The boom and bust in financial balance sheets

1
The boom (and bust) in financial balance sheets

• Gian Maria Milesi-Ferretti
• IMF, Research Department
• Yuko Hashimoto
• Tokyo University

2
What we do

• Present data on the evolution of financial
  balance sheets for some 20 advanced economies
• Explore how the evolution of aggregate and
  sectoral balance sheets is linked to
  macroeconomic fundamentals
• Insights on how financial-sector shocks are
  transmitted to the macroeconomy

3
What are financial balance sheets?

• Financial accounts, Flow of Funds
• They measure financial assets and liabilities of
  an economy by sector and financial instrument
• For some countries, FBS can be integrated with
  data on holdings of nonfinancial assets (housing,
  other tangible assets)
• Data are not consolidated (that is, claims by,
  say, a financial institution on another financial
  institution are not netted out)

4
Sectors

• Financial sector
• Banks
• Insurance companies
• Other financial intermediaries
• Nonfinancial enterprises
• Households
• General government
• Rest of the world (equivalent to IIP)

5
Financial Instruments

• Currency and deposits
• Loans
• Debt securities
• Shares and Other Equity
• Listed shares
• Unlisted shares
• Mutual funds
• Insurance technical reserves
• Other

6
Background

• Much work on individual components of FBS
• Literature on household finance
• work on international financial integration (LMF)
• Literature on comparative financial sector
  development (finance and growth)
• But no cross-country work on aggregate trends

7
The main time series evidence(I) Total Assets
and Liabilities

• Very large expansion of FBS
• In 1995, the median (avg) ratio of total
  financial assets to GDP was 5.5 (5.8)
• In 2007, the median (avg) ratio was 8.5 (9.7)
• Highest ratio in financial centers (Ireland20!)

8
Total financial assets in pct of GDP, 1995 and
2007
9
Financial assets/GDP, 2007(by sector)
10
Financial liabilities/GDP, 2007(by sector)
11
Change in financial assets/GDP, 1997-2007
12
Change in financial liabilities/GDP, 1997-2007
13
Financial assets by instrumentin percent of GDP,
2007
14
The household sector

• High net financial assets
• Total assets highest in US, Swi
• Difference in structure of assets across
  countries
• equity US, Swi
• Pension/insurance UK
• Deposits Jpn, Spa
• Total liabilities highest in DNK, NET, AUS

15
Household sector financial assets/GDP, 2007
16
The Household SectorGross and Net Financial
Assets, 2007
17
How to interpret the effects of the crisis on
household balance sheets?

• US household balance sheets
• High equity holdings (gt150 of GDP)
• High pension and insurance reserves (100 of GDP,
  with significant equity)
• Fall in value of nonfinancial assets (housing)
• Total wealth loss in 2008 11 trillion

18
The financial sector

• Very large balance sheet size
• Largest IRE, NET, UK, SWI (over 8 times GDP)
• Smallest Italy, Finland, Greece, and Norway (3
  times GDP or less)
• Many countries (incl. US) with balance sheets
  between 4 and 5 times GDP
• Net positions small (largest negative UK, US
  38 and 28 of GDP)

19
Financial sector asset composition by
instrument, 2007
20
Financial sector liability composition by
instrument, 2007
21
Nonfinancial corporations

• Negative net financial position
• Largest balance sheets in Belgium, Sweden, Spain,
  France
• Smallest balance sheets in Germany, Italy
• Net position more negative in countries where
  equity is larger (US, UK)
• Significant differences in structure of
  liabilities
• Loans for Prt, Spa,
• Equity and securities for US, UK

22
Nonfinancial corporations net financial position
23
Government

• Net financial position mostly negative
• Positive in Scandinavian countries
• Some reduction in total liabilities over the past
  decade

24
Government net financial position, 2007
25
The rest of the world

• Very significant increase in cross-border
  financial holdings
• Very large gross holdings (relative to net
  holdings), especially in financial centers
• Size of cross-border holdings positively related
  to trade openness and GDP per capita

26
Claims on ROW1997 and 2007
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Claims and liabilities vis-à-vis the ROW
28
Share of claims on the ROW and trade openness