue Book 2013, to be published in June 2013.

ONS welcomes feedback and engagement from any users who may wish to contribute to this work.  This may include sharing data, research and expertise.  Please contact profitability@ons.gsi.gov.uk if you have any comments or would like to participate in this and future reviews.

Reviewing and improving ONS Statistics

As noted in the introduction, this article launches a new way in which users will be kept informed of the statistical reviews and improvements currently being taken forward across ONS. Examples of other developments include:

  • Index of Services (IoS) (446.3 Kb Pdf) : a re-launch of the IoS development programme to improve the measurement of selected industries in the output measure of Gross Domestic Product (GDP).

  • European System of Accounting 2010 and Balance of Payment Manual Six: the implementation of improved methods to meet new international standards in the compilation of National Accounts and Balance of Payments.

  • Ownership of UK quoted shares: a review to improve the methodology used to produce estimates published as part of the statistical bulletin 'Ownership of UK quoted shares' and in the UK Economic Accounts.

  • Bonds: a review to improve estimates of debt securities which forms part of the ONS’s ‘developing financial statistics for policy' programme of work.  This recommends that:  A review of bond transactions should be carried out, focusing on the reconciliation of data between the income and capital account and measures in the financial account.

Statistical Contact

Guled Guled, +44(0)1633 456898, Analysis and Methods, ONS, profitability@ons.gov.uk

Acknowledgements

ONS would like to thank the members of the working group for their advice and support in reviewing this measurement challenge.

Annex A

Current Methodology Flow Chart (63.5 Kb Excel sheet)

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