5.1 The analysis of FSI ratios is affected by the extent to which the data used for their calculation are consolidated. Thus, when constructing FSI ratios, attention needs to be paid to whether the data reported by entities are on a consolidated basis and the method by which the data for the whole of the reporting population 1 are aggregated. This chapter explains what is meant by consolidation and aggregation, and sets out the various approaches. It also sets out the adjustments required to produce sector- level data.
5.2 The FSI data compiled for domestically controlled deposit takers on a cross-border consolidated basis are best suited for financial soundness analysis when the deposit takers have international operations. Data on domestically located operations might be separately distinguished if the authorities believe it would contribute materially to their financial stability analysis (for example, to illustrate the linkage with other macroeconomic information). This chapter will also outline a preferred approach for the other sectors. The data implications of the Guide 's preferred approaches are explained in Chapter 11.
5.3 Aggregation refers to the summation of data on gross positions or flows. Under an aggregation approach, the total positions and flows data for any group of reporting units are equal to the sum of the gross information for all individual units in the group. 2 Thus, the group and subgroup totals equal the sum of their component elements, and the data on claims and liabilities between the members of the group are preserved.
5.4 In contrast, consolidation refers to the elimination of positions and flows between units that are grouped together for statistical purposes. Consolidation can arise at various levels of grouping. For an individual institutional unit, all intraunit positions and flows are eliminated. If related institutional units are grouped together to form one individual reporting entity (for example, foreign branches of domestic banks are grouped with their parent bank), then all positions and flows within that reporting entity are eliminated from the reported information-that is, all flows and positions among the branches and with their parent are eliminated. If data for a group of reporting entities are consolidated, such as those in the same institutional sector (or subsector), then intrasector flows and positions are eliminated, leaving data on positions and flows with entities in other sectors (or subsectors).
5.5 Consolidation and aggregation can be combined for the purpose of compiling data series for use in calculating FSIs. For instance, reporting entities might provide consolidated data to the compiling agency, which then aggregates these data to create sector totals. On the other hand, the data provided might be consolidated rather than aggregated at the sector level. In this case, information on positions and flows among the entities covered in the reporting population need to be available to the compiling agency so that such positions and flows be eliminated. The approach Page 55 to consolidation and aggregation in compiling series for use in calculating FSIs is discussed below.
5.6 Before discussing consolidated data in more detail, definitions of subsidiaries and associates are required, as these terms are used throughout the rest of this chapter.
5.7 Subsidiaries are corporations over which a parent has established control. While recognizing that national practice on determining control can differ, control is defined in the Guide as the ability to determine general corporate policy by choosing (or removing) appropriate directors to obtain benefits from the activities of the corporation. Control is unambiguously established through ownership of more than half of the voting shares or otherwise controlling more than half of the shareholder voting power (including through ownership of a second corporation that in turn has a majority of the voting shares). Control could also be established with ownership of less than half the voting shares, 3 through, for example, special legislation, decree, or regulation. 4
5.8 An associate is a corporation over which the investor has a significant degree of influence and which is not a subsidiary. Significant influence is usually assumed to arise when the investor owns from 10 to 20 percent (depending on national practice) and 50 percent of the equity/voting power of the entity. Typically, if the ownership stake reaches the threshold for classification as an associate but is expected to be of a temporary nature, the investment continues to be classified as a nonassociate equity investment. However, for FSI purposes, if the equity investment has reached the level to be classified as an associate for two successive reporting periods, the implication is that the investment is not temporary.
5.9 Joint ventures are separate entities owned and operated by two or more parties for their mutual benefit. In the Guide, such entities are classified either as subsidiaries, as associates, or neither, depending on the criteria set out in the previous two paragraphs. So if there are two or more investing parties, each of which has a significant degree of influence over the joint venture, they should each classify the entity as an associate, consistent with the definition in the previous paragraph.
5.10 When discussing reporting populations in more detail, definitions of domestic and foreign control are required.
5.11 Deposit-taking entities are defined in the Guide as foreign controlled if they are subsidiaries or branches of a foreign parent deposit taker. Foreign controlled deposit takers, in addition to supervision by the host supervisory authority, are typically subject to supervision by their parent supervisory authority, as recommended in the Basel Concordat of May 1983 (BCBS, 1983). This criterion should be taken into account if there is uncertainty as to the classification of a deposit taker as foreign controlled. All other deposit-taking entities should be classified as domestically controlled. If a domestic deposit taker is controlled by a bank holding company in a foreign country that is subject to banking supervision in that foreign economy, then it should be also classified as foreign controlled. 5
5.12 For corporations in other sectors, they are foreign controlled if they are subsidiaries or branches of a foreign parent. All other resident corporations are to be classified as domestically controlled.
5.13 In the Guide, under an aggregate resident- based approach, data are reported at the level of institutional units resident in the economy and aggregated by the compiling agency to provide totals of the sectors. This is the approach adopted in the 1993 SNA, the sectoral balance sheets in the MFSM, and related national accounts methodologies. The Guide Page 56 recommends this approach for the compilation of FSI data for the household sector.
5.14 For corporations in an aggregate resident-based system, the institutional unit within which all transactions and positions are consolidated consists of a headquarters office and any branch offices resident in the economy. 6
The Consolidated-Based Approach
5.15 In the Guide, the consolidated-based approach refers to the consolidation of data at both the group and sector levels. It is the required approach for compiling data on deposit takers and other corporate sectors for use in the calculation of FSIs. The text below discusses both consolidated group reporting and compiling consolidated sector-level data. The deposit- taking sector is used as an illustration, but the principles espoused are also relevant and can be applied to other corporate sectors. Table 5.1 supports the text.
5.16 Consolidated group reporting by a resident deposit taker includes coverage not only of its own activities but also those of its branches and subsidiaries, with any transactions and positions among these entities eliminated on consolidation. In essence, consolidation is based on the concept of control by a parent of other operating units. Such an approach is an essential element of banking supervision (BCBS, 1997, No. 20) and is adopted to preserve the integrity of capital in deposit takers by eliminating double counting (gearing) of capital (BCBS, 2001b, para.1). It is for this reason, and also to avoid the double counting of income and assets arising from the intragroup activity of deposit takers-that is, activity that rests on the same pool of capital-that the Guide recommends that deposit takers' data be compiled on a consolidated group basis.
5.17 Cross-border consolidated data are represented by Blocks 1a, 1b, 1c...