Financial Markets
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Page 91
8.1 This chapter covers market-based FSIs required for assessing the health of the financial system. The chapter is divided into two sections: interest rate and securities market indicators. The interest rate FSIs provide information on the interest rates charged by and to deposit takers, thus providing an indication of profitability and competitiveness in the banking sector, along with information on the spread in inter- bank rates that can provide early indications of credit risk concerns among deposit takers. The securities market FSIs provide information on the liquidity of the securities markets in which deposit takers are active and on which they can partially rely to help manage their liquidity.
8.2 To support the monitoring of the financial health and soundness of deposit takers, the Guide encourages the compilation of the following two interest-rate-based FSIs: (1) the spread between reference lending and deposit rates (SLDR), and (2) the spread between the highest and lowest inter- bank rate (SIR).
8.3 Spreads between lending and deposit rates can serve as indicators of trends in deposit takers' net interest income, and hence of profitability. The interest rate spread can also provide information on deposit takers' pricing behavior. However, further information would be required to understand the causes of behavior: for instance, wide spreads may arise from high risk due to underdeveloped collateral systems or weak protection by the judicial system, while widening spreads over time might reflect increased risk premiums rather than a lessening of competitive pressures.
8.4 Interest rate spreads, such as those between borrowers with different credit risk profiles, can serve to indicate the level of perceived risk within the financial system. Therefore, the spread between the highest and lowest interbank rates would help to capture banks' own perception of problems and risks facing banks with access to the interbank market. 1
8.5 There is no standard definition of reference or representative rates. To measure the SLDR, the Guide recommends at a minimum the calculation of the weighted average of all lending and deposit interest rates on loans and deposits (excluding loans and deposits among deposit takers) during a reference period in the portfolio of resident deposit takers. The interest rate spread could also be calculated on a domestically controlled, cross-border consolidated basis, thus providing an indication of profitability, but it would be reflecting activity in different markets. Using loan and deposit amounts as weights, the spread between the weighted average lending and deposit rates gives the overall interest spread (in basis points) between loans and deposits.
8.6 Loans and deposits among deposit takers are excluded because the focus of this FSI is on the profitability of the deposit-taking sector as a whole and on its pricing behavior in intermediating the savings of other sectors. While the Guide recommends compilation of an aggregate interest rate spread at a minimum, more disaggregated information on spreads Page 92 could be compiled as needed, such as for nonfinancial corporations and households.
8.7 A method of calculating the weighted average lending rate is to divide the accrued amount of interest income on loans reported by deposit takers for a given period (numerator) by the average position of loans (denominator) for the same period. The weighted average deposit rate can be computed by dividing interest expense on deposits (numerator) by the average position of deposits (denominator) for the same period. 2 Positions should be averaged using the most frequent observations available.
8.8 In principle, using this method, the weighted average interest rate for a portfolio of n loans (types of deposits) can be constructed as follows: 34
(Formula in Pdf File)
8.9 This method of calculation could minimize the reporting burden on deposit takers if data on accrued amounts of interest on loans and deposits are readily available from the accounting systems of deposit takers, as typically data on deposit takers' positions in loans and deposits are regularly reported to central banks in balance sheet reports required for the compilation of monetary statistics. 5 Compilers need to ensure that the numerator and the denominator cover the same set of deposit takers.
8.10 Another method of calculating average weighted interest rates for a given reference period is to use contracted interest rates (that is, price data), using the loan (deposit) amounts as weights. The weights are determined by dividing the outstanding value of each loan (type of deposit) at the end of the period by the outstanding value of all loans (deposits) at the end of the period. Two steps are involved: (1) multiply each weight (which can be derived for each loan separately or for a group of loans with the same contracted interest rate) by the contracted rate for each loan (or group of loans), and (2) sum the results to get the overall weighted interest rate. Thus, an overall average weighted interest rate can be constructed as follows:
(Formula in Pdf File)
8.11 Under accrual accounting, interest costs accrue continuously on debt instruments, thus matching the cost of funds with the provision of funds. The rate at which these costs accrue is known as the interest rate, and for deposits and loans it is typically established by contractual arrangement. Interest rates may be fixed or variable. Charges such as fees that reflect payments for the provision of services should be excluded from the interest rate calculation. For compiling the SLDR, annualized interest rates should be calculated. 6 Loans and deposits are defined in Chapter 4. The reporting population is the deposit-taking sector, as defined in Chapter 2, on a resident basis (although data could also be compiled on a domestically controlled, cross-border consolidated deposit taker basis).
8.12 Average-period interest rates are more closely related to profitability and pricing behavior than end- period rates and are not subject to the possibility of exceptional daily fluctuations. However, an SLDR Page 93 based on end-period rates, directly measured, with appropriate metadata, provides reliable information. Such a spread between lending and deposit rates would be calculated as the difference between the weighted averages of end-period interest rates for the different types of loans and the different types of deposits (that is, three-month and six-month). The weights for each type of loan and deposit would be calculated using end-period position data (see paragraph 8.10).
8.13 The Guide recommends at a minimum the compilation of an SLDR for outstanding business, as this is directly related to profitability. For the purposes of this FSI, outstanding business is the stock of deposits placed with deposit takers and the stock of loans extended by deposit takers, excluding deposits from, and loans to, other resident deposit takers. The stock of loans is measured after specific provisions. The interest rate on outstanding business covers all business that has been agreed in all periods prior to the reference date and is still outstanding.
8.14 To reflect more closely current market developments and deposit takers' pricing behavior, rather than outstanding business, countries could also compile an SLDR for new business, particularly if the necessary data are readily available. New business is defined as deposits placed with deposit takers and loans extended by deposit takers during the reference period. New business includes "rolled over" or renewed loans and deposits. 7 Interest rates on new business allow for the monitoring of deposit takers' pricing behavior in response to current financial market developments, such as changes in central bank intervention rates.
8.15 In Chapter 4, the Guide recommends that interest should no longer accrue on nonperforming loans resulting in an implicit interest rate of zero. While there might be some analytical benefit in excluding NPLs from the SLDR calculation (see below), the Guide 's preferred approach is to include such loans in the calculation. In other words, when compiling the interest rate on loans, positions in NPLs (less specific provisions) 8 should be included in the denominator and zero interest included in the numerator. Excluding such positions would give a misleading- an overstated-indication of profitability, as it would significantly widen the spread. 9 Indeed, movements over time in the SLDR could be analyzed with the help of data on outstanding NPLs.
8.16 However, if NPLs are significant in deposit takers' portfolios, to provide additional information on deposit takers' pricing behavior, another SLDR could be calculated that excludes the position in NPLs from the denominator in the compilation of the loan interest rate.
8.17 In some economies, a certain amount of lending by deposit takers can be directed to priority sectors at prescribed interest rates...
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