Financial Accounts in Iceland Methods and Results

Financial Accounts in IcelandMethods and Results

» Brief economic background of importance for the financial development in Iceland and for understanding the development of financial accounts

» What are financial accounts » Compilation and preparation of financial accounts, methodology,

valuation, reconciliation, source data, etc.

» Results and interpretations of financial accounts

» The use of financial accounts or flow-of-funds accounts for economic analysis

The economic development in Iceland

A short background of the Icelandic economy before looking at the development of the financial accounts:

» In 2003, the Central bank lowered the reserve requirement for the ICE banking system from 4 percent to 2 percent, in accordance with European rules. The lending capacity of banking system was increased by around one GDP.

» In 2003, the banking system was dominated by three banks; two state owned and one private. The

state banks were privatized 2003 and sold to favorable partners who had not much banking experiences.

» In the parliament spring election 2004, one of the political parties promised to increase the loan-to-value ratio of the State Housing Fund to 90% if it came into power. This promise was introduced in August 2004.

» Inflationary pressures => policy rate increasing (5.3% May 2004 to 14,3% March 2007) => bank credit growth fuelled by the carry-trade capital inflows attracted by high yields => appreciated ISK krona and falling import prices fuelled private consumption demand.

» Low international interest rates => Icelandic firms borrowed in foreign currency at low rates » Wealth effects, portfolio effects, easy capital, etc.

The Main Price Indices 1995-2013

The GDP in fixed prices (2005) and GDP growth

NPISH HH GG FC NFC NFC FC GG HH NPISH

Saving net

Net lending/borrowing

Capital account

Redistribution of income in kind account

Distribution of income account

Current Accounts

Use of income account

Income account

Production account

Financial account

Balance SheetAssets Liabilities &

Net Worth

Rest of the

world

Rest of the

world

Accumulation Accounts

SNA: Intergrated System

Uses Resources

Changes in Liabilities & NW

Changes in Assets

Primary distribution of income account

Secondary distribution of income account

Other economic

flows

Other economic

flows

Capital transfers &

Non-financialassets

Income account

Production account

Transactions

GDP (value added)

ESA10SNA’08

Financialassets &liabilities

Closingbalance

sheet

Saving

Revenue account

Expense account

Financialassets &liabilities

Non-financialassets

Closingbalance

sheet

GFSM 2001

Transactions

Operating balance

Net lending / borrowing

Relationshipsbetween GFSM 2014 and ESA

2010

Stocks at the

beginning of the period

(Opening balance)

Net acquisitions of assets

by transaction

taking place

during the period

Net holding gains

(Revaluation)

Other changes in volume of

assets

Stocks at the end of the period

(closing balance)

Transactions Other economic flows

Flows

Full system of financial accounts

What are financial accounts

The financial accounts - concise form - changes in assets and liabilities

Assets Liab. Assets Liab. Assets Liab. Assets Liab. Assets Liab. Assets Liab. Assets Liab. Assets Liab.Net lending / net borrowing -56 -1 -103 174 -4 10 -10 0

Net acquisition of financial assets/liabilities 83 139 172 173 -10 93 189 15 2 6 436 426 47 57 483 483

1. Monetary gold and SDRs 0 0 -1 0 0 0 0 0 0 0 -1 0 1 0 0 0

2. Currency and deposits 39 0 10 65 -26 37 64 0 2 0 89 102 11 -2 100 100

3. Debt securities 7 6 66 30 4 38 10 0 -1 0 86 74 9 21 95 95

4. Loans 19 21 53 0 3 9 3 11 0 6 78 47 4 35 82 82

5. Equity and investment fund shares 10 83 28 22 3 0 66 0 0 0 107 105 12 14 119 119

6. Insurance, pension and standardized guarantee schemes1 0 7 48 1 0 39 0 0 0 48 48 0 0 48 48

7. Financial derivatives and employee stock options 3 3 8 8 0 0 3 0 0 0 14 11 0 3 14 14

8. Other accounts receivable/payable 4 26 1 0 5 9 4 4 1 0 15 39 10 -14 25 25

The financial accounts - concise form - stocks in assets and liabilities

Assets Liab. Assets Liab. Assets Liab. Assets Liab. Assets Liab. Assets Liab. Assets Liab. Assets Liab.Net financial worth -2.143 -7.274 -949 2.168 -49 -8.247 8.263 15

Total assets/liabilities 6.113 8.256 11.184 18.458 1.269 2.218 3.739 1.571 56 105 22.360 30.608 13.096 4.833 35.456 35.441

1. Monetary gold and SDRs 0 0 16 0 0 0 0 0 0 0 16 0 0 0 16 0

2. Currency and deposits 577 0 1.474 3.383 511 0 601 0 35 0 3.198 3.383 1.163 978 4.361 4.361

3. Debt securities 273 1.415 3.499 2.216 3 840 86 0 5 0 3.866 4.470 1.451 848 5.318 5.318

4. Loans 2.316 3.838 4.454 9.154 191 808 0 1.530 0 100 6.962 15.429 10.287 1.819 17.248 17.248

5. Equity and investment fund shares 2.217 2.189 1.521 1.053 365 0 135 0 12 0 4.250 3.242 140 1.148 4.390 4.390

6. Insurance, pension and guarantee schemes 20 0 2 2.466 0 439 2.883 0 0 0 2.905 2.905 0 0 2.905 2.905


8. Other accounts receivable/payable 711 814 217 186 199 133 34 41 4 5 1.164 1.179 55 41 1.219 1.219

Total economyRest of the

World TotalNon-financial corporations

Financial corporations

General Government Households NPISHs

TotalHouseholds Total economyNon-financial corporations


General Government NPISHs

Rest of the World

What are financial accountsThe financial accounts - full detail - changes in assets and liabilities

Assets Liab. Assets Liab. Assets Liab. Assets Liab. Assets Liab. Assets Liab. Assets Liab. Assets Liab.Net lending / net borrowing -56 -1 -103 174 -4 10 -10 0

Net acquisition of financial assets/liabilities 83 139 172 173 -10 93 189 15 2 6 436 426 47 57 483 483

1. Monetary gold and SDRs 0 0 -1 0 0 0 0 0 0 0 -1 0 1 0 0 0

Monetary gold 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

SDRs 0 0 -1 0 0 0 0 0 0 0 -1 0 1 0 0 0

2. Currency and deposits 39 0 10 65 -26 37 64 0 2 0 89 102 11 -2 100 100

Currency 5 0 15 0 2 35 10 0 1 0 33 35 3 1 36 36

Transferable deposits 30 0 -5 26 -27 2 27 0 1 0 26 28 2 0 28 28

Interbank positions 0 0 -5 -5 0 0 0 0 0 0 -5 -5 0 0 -5 -5

Other transferable deposits 30 0 0 31 -27 2 27 0 1 0 31 33 2 0 33 33

Other deposits 4 0 0 39 -1 0 27 0 0 0 30 39 6 -3 36 36

3. Debt securities 7 6 66 30 4 38 10 0 -1 0 86 74 9 21 95 95

Short-term 10 2 13 18 1 4 3 0 0 0 27 24 2 5 29 29

Long-term -3 4 53 12 3 34 7 0 -1 0 59 50 7 16 66 66

4. Loans 19 21 53 0 3 9 3 11 0 6 78 47 4 35 82 82

Short-term 14 4 4 0 1 3 3 2 0 2 22 11 3 14 25 25

Long-term 5 17 49 0 2 6 0 9 0 4 56 36 1 21 57 57

5. Equity and investment fund shares 10 83 28 22 3 0 66 0 0 0 107 105 12 14 119 119

Equity 10 83 25 11 3 0 53 0 0 0 91 94 12 9 103 103

Listed shares 5 77 23 7 1 0 48 0 0 0 77 84 10 3 87 87

Unlisted shares 3 3 1 4 1 0 2 0 0 0 7 7 2 2 9 9

Other equity 2 3 1 0 1 0 3 0 0 0 7 3 0 4 7 7

Investment fund shares/units 0 0 3 11 0 0 13 0 0 0 16 11 0 5 16 16

Money market fund shares/units 0 0 2 5 0 0 5 0 0 0 7 5 0 2 7 7

Non MMF investment fund shares/units 0 0 1 6 0 0 8 0 0 0 9 6 0 3 9 9

6. Insurance, pension and standardized guarantee schemes 1 0 7 48 1 0 39 0 0 0 48 48 0 0 48 48

Non-life insurance technical reserves 1 0 2 7 0 0 4 0 0 0 7 7 0 0 7 7

Life insurance and annuity entitlements 0 0 0 22 0 0 22 0 0 0 22 22 0 0 22 22

Pension entitlements 0 0 0 11 0 0 11 0 0 0 11 11 0 0 11 11

Claim of pension fund on pension managers 0 0 3 3 0 0 0 0 0 0 3 3 0 0 3 3

Entitlements to non-pension benefits 0 0 0 2 0 0 2 0 0 0 2 2 0 0 2 2

Provisions for calls under standardized guarantees 0 0 2 3 1 0 0 0 0 0 3 3 0 0 3 3


Financial derivatives 3 2 8 7 0 0 1 0 0 0 12 9 0 3 12 12

Options 1 2 3 2 0 0 1 0 0 0 5 4 0 1 5 5

Forwards 2 0 5 5 0 0 0 0 0 0 7 5 0 2 7 7

Employee stock options 0 1 0 1 0 0 2 0 0 0 2 2 0 0 2 2

8. Other accounts receivable/payable 4 26 1 0 5 9 4 4 1 0 15 39 10 -14 25 25

Trade credits and advances 3 6 0 0 1 6 3 4 0 0 7 16 8 -1 15 15

Other account receivable/payable 1 20 1 0 4 3 1 0 1 0 8 23 2 -13 10 10

Rest of the World Total

Non-financial corporations


General Government Households NPISHs Total economy

Financial assets/liabilitiesMonetary gold and SDRs x x x x Equity and investment fund shares x x x x

Monetary gold x x x x Equity x x x xSDRs x x x x Listed shares x x x x

Currency and deposits x x x x Resident enterprises x x x xCurrency x x x x Non-residents enterprises x x x x

Local currency x x x x Unlisted shares x x x xResidents x x x x Resident enterprises x x x xNon-residents x x x x Non-residents enterprises x x x x

Foreign currency x x x x Other equity x x x xTransferable deposits x x x x Resident enterprises x x x x

Interbank positions x x x x Non-residents enterprises x x x xOther transferable deposits x x x x Investment fund shares/units x x x x

Local currency x x x x Money market fund shares/units x x x x

Residents x x x x Resident enterprises x x x xNon-residents x x x x Non-residents enterprises x x x x

Foreign currency x x x x Other investment fund shares/units x x x x


Other deposits x x x x Insurance, pension and standardized guarantee schemes x x x x

Local currency x x x x Non-life insurance technical reserves x x x xResidents x x x x Life insurance and annuity entitlements x x x xNon-residents x x x x Pension entitlements x x x x

Foreign currency x x x x Claims of pension funds on pension managers x x x xResidents x x x x Entitlements on non-pension benefits x x x xNon-residents x x x x Provisions for calls under standardized guarantees x x x x

Debt securities x x x x Financial derivatives and employee stock options x x x xShort-term x x x x Financial derivatives x x x x

(Sectors) x x x x Options x x x xLong-term x x x x Forwards x x x x

(Sectors) x x x x Employee stock options x x x xLoans x x x x Other accounts receivable/payable x x x x

Short-term x x x x Trade credits and advances x x x x(Sectors) x x x x (Sectors) x x x x

Long-term x x x x Other accounts receivable/payable x x x x(Sectors) x x x x (Sectors) x x x x

Format for detailed flow of funds table or stocks of financial assets analysed by debtor and creditorSectors and subsectors Sectors and subsectors

Debtors/creditors Debtors/creditors

The Development of Financial Accounts in Iceland, collaboration & publishing

» The development started in 2010 with an agreement between the Statistics Iceland and the Central Bank of Iceland

» The CB collects data for the financial sector and the rest of the world (IIP)

» Statistic Iceland collects and processes data for other sectors and finalizes the compilation and balancing of the accounts

» To start with the ESA 1995 (European System of Accounts, 1995) was used

» Statistic Iceland got 3 years IPA grant (though 2013-2015) from the EU (IPA=Instrument of multi-beneficiary Pre-Accession Assistance) to introduce ESA 2010

» Currently, only stock data are published for the whole economy and its sectors

» Stock and flow data will be published later this year according to ESA 2010

The Development of Financial Accounts in Iceland, methodology

» The financial accounts are classified by the sectors/subsectors on the financial markets and by the nature of financial instruments (liquidity and legal characteristics)

» AF.1 Monetary Gold & Special Drawing Rights» AF.2 Currency and deposits» AF.3 Securities other than Shares» AF.4 Loans» AF.5 Shares and other Equity» AF.6 Insurance technical reserves» AF.7 Financial derivatives» AF.8 Other accounts receivable/payable

» The Icelandic economy is divided into five main sectors and eight subsectors and the rest of the world is also added, so they are fourteen in total.

The Institutional Sectors in Iceland

The compilation and reconciliation of financial accounts

» Whom-to-whom basis - debtor and creditor sectors / two sides involvement

- show detailed asset and liability positions of both sectors at end of the period

- comparing the available data with the counterpart data

- considerable difference can exist /same financial instrument

- definitions, timing and valuation methods

» The main matrix depicts two sources of data were available - source data - counterpart data

» Establish a hierarchy/ranking order of sources

» Select a “final” amount of each instrument, for the combination of debtor/creditor sectors

» Sometime needs to make a judgment based on: (1) data revalidation and cross-checks; (2) consultation with experts; and (3) published vs. unpublished data, etc.

Rank Sectors and subsectors Data source

1. General government and its subsectors Annual Government Accounts2. The Central Bank of Iceland Balance sheets

3. Rest of the world

International Investment Position calculated by the Central Bank of Iceland, IIP

4. Financial corporations and the following Balance sheetssubsectors: -Monetary Financial Institutions

-Other financial intermediaries -Insurance corporations and Pension funds

5. Financial institutions in winding-up Balance sheets proceedings or of creditors negotiations

6. Non-financial corporations Balance sheets from Tax Authorities

7.Households & Non-profit institutions serving households (NPISHs)

Annual tax returns from Tax Authorities

» Financial balance sheets» Aggregated tax return statements» A need to ranking data sources

Primary data sources

Instrument F.2 Asset sectors

Sector A …. Sector N

Liabilit

y sectors

Sector A S X

C Y

F Final data sector

.

.

.

Sector N S X

C Y

F F

S: source dataC: counterpart dataF: final dataUsually Y≠X

Simplified matrix

Challenges

» Different valuations- ESA recommends market value- Some methods to approach or estimate the market value

- Pricelist/price-register of comparable instruments- Various calculation methods used to approach the market value

» Calculation of quoted and unquoted shares problematic in the absence of robust stock market

» Data on loans and securities needs to be disaggregated

» Work initiated on reducing data discrepancies between IIP and financial sector

» Need to strengthen data collection of NPISHs - To be disaggregated from the household sector in 2015

Valuation of financial instruments

The valuation of financial instruments can vary greatly due to their nature:» Gold reserves (F.11) is determined by the gold market» SDR´s (F.12) valued in ISK króna at daily rate published by the IMF» Currency and deposits (F.2) valued at nominal prices» Securities (F.3) are valued at market prices» Loans (F.4) are usually valued at nominal prices, the market prices of loans

can fluctuate according to their nature and lifetime» Valuation of shares and equities (F.5) or the net worth is difficult in Iceland:

(1) the stock market or (2) the difference between assets and liabilities.» Insurance technical reserves (F.6) valued on marked prices» Other accounts receivable/payable (F.8) are usually recorded at nominal value

depending on their nature

First issue problems in Iceland

Some problems appeared related to data compilation and the methodology that needed be solved:» Shortage of financial data on special purpose entities and holding companies» Some financial data only available as aggregated data, e.g. securities and

sometimes securities and loans not separated » Very difficult to draw right picture of the Icelandic economy during the period

2007-2009 due to data problems following the economic crisis (and due to fall of the ISK króna and frequent exchange fluctuations – foreign assets)

» Inconsistency between source data from foreign entities (S.2) and financial corporations (S.12) – each case scrutinized

» Discrepancy in National Tax Authority’s source data and depository banks regarding loans to HHs and NFCs during 2008-2009 due to different valuations

» Discrepancy in data sources of FCs in winding-up process and the bankrupt entities

» Attempts have been made to harmonize as much as possible the financial data collected by Statistics Iceland and the Central Bank

Year 2012

In billion ISK Assets Liabilities Assets Liab. Assets Liab. Assets Liab. Assets Liab. Assets Liab. Assets Liab.

Net financial worth -2.142,8 -7.273,7 -949,1 2.118,4 -8.247,2 8.262,7 15,5

Total assets/liabilities 6.112,9 8.255,7 11.184,0 18.457,7 1.269,3 2.218,3 3.794,3 1.676,0 22.360,5 30.607,7 13.095,7 4.833,0 35.456,2 35.440,7

MG and SDRs 0,0 0,0 15,5 0,0 0,0 0,0 0,0 0,0 15,5 0,0 0,0 0,0 15,5 0,0

Currency and deposits 576,8 0,0 1.473,6 3.382,8 511,3 0,0 635,8 0,0 3.197,4 3.382,8 1.163,1 977,7 4.360,5 4.360,5

Securities and loans 2.589,3 5.252,4 7.953,7 11.370,0 194,1 1.647,2 90,8 1.629,9 10.827,9 19.899,5 11.738,1 2.666,5 22.565,9 22.565,9

Shares and equity 2.216,6 2.189,0 1.521,4 1.052,7 365,4 0,0 147,0 0,0 4.250,5 3.241,7 139,7 1.148,4 4.390,1 4.390,1

Insurance technical reserves 19,6 0,0 2,4 2.466,2 0,0 438,6 2.882,7 0,0 2.904,8 2.904,8 0,0 0,0 2.904,8 2.904,8

Other accounts payable 710,6 814,2 217,4 185,9 198,5 132,6 38,0 46,1 1.164,5 1.178,8 54,9 40,5 1.219,3 1.219,3

Year 2012

Percent of GDP Assets Liabilities Assets Liab. Assets Liab. Assets Liab. Assets Liab. Assets Liab. Assets Liab.

Net financial worth -120,8 -410,0 -53,5 119,4 -464,9 465,8 0,9

Total assets/liabilities 344,6 465,4 630,4 1.040,5 71,5 125,0 213,9 94,5 1.260,5 1.725,3 738,2 272,4 1.998,7 1.997,8

MG and SDRs 0,0 0,0 0,9 0,0 0,0 0,0 0,0 0,0 0,9 0,0 0,0 0,0 0,9 0,0

Currency and deposits 32,5 0,0 83,1 190,7 28,8 0,0 35,8 0,0 180,2 190,7 65,6 55,1 245,8 245,8

Securities and loans 146,0 296,1 448,3 640,9 10,9 92,9 5,1 91,9 610,4 1.121,7 661,7 150,3 1.272,0 1.272,0

Shares and equity 124,9 123,4 85,8 59,3 20,6 0,0 8,3 0,0 239,6 182,7 7,9 64,7 247,5 247,5

Insurance technical reserves 1,1 0,0 0,1 139,0 0,0 24,7 162,5 0,0 163,7 163,7 0,0 0,0 163,7 163,7

Other accounts payable 40,1 45,9 12,3 10,5 11,2 7,5 2,1 2,6 65,6 66,5 3,1 2,3 68,7 68,7

Rest of the world Total economy

Total economyNonfinancial corporations


General government

Households and NPISH Domestic sectors Rest of the world

Nonfinancial corporations


General government

Households and NPISH Domestic sectors

Financial accounts for one year – stock figures

• The following figures show some of the latest result and give an idea of what is produced in Iceland.

2003 2004 2005 2006 2007 2008 2009 2010 2011 20120

200

400

600

800

1,000

1,200

1,400

1,600

1,800

0

20

40

60

80

100

120

140

160

180

Figure 2. Financial liabilities of households and NPISHs

Financial Liabilities (left axis) Financial liabilities (right axis) Financial net worth (right axis)

Billion ISK

% of GDP

• In 2012, the total financial assets (FA) of the HHs and NPISH was 3,8 billion ISK or 214 of GDP.

• It was 185% of GDP in the beginning of the period and its highest proportion was 229% of GDP in 2007, but fell to 197% in 2008 following the crisis.

• Pension claims are the largest FA. They were 163% of GDP in 2012 compared with 125% of GDP in 2003. It reached 151% of GDP in 2006, but fell to 131 in 2008.

• The currency and deposits were 36% of GDP in 2012, but its peak was 51% in end of 2008.

• In end of 2007, the shares and equities were 30% of GDP but fell to 8.6% in 2008 following the crisis. In end of 2012, it was 8.3% of GDP.

• The financial liabilities of HHs and NPISHs were 95% of GDP in end of 2012 and had been close to that in the beginning of the period. Its peak was in 2007 reached the level of 115% of GDP.

• The liabilities are mostly in form of loans.

• The net financial assets position was 119% of GDP in end of 2012 and has not been higher. In 2007, it reached of 114% but fell to 100% in 2008. In the beginning of the period it was 92%.

% of GDP

2003 2004 2005 2006 2007 2008 2009 2010 2011 20120

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

-20

20

60

100

140

180

220

260

300

Figure 1. Financial assets of households and NPISHs

Currency and deposits Securities other than shares and loans Shares and equity

Insurance technical reserves Other accounts payable Financial Assets (right axis)

Billion ISK

2003 2004 2005 2006 2007 2008 2009 2010 2011 20120

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

11,000

0

75

150

225

300

375

450

525

600

675

750

825

Figure 3. Financial assets of nonfinancial corporations

Currency and deposits Securities other than shares and loans Shares and equityOther accounts payable Financial Assets (right axis)

Billion ISK

2003 2004 2005 2006 2007 2008 2009 2010 2011 20120

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

-400

-350

-300

-250

-200

-150

-100

-50

0

Figure 4. Financial liabilities of nonfinancial corporations

Securities and loans Shares and equity

Other accounts payable Financial net worth (right axis)

Billion ISK

• The financial assets position of NFCs was 345% of GDP in end of 2012. It reached is peak in 2007 when it was 729% of GDP. In the beginning of the period it was 206% of GDP.

• Through the period the shares and equity was the biggest asset part. It when up to 446% of GDP in 2007 but fell drastically in 2008 to 203% of GDP and was 125% in end of 2012.

• The other part of interest here is the development of the asset position in securities and loans, which is now the biggest financial assets of the NFCs or 146% of GDP.

• The net financial worth of the NFCs reached its lowest point in 2007 when it was negative by 242% of GDP. In the beginning of the period it was 133% of GDP and in end of 2012 it was 121% of GDP.

• Securities and loans is the biggest liabilities part and it reached the highest ratio in 2008 when it was 466% of GDP. It was 296% in end of 2012 and 172% in the beginning of the period.

• It is also interesting to see the development of the liabilities in shares and equities which accounted for 416% of GDP in 2007 and fell to 196% of GDP in 2008. It was 123% of GDP in end of 2012.

% of GDP

% of GDP

2003 2004 2005 2006 2007 2008 2009 2010 2011 20120

2000

4000

6000

8000

10000

12000

14000

16000

0

150

300

450

600

750

900

1,050

1,200

Figure 5. Total financial assets of financial corporations

FCs under winding-up process FCs excluding those in winding-up process

Billion ISK % of GDP

2003 2004 2005 2006 2007 2008 2009 2010 2011 20120

3,000

6,000

9,000

12,000

15,000

18,000

21,000

24,000

-10,000

-8,500

-7,000

-5,500

-4,000

-2,500

-1,000

500

2,000

Figure 6. Total financial liabilities of financial corporations

FCs excluding those in winding-up process (left axis)FCs under winding-up process (left axis)Financial net worth, total (right axis)

Billion ISK

• As shown in this figure, the financial assets position of FCs was 10 times the GDP in 2007

• By excluding the FCs in the winding-up process, the asset position went down to 553% of GDP in 2008. The financial assets of the FCs in the winding-up process was 186% of GDP in 2008.

• In end of 2007, the financial liability position was close to 10 times the GDP, so the net financial worth of FCs was positive of 10% of GDP.

• Following the crisis, the liability position went up to 1,295% of GDP in 2008, but has reach the level of 1,040% of GDP in 2012.

• Around 55% of the liability position is in winding-up process.

• The net financial worth was slightly positive up to 2007, but has changed drastically following the crisis.

Billion ISK

2003 2004 2005 2006 2007 2008 2009 2010 2011 20120

2,000

4,000

6,000

8,000

10,000

12,000

Figure 7. Financial assets of other depository corporations

Total financial assets Thereof securities and loans

Billion ISK

2003 2004 2005 2006 2007 2008 2009 2010 2011 20120

1,500

3,000

4,500

6,000

7,500

9,000

10,500

12,000

-25

-20

-15

-10

-5

0

5

10

15

Figure 8. Financial liabilities of other depository corporations

Shares and equity Securities and loans Currency and depositsOther accounts payable Financial net worth (right axis)


• The financial asset position of depository corporations was 168% of GDP in 2012 and as well in 2003, but had reached its peak in 2007 when it was 704% of GDP.

• The great majority of the assets is loans.

• The development of the liability position of DFCs is similar to the their assets development.

• In 2012, the total liabilities were 167% of GDP compared with 174% in 2003. The highest ratio was 706% of GDP in 2007.

• The net financial worth of DFCs was negative by 19% of GDP in 2008.

• From 2008 and onward, the largest liability part is currency and deposits. But prior to that, it was securities and loans.

• Securities and loans were 405% of GDP in 2007, but 39% in 2012.

• The financial asset position of IFCs 146% of GDP in end of 2012 compared with 104% in the beginning of the period.

• It was 134% of GDP in 2007, but fell to 116% in 2008.

• The largest part of the assets is securities, but in 2005-2007 the shares and equity was larger.

2003 2004 2005 2006 2007 2008 2009 2010 2011 20120

300

600

900

1,200

1,500

1,800

2,100

2,400

-140

-120

-100

-80

-60

-40

-20

0

20

Figure 9. Financial liabilities of general government

Local government Social security funds Central government Financial net worth (right axis)

Billion ISK

• The net financial worth of general government was negative by 54% of GDP in 2012 and had been deteriorated since 2007 when it was positive by 1% of GDP. In the beginning of the period it had been negative by 30% of GDP.

• The total liability position was 125% of GDP in 2012 compared with 71% in 2003. It was 52% in 2007 and jumped to 100% in 2008.

• Most of the liabilities are with the central government.

2003 2004 2005 2006 2007 2008 2009 2010 2011 20120

300

600

900

1,200

1,500

1,800

2,100

2,400

2,700

3,000

0

20

40

60

80

100

120

140

160

180

200

Figure 9. Financial assets of insurance companies and pension funds



% of GDP

2003 2004 2005 2006 2007 2008 2009 2010 2011 20120

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

0

75

150

225

300

375

450

525

600

675

750

825

900

975

1,050

Figure 11. The financial assets of rest of the world


Billion ISK

2003 2004 2005 2006 2007 2008 2009 2010 2011 20120

1,000

2,000

3,000

4,000

5,000

6,000

7,000

0

100

200

300

400

500

600

700

Figure 12. Financial liabilities of rest of the world

Securities and loans Shares and equity

Other accounts payable Financial net worth (right axis)

Billion ISK

• The financial assets of RoW went from 143% of GDP in 2003 to 625% in 2007, then there was a jump to 945% of GDP in 2008 due to the crisis. It has since been reduced to 738% in 2012.

• The bulk of the assets is in form of securities and loans.

• Currency and deposits increased drastically in 2007-2008 and has been considerable due to the capital control.

• The RoW liabilities increased rabidly through 2003-2007 or from 79% of GDP in 2003 to 508% in 2007.

• The due to the crisis the liabilities fell drastically and was 272% of GDP in 2012.

• The RoW's net financial worth increased slowly from 2003 to 2007, but jumped from 118% of GDP to 660% of GDP between 2007 and 2008 due to crisis and the exchange rate crash.

% of GDP

% of GDP

Financial assets/liabilitiesMonetary gold and SDRs x x x x Equity and investment fund shares x x x x

Monetary gold x x x x Equity x x x xSDRs x x x x Listed shares x x x x

Currency and deposits x x x x Resident enterprises x x x xCurrency x x x x Non-residents enterprises x x x x

Local currency x x x x Unlisted shares x x x xResidents x x x x Resident enterprises x x x xNon-residents x x x x Non-residents enterprises x x x x

Foreign currency x x x x Other equity x x x xTransferable deposits x x x x Resident enterprises x x x x

Interbank positions x x x x Non-residents enterprises x x x xOther transferable deposits x x x x Investment fund shares/units x x x x

Local currency x x x x Money market fund shares/units x x x x


Foreign currency x x x x Other investment fund shares/units x x x x


Other deposits x x x x Insurance, pension and standardized guarantee schemes x x x x

Local currency x x x x Non-life insurance technical reserves x x x xResidents x x x x Life insurance and annuity entitlements x x x xNon-residents x x x x Pension entitlements x x x x

Foreign currency x x x x Claims of pension funds on pension managers x x x xResidents x x x x Entitlements on non-pension benefits x x x xNon-residents x x x x Provisions for calls under standardized guarantees x x x x

Debt securities x x x x Financial derivatives and employee stock options x x x xShort-term x x x x Financial derivatives x x x x

(Sectors) x x x x Options x x x xLong-term x x x x Forwards x x x x

(Sectors) x x x x Employee stock options x x x xLoans x x x x Other accounts receivable/payable x x x x

Short-term x x x x Trade credits and advances x x x x(Sectors) x x x x (Sectors) x x x x

Long-term x x x x Other accounts receivable/payable x x x x(Sectors) x x x x (Sectors) x x x x

Format for detailed flow of funds table or stocks of financial assets analysed by debtor and creditorSectors and subsectors Sectors and subsectors

Debtors/creditors Debtors/creditors

Money flows between non-MFIs, MFIs and RoW

Non-MFIs MFIs

Rest of the world

Money holdings

Financial investmentsother than money

MFI credit to non-MFIs

Net lending of non-MFIs

RoW creditto non-MFIs

Cash flows are received by the sector with a net lending position from sector with a netborrowing position.

Analytical uses of financial accounts

• Flow of funds provide comprehensive and consistent set of macro-finance information on all sectors of the economy. Integrated with the non-financial accounts, they provide unique overview for analysis of interactions between the real and financial sides of the economy and the assessment of major risks of financial imbalances

• A detailed flow of funds table can be used in many important areas related to economic policy:

» Analyzing and descripting activities and trends in current periods.» In projections of production and assessment of economic policies

- How will the central government’s deficit be financed?

- How will the major public nonfinancial corporations be financed and by whom?

» In modelling of the economy to study economic behavior.» To help to analyse the interrelation between real investment, financial investment and

saving.» To assess financial stability» After the crisis the analysts have focused on: financial imbalances, evolution of the balance

sheets of financial intermediaries, development in BSs of HHs and NFCs as financial indicators like debt ratios, financial wealth (wealth effects), growth of public debt, etc.


» Portfolio shifts between money and other financial assets.» Two main sources of changes in the money holdings of non-MFIs

- A “credit effect” with the rise in total FAs of non-MFIs due to MFI credit- A “portfolio shift effect” a shift between money and non-monetary FAs in

in the total financial assets held by non-MFIs

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008-10

-8

-6

-4

-2

0

2

4

6

8

10

12

14

Contributions of credit effect and the portfolio shift effect to money growth

Credit effect % of GDP Protfolio shift effect % GDP


» Banking intermediation

- Comparing MFI credit to non-MFIs with total credit to non-MFIs

- 2007: MFI’s credit 39% of total financing, loans 73% of total and debt securities 20%

1999 2000 2001 2002 2003 2004 2005 2006 20070

20

40

60

80

100

0

10

20

30

40

50

Share of total credit granted by MFIs in the total financing of non-MFIs

Loans (left axis) Debt securities (right-axis) Shares (right axis) Total financing (right axis)

Conclusion

» FoF is a key framework for the analysis of monetary, financial and economic developments and the interrelations between them.

» FoFs allow financial intermediation process to be tracted » In modelling of the economy to study economic behavior.» To help to analyse the interrelation between real investment, financial

investment and saving.» To assess financial stability» After the crisis the analysts have focused on: financial imbalances, evolution

of the balance sheets of financial intermediaries, development in BSs of HHs and NFCs as financial indicators like debt ratios, financial wealth (wealth effects), growth of public debt, etc.

Economic theory – an example

» qi = fi[Rei - Ce

i, Moi; qij] j = 1,.......,m

Mynd 11.1

Skammtíma tekju- og kostnaðar-væntingar (Re,Ce)

q3 q1

Framleiðslumagn (Q)

Rei

Cei

Cei

q4 q2

The entrepreneurs‘ expectations of aggregate demand can be broken down to expectations of consumption Cpe, public expenditure Ge, investment Ie, speculation on goods Sge, and export Exe; where p (price structure) is implicit in the expectations. This can formulated in following equation: (2) Re = g[Cpe,Ge,Ie,Sge,Exe]

The entrepreneurs’ consumption expectations depend on factors like current consumption [Cp], the consumers taste [SM], the current and expected price structure [p, pe], and the expectations of financing consumption, which depend on factors like current and expected disposable income [Yd,Yde], the current expected interest rates [r,re], the current and expected consumers‘ wealth [WI,WIe], and other factors Z like access to borrowing. (3) Cpe = h[Cp,Sm,Yd,Yde,r,re,p,pe,WI,WIe,Z]

Sum q1 = sum fi [Rei-Ce

i, Moi; qij] i=1,.......,n (1) q = f[Re-Ce,Mo,qj]

Economic theory – an example

The entrepreneurs expectations of government expenditures depend on factors like current expenditure [G], the governments intensions and their expectations of financing the expenditure, which depend on the current and expected tax revenues [T,Te], expected net supply of government financial assets and liabilities [sFG

e], and other factors [Z] like government creditworthiness and borrowing accessability. This relation is shown in following equation. (4) Ge = j[G,Sm,T,Te,sFG

e,Z]

The investment demand [I], which can be divided into working capital demand [Iwk] and fixed capital demand [Ifk], depends first and foremost of investors’ expectations of revenue and costs and their motives; or in other words on their planned production q. Such expectations can be both to short and long-term dependent of the nature of the planned investment. The demand for fixed capital is usually determined by long-term expectations. Other important factors for investment decisions are current and expected prices of working and capital goods [pwk,pwk

e,pfk,pfke], the current

and expected wage level [w,we], the current and expected "real-mark" value [rm,rme], and other factors Z like and technology options, new technology, borrowing accessibility and other operational premises. It is of course the entrepreneurs expectations of investors demand that matter in this context. The relations can be shown by following equations, where q* l stands for the planned long-term production. Iwk

e = k[q*,pwk,pwke,w,we,r,re,Z]

Ifke = f[q*l,pfk,pfk

e,r,re,rm.rme,Z] (5) Ie = Iwk

e + Ifke

.

Documents

Financial Accounts in Iceland Methods and Results