Real Sector Division
IMF Statistics Department
Adding Creditor Perspective Information
to National Accounts
Marshall Reinsdorf (IMF) and
Kyle Hood (Bureau of Economic Analysis)
Society for Economic Measurement Conference
Paris, July 23, 2015
The views expressed herein are those of the authors and should not necessarily be attributed to the IMF,
its Executive Board, or its management, or to Bureau of Economic Analysis
Real Sector Division
IMF Statistics Department
Bad Debt in National Accounts
 In the current accounts, disposable income and saving
are calculated as though all amounts due were paid
•
•
•
Commodities delivered but not paid for are defined as part of
production, and income from production  production
Defaulting is not a transaction
The picture of debtors’ finances must include all payables accrued
 Reductions in loan balance by agreement are capital transfers

to the borrower, but loan write-offs due to defaults fall under
“Other changes in volume of assets”
But the SNA does recommend a balance sheet memo item
showing the market value of loans or the nominal value net of
provisions for expected losses
Real Sector Division
IMF Statistics Department
Expected losses on loans to risky borrowers
 In business accounting, lenders deduct provisions for



expected default losses when calculating their income
But to measure borrowers’ saving, the entire amount of
interest charges and debt that they incur has to be
counted, even if the probability of default > 0
To avoid inconsistencies in system of accounts, approach
that is appropriate for borrowers is also applied to lenders
Expected default losses are not considered when
calculating the disposable income of lenders
Real Sector Division
IMF Statistics Department
The Lending Business
 Default losses are a normal part of the lending business,



much like claims are part of the insurance business
Besides a “return-to-risk-bearing” premium to generate
the return required on a risky investment, interest rates to
risky borrowers include a default premium lender can
substitute interest for missing repayments of principal
With no provision for expected losses, income from loans
to risky borrowers is overstated in national accounts
During times of rising losses, such as the financial crisis,
the income of banks as measured in national accounts may
show implausible growth
Real Sector Division
IMF Statistics Department
Measuring the output of lenders
 Implicitly-priced financial intermediation services are




measured by FISIM
FISIM reclassifies some interest from loans as an implicit
payment for services, leaving a “pure interest” residual
FISIM consumed by borrowers is measured by the spread
between the loan rate and the reference rate
But some of this interest is actually needed to cover
expected losses of principal due to default
The default margin can be netted out of the loan rate used
to calculate FISIM without changing the measure of lenders’
income by letting their “pure interest” get bigger
Real Sector Division
IMF Statistics Department
Example of average loss rate and FISIM
 Default margins are modest for some types of loans, but large for others
 For US commercial banks in 2013, the average charge-off rate on loans in
general was 0.7 percent, while the average effective interest rate (which
excludes uncollectable interest) was 5.9 percent.
 But some types of loans, like credit cards, have much higher loss rates
Credit Card Lending in the UK, averages for 1994-2007
User cost margin for FISIM, conventional approach
7 percent
Write-off rate
3.5 percent
User cost margin for FISIM, corrected
3.5 percent
Real Sector Division
IMF Statistics Department
Alternative measure of income of lenders
 A measure of income of lenders that is appropriate for many

purposes nets out a provision for expected default losses
To exclude the default premium from both “pure interest”
and FISIM when looking at the lender but not when looking
at the borrower, the system of accounts can include an
adjustment item equal to the provision for expected losses
•
“Taxes on products” is an example of such an adjustment item
 But we prefer a simpler method
 To avoid disrupting the core accounts, alternative measures
of disposable income and saving of the financial corporations
that make loans can be shown as supplementary information
Real Sector Division
IMF Statistics Department
Imputed capital transfers to borrowers
 Lenders to risky borrowers do not expect to receive back all
of the principal; they just expect not to lose more than the
interest generated by the default premium
 An alternative way to look at borrowers would be to record
funds advanced to risky borrowers in the expectation of not
being paid back as imputed capital transfers
 Role of amounts that are advanced and not paid back as a
source of funding for spending would be illuminated
 This alternative approach to borrowers can also be applied to
creditors and will give the same measure of their net lending
as deducting expected losses from their saving
Real Sector Division
IMF Statistics Department
Examples
 Our examples for the US and France show bigger effects


of the alternative treatments of expected losses in the
case of the US, implying that this information we are
recommending is important for international
comparisons
To estimate expected losses in the US we apply an
adaptive expectations with an adjustment speed of 0.3
per year to data on charge-off rates by type of loan
The calculations for France just used simple averages
over the time period
Real Sector Division
IMF Statistics Department
Saving less Net Capital Transfers Paid,
Financial Corporations in the US
(billions of US dollars)
Saving less net capital transfers paid
with no correction for expected losses
Corrected for expected default losses of
commercial banks
Corrected for expected losses of
financial corporations on commercial
bank loans and home mortgages
Memo:
Expected default losses, commercial
banks loans and home mortgages
Net lending with no correction for
expected credit losses
2007
2008
2009
2010
2011
-48.5
-68.9
293.9
249.9
182.1
-86.0
-116.9
219.8
137.3
67.9
-103.0
-161.1
132.8
49.8
-13.5
54.5
92.2
161.1
200.1
195.6
-94.6
-91.2
304.4
263.8
183.3
Real Sector Division
IMF Statistics Department
Saving less Net Capital Transfers Paid,
Households and NPISH in the US
(percent of disposable personal income)
No correction for expected losses
Corrected for expected default
losses of commercial banks
Corrected for expected losses of
financial corporations on commercial
bank loans and home mortgages
2007
2008
2009
2010
2011
2.9
4.9
6.4
5.8
6.0
3.1
5.1
6.9
6.5
6.8
3.3
5.5
7.7
7.3
7.5
24.5
28.9
51.7
82.2
90.2
42.1
74.5
141.2 172.7 174.7
Memo: Imputed capital transfers
received (billions of US $)
from commercial banks
from financial corporations on
commercial bank loans and home
mortgages
Real Sector Division
IMF Statistics Department
Corrected income from interest and FISIM
of depository corporations in France
2008
2009
2010
2011
2012
Correction for expected losses
324
106
430
7
202
120
322
10
151
127
278
8
180
123
303
10
171
126
297
13
Corrected total income from SNA interest + FISIM
424
312
270
293
284
Corrected FISIM
100
110
119
114
113
Expected default losses, as % of borrower FISIM
1.6
6.6
3.1
8.3
2.9
6.3
3.3
8.1
4.4
10.3
Expected default losses, as % of loans outstanding
0.1
0.2
0.2
0.2
0.2
“Pure interest” received
FISIM, no correction for expected default losses
Total income from SNA interest + sales of FISIM
Memo items:
Expected default losses, as % of total interest received
Real Sector Division
IMF Statistics Department
Imputed capital transfers received,
nonfinancial corporations in France
2008
2009
2010
2011
2012
115
38
153
173
87
52
139
165
68
57
125
191
80
55
135
191
72
53
125
185
4
6
4
5
7
177
171
195
196
192
Imputed capital transfers, as % of loans outstanding
2.6
0.2
4.3
0.3
3.2
0.2
3.7
0.3
5.6
0.3
Imputed capital transfers, as % of disposable income
2.6
4.3
3.2
3.7
5.6
“Pure interest” paid
FISIM, no correction for expected default losses
Pure interest paid + FISIM consumed (not corrected)
Gross disposable income, national accounts
Imputed capital transfers received
Gross disposable income + imputed capital transfers
Memo items:
Imputed capital transfers, as % of total interest paid
Real Sector Division
IMF Statistics Department
Imputed capital transfers received,
households in France
2008
“Pure interest” paid
FISIM, no correction for expected default losses
Pure interest paid + FISIM consumed (not corrected)
Gross disposable income, national accounts
Imputed capital transfers received
Gross disposable income + imputed capital transfers
2009
2010
2011
2012
65
57
72
67
54
2
11
17
13
17
67
68
89
80
71
1579 1592 1663 1666 1681
2
4
4
4
5
1581 1596 1667 1670 1686
Memo items:
Imputed capital transfers, as % of loans outstanding
3.0
0.2
5.9
0.4
4.5
0.4
5.0
0.4
7.0
0.5
Imputed capital transfers, as % of disposable income
0.1
0.3
0.2
0.2
0.3
Imputed capital transfers, as % of total interest paid
Real Sector Division
IMF Statistics Department
Conclusion
 Risky borrowers pay higher interest rates so the lender



can substitute interest for expected losses of principal
Ignoring losses from defaults gives a reasonable picture
of the debtor’s situation, but is not suitable for creditors
Disposable income, saving and “net lending” of financial
institutions that make loans to risky borrowers are
overstated
Supplementary information on alternative measures that
take account of expected default losses would allow the
national accounts to present a more complete and
meaningful picture