Specification of Financial Soundness Indicators for Deposit Takers
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6.1 This chapter brings together the concepts and definitions set out in Part I of the Guide to explain how FSIs for deposit takers are to be calculated. The next two chapters cover the calculation of FSIs for other sectors and for financial market FSIs, respectively. The final chapter in Part II covers real estate price indices.
6.2 To summarize the guidance in Chapters 2 and 3:
- The definition of deposit takers is provided in Chapter 2 (paragraphs 2.4 to 2.12).
- Transactions and positions should be recorded on an accrual basis, and only existing actual assets and liabilities should be recognized (paragraphs 3.3 to 3.9).
- The Guide prefers valuation methods that can provide the most realistic assessment at any time of the value of an instrument or item. Market value is the preferred basis of valuation of transactions, as well as for positions in traded securities. For positions in nontradable instruments, the Guide acknowledges that nominal value (supported by appropriate provisioning policies) may provide a more realistic assessment of value than the application of fair value (see paragraphs 3.20 to 3.33).
- Residence is defined in terms of where an institutional unit has its center of economic interest (see paragraphs 3.34 to 3.36).
- Transactions and positions in foreign currency should be converted into a single unit of account based on the market rate of exchange (see paragraphs 3.44 to 3.48).
- Short-term maturity is defined as one year or less (or payable on demand), more than one year is defined as long term (see paragraphs 3.49 to 3.50). Duration is also defined (see paragraphs 3.51 to 3.56).
6.3 Except where otherwise noted, these are the concepts to be employed in compiling the underlying series used to calculate FSIs.
6.4 The underlying series to be used in calculating individual FSIs are defined in Chapter 4. In describing the FSIs below, some brief descriptions of the underlying series are provided, together with cross- references to the more detailed definitions provided in earlier chapters. The sector data should be compiled on a consolidated-based approach as described in Chapter 5; that is, it should encompass both consolidated group reporting and consolidation adjustments at the sector level (Box 5.1).
6.5 Most FSIs are calculated by comparing two underlying series to produce a ratio, as described below. For each ratio, the calculation should use data with the same periodicity for both the numerator and the denominator-either flows recognized during the period, or end-period or average period positions, depending on the ratio being calculated. The Guide considers that for the production of time series, the data for the shortest period available should be used (for example, quarterly data). However, even when higher frequency data are available, annual calculations might also be considered, among other things, to reduce the impact of seasonal factors. 1
6.6 Given that this is a new field of financial and economic statistics, and experience of compiling and using FSIs at both the national and international level is relatively limited, it is recognized that the definitions underlying available data series for use in calculating FSIs might differ among countries, as well as from the guidance set out in the Guide. Any dissemination of such FSI data should be accompanied by metadata so that the basis of calculation is transparent.
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6.7 The Guide discusses the compilation of data on a domestically controlled, cross-border consolidated basis and domestic consolidated basis in Chapter 5 (paragraphs 5.31 and 5.33). However, the compilation of FSIs in accordance with the Guide requires data on a domestically controlled, cross-border consolidated basis. Additional possibilities arise-for example, separate ratios could be calculated for all domestically incorporated deposit takers, foreign controlled deposit takers, deposit takers that are commercial banks, and deposit takers that are savings banks. For all FSIs, ratios could be calculated for groupings based on these or other structural dis- aggregations of the financial sector. 2
6.8 Depending on the analytical needs of users, the guidance provided in the Guide is intended to allow compilers the flexibility to calculate additional FSIs that are not specifically described in this Guide, using the concepts and definitions provided for the underlying series.
6.9 There are 12 core and 14 encouraged FSIs for deposit takers. Other than the two interest-rate-based indicators, which are described in Chapter 8, the agreed FSIs are set out in Table 6.1 and described in this chapter. The core FSIs are indicated. For exposition purposes, capital-based FSIs are presented first, followed by asset-based FSIs, and then by income and expense FSIs. 3 Numerical examples of how to compile and present these data series are provided in Appendix V. 4
6.10 During the drafting of, and consultation on, the Guide, ideas for further developing or redefining some of the FSIs described below were provided. These ideas are set out in Appendix III as examples of additional ratios that go beyond the agreed list but that nonetheless countries might find of relevance to their own national circumstances.
Table 6.1. Deposit Takers: Financial Soundness Indicators
Capital-based
(i) Regulatory capital to risk-weighted assets (core)
(ii) Regulatory Tier 1 capital to risk-weighted assets (core)
(iii) Capital to assets
(iv) Nonperforming loans net of provisions to capital (core)
(v) Return on equity (net income to average capital [equity]) (core)
(vi) Large exposures to capital
(vii) Net open position in foreign exchange to capital (core)
(viii) Gross asset and liability positions in financial derivatives to capital
(ix) Net open position in equities to capital
Asset-based
(x) Liquid assets to total assets (liquid asset ratio) (core)
(xi) Liquid assets to short-term liabilities (core)
(xii) Customer deposits to total (noninterbank) loans
(xiii) Return on assets (net income to average total assets) (core)
(xiv) Nonperforming loans to total gross loans (core)
(xv) Sectoral distribution of loans to total loans (core)
(xvi) Residential real estate loans to total loans
(xvii) Commercial real estate loans to total loans
(xviii) Geographical distribution of loans to total loans
(xix) Foreign-currency-denominated loans to total loans
(xx) Foreign-currency-denominated liabilities to total liabilities
Income- and expense-based
(xxi) Interest margin to gross income (core)
(xxii) Trading income to total income
(xxiii) Noninterest expenses to gross income (core)
(xxiv) Personnel expenses to noninterest expenses
6.11 Monitoring interest rate risk for the deposit- taking sector is important and, in early drafts of the Guide, two FSIs-duration of assets and duration of liabilities-were included for this purpose. However, given that the techniques for monitoring systemwide interest rate risk are still being developed, including by the BCBS, 5 it is premature to include at Page 77 this point specific indicators of interest rate risk in the list of FSIs to be compiled. Research is continuing on the various possible techniques to assess interest rate risk, including duration and gap analysis, as is described in Appendix VI.
6.12 Unless otherwise stated, all the line references in this section refer to Table 4.1.
6.13 Capital is defined in terms of the Tier 1 capital (line 32), total regulatory capital (line 36), and capital and reserves (line 30).
6.14 As noted by the Basel Committee in its Capital Accord, Tier 1 capital is a common feature in all countries' banking systems, being the basis on which market and supervisory judgments of capital adequacy are made, and having a crucial bearing on profit margins and on a bank's ability to compete. It is less affected than capital and reserves by period- to-period unrealized valuation changes.
6.15 The data for capital and reserves (compiled from balance sheet data) are the residual interests of the owners in the assets of the sector after the deduction of liabilities. These data provide a comprehensive measure of the capital resources available to the sector, not least to absorb losses. For instance, when total capital is employed in the "return on equity" FSI ratio, an...
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