Output of the U'S' Financial Sector: Measuring the services of banks andinsurance companies

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Output of the U.S. Financial Sector Measuring
the services of banks and insurance companies
Brian C. Moyer Deputy Chief National Income and
Wealth Division
10th OECD-NBS Workshop on National
Accounts Paris, France November 6-10, 2006
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Output of the financial sector

• Financial sector includes
• commercial banks
• credit unions
• savings and loans
• regulated investment companies
• insurance companies
• Output can be either priced or implicit

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I. Implicit output of commercial banks

• Current measure introduced in the 2003 NIPA
  comprehensive revision
• Based on the 1993 System of National Accounts
  Financial intermediation services indirectly
  measured (FISIM)
• FISIM of commercial banks recognized for both
  depositors and borrowers

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Implicit output of commercial banks

• Implicit output of depositors and borrowers
  services calculated by type of liability and
  asset, respectively
• Implicit output of depositors services  
• YiD (r average rate paid) average
  liability balance
• Implicit output of borrowers services
• YiB (average rate received r)
  average asset balance
• Total implicit output of commercial banks
• Yi YiD YiB

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Calculation of average rates

• Based on book value calculations
• average rate paid
• (interest expense / average liability balance)
• average rate received
• (interest income / average asset balance)
• Data available from commercial banks balance
  sheet and income statements

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Calculation of the reference rate (r)

• Pure cost of borrowing funds does not include
  risk premiums or intermediation services
• Ratio of interest income on U.S. Government
  Treasury and Agency securities (excluding
  mortgage- backed securities) to their value on
  balance sheets of commercial banks

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Average rates and the reference rate
average rate received
percent
reference rate
average rate paid
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Average rates and the reference rate

• Spread between the reference rate and the average
  rate paid represents
• for depositors, foregone interest income
• for banks, equilibrium cost of supplying services
  to depositors
• Spread between the average rate received and the
  reference rate represents
• extra cost paid by borrowers for financial
  services received
• extra revenue earned by banks as compensation for
  financial services supplied

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Sector allocations of implicit output

• Consumption of implicit output allocated to
  persons, government, rest of world, and
  businesses (corporations, sole proprietors, and
  partnerships)
• Allocations estimated by asset and liability
• Assets allocated based on sector distribution of
  loan/lease balances
• Liabilities allocated based on sector ownership
  of deposit balances
• Data available from the U.S. flow of funds
  accounts

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Constant-price implicit output

• Steps in the calculation
• Reference year total output (both priced and
  implicit)
• extrapolated with volume index of banking
  output
• equals constant-price total output
• less constant-price output of priced
  services
• equals constant-price implicit output
• Sector shares of constant-price implicit output
  same as current-price sector shares

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II. Output of insurance companies

• Output of property and casualty (PC) insurance
  companies includes
• transfer of risk
• financial intermediation
• administrative services, such as handling claims
• Current measure introduced in the 2003 NIPA
  comprehensive revision
• Similar treatment recommended by the Advisory
  Expert Group for the upcoming revision to the
  1993 System of National Accounts

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BEAs previous measure of output

• Output net premiums
• dividends paid to policy holders
• actual losses
• However, disasters often cause large swings in
  measured output of insurance companies

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Consumption of household insurance
premiums
actual losses
Sept 11
consumption premiums actual losses
Hurricane Andrew
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BEAs current measure of output

• Output direct premiums earned
• premium supplements
• dividends paid to policy holders
• normal (expected) losses incurred
• More consistent with the behavior of insurance
  companies

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Consumption of household insurance
premiums
normal losses
consumption premiums normal losses
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Output of PC insurance companies

• Direct premiums earned include transactions
  related to reinsurance
• Premium supplements
• Expected income earned by insurance companies
  from investing policyholder reserves
• Used to supplement revenue from premiums to pay
  claims or purchase reinsurance services

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Output of PC insurance companies

• Normal losses
• Represent claims that insurance companies expect
  to pay in a period
• Insurance companies determine premiums for a
  future period based on the claims they expect to
  pay that is
• Normal lossest direct premiums earnedt
• 0.3 (direct losses incurredt-1 / direct
  premiums earnedt-1)
• 0.7 E(direct losses incurredt-1 / direct
  premiums earnedt-1)

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Adjusting for disasters

• Effect of disasters on normal losses is
  smoothed a portion of the disaster is added to
  normal losses for a 20-year period following the
  disaster
• Net insurance settlements is the difference
  between actual and expected losses it is
  recorded as a current transfer payment to
  policyholders from insurance companies

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Constant-price insurance output

• Currently based on a single-deflation technique
  using consumer price indexes and producer price
  indexes
• Research underway to consider constant-price
  estimates based on double-deflation techniques