Report from the Commission to the Council and the European Parliament concerning the Allocation of Financial Intermediation Services Indirectly Measured (FISIM) containing a qualitative and quantitative analysis of the results of the trial calculations for allocating and calculating FISIM as described in the Council Regulation (EC) No 448/98 of 16 February 1998
Date: 2002-06-21
Institutions: European Commission
Subjects: Economic and Monetary Union, European accounting system, data transmission, financial analysis, financial policy, gross domestic product, qualitative analysis, quantitative analysis, statistical method

COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 21.6.2002
COM(2002) 333 final

REPORT FROM THE COMMISSION TO THE COUNCIL
AND THE EUROPEAN PARLIAMENT

concerning the Allocation of Financial Intermediation Services Indirectly Measured
(FISIM)

containing a qualitative and quantitative analysis of the results of the trial calculations
for allocating and calculating FISIM as described in the Council Regulation (EC)
No 448/98 of 16 February 1998

TABLE OF CONTENTS

1.

1.1

1.2

2.

3.

4.

4.1

4.2

5.

5.1

5.2

5.3

5.4

5.5

Summary.................................................................................................................. 3

Legal Dispositions.................................................................................................... 3

Two options.............................................................................................................. 4

Presentation of the issue: The question to be solved in the national accounts and its
impact on Gross Domestic Product (GDP)................................................................ 6

The methodology of allocating FISIM ...................................................................... 7

Data sources ............................................................................................................. 9

Coverage of S122 and S123 sectors.......................................................................... 9

Data available on stocks of loans and deposits, and interest flows............................. 9

Main Results ............................................................................................................ 9

Comparison between non allocated FISIM as defined now and allocated FISIM....... 9

Output of the Central Bank ..................................................................................... 10

Occurrence of negative FISIM................................................................................ 10

FISIM by industry .................................................................................................. 10

Analysis of the impact on GDP............................................................................... 11

5.5.1

Average impact on GDP by country ....................................................................... 11

5.5.2

Average impact on GNI by country ........................................................................ 13

5.5.3

Average impact on GDP by method and country .................................................... 13

5.5.4

Index of “volatility”................................................................................................ 14

5.5.5

FISIM at constant prices......................................................................................... 16

6.

7.

Choice of a method of allocation of FISIM............................................................. 17

Conclusion ............................................................................................................. 18

2

1.

SUMMARY

Financial intermediaries explicitly charge commissions and fees to their customers.
The measurement of the production and consumption of these services poses no
special conceptual or practical problems for national accountants.

But financial intermediaries are also able to provide services for which they charge
implicitly by paying or charging different rates of interest to borrowers and lenders.
They pay lower rates of interest than would otherwise be the case to those that lend
them money and charge higher rates of interest to those who borrow from them. The
resulting net receipts of interest are used to defray their expenses and provide an
operating surplus. This scheme of interest rates avoids the need to charge their
customers individually for services provided and leads to the pattern of interest rates
observed in practice. However, in this situation, the national accounts must use an
intermediation services indirectly measured
indirect measure, called financial
(FISIM), of the value of the services for which the intermediaries do not charge
explicitly.

In principle, FISIM output should be allocated among the various users of the
services for which no explicit charge are made, and therefore in national accounts
treated as intermediate consumption by enterprises, as final consumption by
households, General Government, and Non Profit Institutions Serving Households
(NPISHs), or as exports to non residents.

This would ensure that the levels of Gross Domestic Product (GDP) and Gross
National Income (GNI) take account of FISIM as for any other type of output.

In practice, however, it may be difficult to find a method of allocating FISIM among
different users in a way which is conceptually satisfactory from an economic
viewpoint and for which the requisite data are also available.

1.1

Legal Dispositions

Council Regulation (EC) No 448/98 completing and amending Council Regulation
(EC) No 2223/96 with respect to the allocation of Financial Intermediation Services
Indirectly Measured (FISIM) within the European System of National and Regional
Accounts (ESA 95) introduces the principle for allocating FISIM. This Council
Regulation presented trial methods of allocating FISIM which were to be tested by
Member States for the years 1995 to 2001.

This final report fulfils the requirements of Article 5 of the Regulation : “The
Commission, after consulting the Statistical Programme Committee, shall submit
before 1 July 2002 a final report to the European Parliament and the Council
containing a qualitative and quantitative analysis of the implications of the trial
methods for calculating and allocating FISIM”. More detailed technical reports have
been made to National Statistical Offices regularly throughout the trial period.

The Regulation also states that, if the findings of the final evaluation report on the
reliability of the results obtained during the trial period were positive, FISIM would
be allocated in national accounts.

3

This would involve changes (increases) in the levels of Gross Domestic Product and
Gross National Income, which would have an impact on certain community policies.
However, the Council Regulation states in its Article 8(1) that “the decision to
allocate FISIM for the establishment of the Gross National Product used for the
purposes of Community’s budget and its own resources shall be adopted by the
Council, acting unanimously, on a proposal from the Commission”.

If the findings of the final evaluation report were negative, none of the trial methods
for allocating FISIM being more reliable for the correct measurement of the
economic activity than the present zero allocation,
the Commission would be
required to submit an appropriate proposal to the Council for the modification of
Regulation (EC) No 2223/96, in order to eliminate from ESA 95 methodology the
principle of allocating FISIM which had been introduced by Regulation (EC) No
448/98.

1.2

Two options

During the trial period, Eurostat set up a FISIM Task Force, consisting of national
experts in charge of implementing the trial exercise in each Member State.
Candidates countries have been associated in the latter stages of this Task Force and
one of them, Slovakia, has conducted the complete exercise.

Meetings of the Task Force have enabled the assessment of common practise for
improved comparability and to discuss about data and methodological issues. The
work of this FISIM Task Force and the results obtained by Member States have been
discussed regularly by the National Accounts Working Party.

The main results of the trial exercise are the following :

–

–

–

It is broadly recognised that, from a theoretical point of view, allocating FISIM
would improve ESA methodology as more accurate GDP levels could be
obtained: GDP would include the entire value added generated by financial
intermediaries, and not just the part (varying significantly between Member
states) corresponding to commissions and fees directly invoiced to customers.

The impact of allocating FISIM on GDP (and GNI) would correspond, on
average, to an increase of 1.3%.

In the same time, from a practical point of view, the allocation of FISIM
requires the use of precise data, as FISIM is calculated as margins. Member
States have observed a lack of direct sources for some data, which would
question the reliability of national aggregates if they included allocated FISIM.

Two options are possible, depending on the appreciation of the method from both a
conceptual and practical point of view:

–

The first option is that, despite the lack of direct sources for some data, most
Member States were able to implement the trial methods and obtained comparable
and quite stable results.

It is recognised that the allocation of FISIM, highly desirable from a conceptual point
of view, is not perfect from a practical point of view. But it can be considered that
the quality of the allocation will be improved through years, in particular through

4

development of sources for new ECB data requirements, and that a sufficient level of
quality has already been obtained.

Therefore, allocating FISIM in national accounts is feasible, which will bring the
Member States national accounts in line with those of United States, Canada and
Australia, which already allocate FISIM in their national accounts.

A postponement to 2004 or 2005 for the allocation of FISIM is proposed by some
Member States as they consider this supplementary delay could be useful to improve
the sources and methods used.

Such a positive final decision on the allocation of FISIM is expected to empower
National Statistical Offices to obtain better quality information from various sources,
particularly the banking system.

This option is favoured by a majority of Member States.

–

The second option is to consider that conceptual reservations can be raised for the
allocation of FISIM, especially on the fact that the remuneration of a financial
instrument is connected to economic functions (e.g. production and consumption).

Moreover, even if it appeared useful from a conceptual point of view to allocate
FISIM, the testing period is considered as having revealed that the results largely
depend on assumptions made in the absence of direct data. In particular, data
necessary for the implementation of regional and quarterly accounts would be weak
if FISIM was to be allocated.

Therefore, in practise, none of the trial methods as presented in the regulation are
satisfactory and it would be more reliable not to allocate FISIM in national accounts.
It is recommended to keep the present convention of a zero allocation for treating
FISIM in national accounts. However, Member States could, if they wish, present
allocated FISIM in satellite accounts.

This option is favoured by a minority of Member States.

It is clear that the first option is suggested by a large majority of Member States: it is
broadly considered that allocating FISIM would improve the accuracy of national
accounts aggregates.

It is useful to recall the conclusions of the mid term report presented in 2000 by the
Commission to the European Parliament and the Council: “Being calculated as
margins, allocated FISIM require the use of precise data. Despite the lack of direct
sources for some data, most Member States were able to implement the trial methods
and obtained quite stable results. Therefore the Commission considers that allocating
FISIM is feasible if improvements continue to be made in data sources”.

Member States have in the last two years provided revised results for the first years
of the trial period (1995 to 1997), resulting from improvements in data sources and in
the methods of estimation used.

The Commission does not wish to understate the practical difficulties encountered in
the allocation of FISIM, but considers that the results of the trial period are positive.

5

The Commission expects that the quality of sources and methods will be further
improved in future years, as Member States will benefit from more experience in the
compilation of this exercise.

Given these considerations, and according to Council Regulation (EC) No 448/98,
the Commission will before the end of 2002 propose a Commission Regulation for
the allocation of FISIM in national accounts.

The Commission considers that two additional years could be useful in order to
enable Member States to make further improvements in the sources and methods
used. From 1 January 2005, data transmitted (related to previous years) according to
the Transmission Programme of National Accounts data (Annex B of Council
Regulation (EC) No 2223/96) should reflect the allocation of FISIM.

But, according to the Council Regulation (EC) No 448/98 (Article 8), the allocation
of FISIM will not be taken into account for the purposes of European Union’s budget
and its own resources unless the Council, acting unanimously on a proposal of the
Commission, takes such a decision.

2.

PRESENTATION OF THE ISSUE: THE QUESTION TO BE SOLVED IN THE NATIONAL
ACCOUNTS AND ITS IMPACT ON GROSS DOMESTIC PRODUCT (GDP)

Solving the problem of allocating FISIM would lead to major improvements in the
methodology of the European system of national and regional accounts (1995 ESA)
and in particular to more accurate GDP levels.

The allocation of FISIM is recommended by the System of National Accounts (SNA
93) which was prepared jointly by the United Nations, the International Monetary
Fund (IMF), the Organisation for Economic Cooperation and Development (OECD),
the World Bank and the Commission of the European Communities.

The purpose of the Council regulation of 16 February 1998 concerning the allocation
of FISIM within the ESA is to define a methodology to be used on a harmonised
basis by all Member States.

According to Council Regulation (EC) No 448/98, the allocation of FISIM is to be
made on the base of the use of a “reference” rate of interest.

In the trial calculations the allocation of FISIM among users is based on the
difference between the actual rates of interest payable and receivable, and a
“reference” rate of interest.

This reference rate represents the pure cost of borrowing funds – that is, a rate from
which the risk premium has been eliminated to the greatest extent possible and which
does not include any intermediation services.

To illustrate the FISIM calculations, let us take two examples :

–

A loan of 100:

–

–

Interest receivable by the financial intermediary 5%

Reference rate 2 %

6

–

FISIM = 100 x (5% - 2%) = 3

–

A deposit of 100:

–

–

–

Interest payable by the financial intermediary 1.5 %

Reference rate 2 %

FISIM = 100 x (2 % - 1.5 %) = 0.5

Total FISIM = 3.5

is not allocated among users but

In the ESA adopted in 1995 (before the amendments introduced by Council
Regulation No 448/98) and the data supplied by Member States, by convention,
FISIM output
is treated as absorbed by the
intermediate consumption of a nominal sector and, therefore, the GDP is invariant to
the size of the FISIM output, in contrast to commissions and fees charged directly by
financial intermediaries to users. But the relative importance of the part which is
explicitly charged for as commissions and fees, to the part implicitly charged for as
FISIM, is different from country to country.

The shares of FISIM and of commissions and fees in the output of financial
intermediaries (last year for which data are available):

Nether-
lands

Finland

Spain

70%

30%

70%

30%

68%

32%

Ger-
many

67%

33%

Denmark

UK

France

Italy

Luxem
-bourg

53%

50%

44%

34%

23%

47%

50%

56%

66%

77%

FISIM

Commissions
and fees

Output

100%

100%

100%

100%

100% 100% 100% 100% 100%

This table shows that the existing method leads to unharmonised methodology.

3.

THE METHODOLOGY OF ALLOCATING FISIM

FISIM has to be calculated and allocated only on loans and deposits granted by
financial
intermediaries (belonging to sectors S.122 other monetary financial
institutions and S.123 other financial intermediaries, except insurance corporations
and pension funds) to user sectors. This is because only the interest rates of those
loans and deposits are controlled by the financial intermediaries (FIs).

The output of The Central Bank (S121) is measured as the sum of its costs. The
Central Bank is not taken into account in the calculation of FISIM output and its
allocation among user sectors.

FISIM is only allocated on loans and deposits: FISIM is not allocated on securities
other than shares (for example bonds), because when financial intermediaries buy or
sell securities on the open market they are price takers who cannot control the prices
at which they buy or sell and hence the interest rates they receive or pay. Securities
other than shares are only used to calculate the reference rate according to methods 2
and 4c (as described later).

7

The calculation of FISIM on loans and deposits is based on the difference between
the actual interest payable and receivable and a “reference” rate of interest.

Annex III of the Council Regulation 448/98 presents the required statistical data for
the calculation and allocation of the FISIM produced. It is stated that, “it is necessary
to use the table of average stocks of loans, deposits (split by user sectors) and the
securities other than shares issued by FIs for the period (average of four quarters) and
the accrued interest, after reallocation of interest rate subsidies to their actual
recipients as defined by the 1995 ESA.”

These statistical data will allow the test calculation of six internal reference rates, and
of one external reference rate for the exports and imports of FISIM:

Methods of calculating the reference interest rate

Method 1

Method 2

Interest receivable on resident
resident interbank loans.

interbank loans, divided by stock of

Interest receivable on resident interbank loans and on securities other
than shares issued by FIs, divided by stock of resident interbank loans
and of securities other than shares issued by FIs.

Method 3

Method 1 applied to short-term transactions.

Method 4a

Method 4b

Method 4c

Published rates for securities other than shares applied to long-term
transactions.

Average of the average rates of credit and deposit interest applied to
resident user institutional sectors (other than central banks)

Average of Methods 4a and 1.

Average of Methods 4a and 2.

Method for exports
and imports

Weighted average interbank rate on loans and deposits between resident
FIs and non resident FIs.

Stocks and interest on loans and deposits have to be broken down by user sectors.

The households sector in national accounts includes households as consumers and as
producers to the extent they operate unincorporated enterprises.

In order to identify the part of the FISIM to be allocated to final consumption, and
thus to evaluate the impact on the GDP, it
is also necessary to have a further
decomposition of the stocks and interest on loans granted to the households sector by
distinguishing:

–

–

–

Dwelling loans (intermediate consumption, as owners occupiers are treated in
the system as the owners of enterprises engaged in the production of housing
services for their own final consumption).

Loans to households as owners of unincorporated enterprises (intermediate
consumption).

Other loans to households (final consumption).

8

Stocks and interest on deposits from households have also to be broken down by
distinguishing:

–

–

Deposits
(intermediate consumption).

from households

as

owners

of unincorporated

enterprises

Deposits from households as consumers (final consumption).

4.

4.1

DATA SOURCES

Coverage of S122 and S123 sectors

FISIM to be allocated is produced by other monetary financial institutions (sector
S122, which does not include the central bank) and by other financial intermediaries,
except insurance corporations and pension funds (sector S123), depending on the
characteristics of the entities included in this sector.

Information is more reliable for S122 than for S123 sector, but the latter sector is
much smaller.

4.2

Data available on stocks of loans and deposits, and interest flows

Information on the stock of loans and deposits is available from direct sources, with a
breakdown by user sectors. In general, less detailed information is available on
interest flows than on stocks. In a majority of countries, information on interest flows
is available from direct sources, but with no breakdown between institutional sectors,
and it is therefore necessary to estimate interest flows for each institutional sector by
applying estimated interest rates to the known corresponding stocks.

A major problem is the breakdown of households’ deposits and loans in order to
determine the part corresponding to final consumption (which impacts GDP) and the
part corresponding to intermediate consumption (which does not impact GDP). This
split
is necessary to
distinguish, on the basis of estimates, deposits of households as owners of
unincorporated enterprises and deposits of individuals (the latter having the main
impact on the increase of GDP generated by the allocation of FISIM).

is particularly difficult on the deposits side, for which it

Difficulties are met in the calculation of imports (exports being better known) as
there is an imperfect knowledge of loans and deposits made by resident institutional
sectors in non-resident financial institutions.

The implementation of “Method 3” as defined by the Regulation requires a
distinction between long term and short term loans and deposits, eight Member
States could not apply such a split.

5.

5.1

MAIN RESULTS

Comparison between non allocated FISIM as defined now and allocated FISIM

There are generally small differences in the results of the methods used to calculate
the total (non-allocated to users) FISIM as defined now and the sum of allocated
FISIM output. Those differences – positive or negative in Member States – depend

9

on interest payable less receivable by financial intermediaries on securities other than
shares, because securities other than shares are included in the calculation of the total
FISIM, whereas the calculation of allocated FISIM is confined to loans and deposits
(the reason being that only interest rates on loans and deposits are controlled by the
FIs).

5.2

Output of the Central Bank

According to the FISIM regulation, the output of the Central Bank should not be
calculated as for other financial intermediaries, but should be calculated as the sum
of costs. Most Member States in their reports are in favour of this method.

5.3

Occurrence of negative FISIM

Negative FISIM can occur as allocated FISIM are calculated on the basis of the
difference between interest receivable by FIs and the reference interest (for loans),
and of the difference between the reference interest and interest payable by FIs (for
deposits).

The fact that the reference rate changes quickly, whereas the rates of some loans or
deposits are more stable, can explain the occurrence of negative FISIM.

Most Members states are reluctant to have negative FISIM, putting forward the
difficulty of presenting a service with a negative value. Other Member States admit
the possible existence of negative FISIM, arguing that revenues of the S122/S123
sectors are not generated only by the differential of interest receivable/payable, but
also by the fees and commissions.

Negative FISIM have been observed occasionally in the allocation of FISIM by user
sectors, however FISIM results are almost always positive using all methods, and
overall FISIM results for banking as a whole are always positive.

Only rare and sporadic negative results were obtained with all sectors, the sector
towards which negative FISIM occur most often being the insurance corporations
and pension funds sector (on the deposits side).

5.4

FISIM by industry

Eurostat proposed two alternative methods of allocating FISIM by industry:

–

–

Method A: based on the estimation of stocks of loans and deposits for each
industry

Method B: based on the output for each industry.

Both methods are conceptually weak, but were proposed due to the lack of basic
data. Method A was considered more precise than method B, however stocks only
roughly reflect the levels of FISIM. Only a minority of Member States are able to
calculate the allocation with method A. Method B was used by most Member States
to calculate the allocation by industry, at the NACE 60 level.

10

5.5

Analysis of the impact on GDP

5.5.1

Average impact on GDP by country

The comparison of average impact on GDP by country of allocating FISIM only
gives a partial view of the importance of FIs in the economy, as FIs also directly
charge commissions and fees which are already allocated to user sectors and
therefore already taken into account in the GDP calculation.

In the countries which have provided a comparison between FISIM and commissions
and fees, a decreasing trend of FISIM can be observed in the period, because directly
charged commissions and fees make up an increasing part of financial intermediation
output.

FISIM produced divided by total commissions and fees charges by S122 and S123

Denmark

Germany

Spain

France

Italy

Luxem-
bourg

Nether-
lands

Finland

UK

1995

1996

1997

1998

1999

2000

1,77

1,47

1,33

1,11

-

-

2,88

2,80

2,42

2,01

-

-

2,93

2,74

2,47

2,17

2,04

1,97

1,35

1,28

1,07

0,95

0,87

0,79

0,90

0,71

0,64

0,52

0,51

-

1,70

1,61

0,62

0,44

0,61

0,30

3,44

3,12

2,59

2,33

2,32

-

4,57

2,79

2,70

2,75

2,32

2,36

1,47

1,31

1,32

1,32

1,06

1,00

For the average of all years and for all methods, the allocation of FISIM would
increase GDP by about 1,3% (weighed average of the countries).

More precisely the impact on GDP (weighted average of the countries) has been the
following through years:

1995: 1.43 %
1996: 1.37 %
1997: 1.34 %
1998: 1.32 %
1999: 1.27 %
2000: 1.34 %

The volatility of this impact is examined, country by country, in section 5.5.4.

The following table shows, by country, the impact on GDP, based on the average of
the different methods on the trial period. This impact is split into:

–

the increase of final consumption of households (including the non-profit
institutions when this sector cannot be presented separately) corresponding to
services produced by resident FIs.

11

–

–

the increase of final consumption of non-market services provided by the
sectors General Government and NPISHs (when this last sector is presented
separately) corresponding to services produced by resident FIs

the exports of FISIM less the imports of FISIM for intermediate consumption
of market producers (as FISIM imported for final consumption is neutral on
GDP). Exports and imports of FISIM are not only calculated on the basis of
loans and deposits between FIs and non FIs units, but also on interbank loans
and deposits between resident FIs and non resident FIs which are treated as
exports or imports depending on the sign of the net result.

Country

Impact on GDP

(%)

Of which
increase of final
consumption of
households

Of which
increase of final
consumption of
non-market
services

Of which
exports less
imports for
intermediate
consumption

Belgium

Denmark

Germany

Greece

Spain

France

Ireland

Italy

Luxembourg

The
Netherlands

Austria

Portugal

Finland

Sweden

United
Kingdom

Weighted
Average EU

Slovakia

(1)

(2)

1,6

1,5

1,4

1,6

1,3

1,1

0,9

1,1

8,2

1,4

1,2

2,0

1,2

1,1

1,7

1,3

1,5

1,1

1,3

1,5

1,1

1,2

0,8

0,6

1

0,8

1,1

0,4

1,7

0,9

1

1,6

1,2

0,9

0,2

0,1

0,2

0,5

0,1

0,2

0,3

0,1

0,2

0,1

0,4

0,4

0,1

0,1

0,1

0,1

0,6

0,3

0,1

-0,3 (1)

(2)

0

0,1

(2)

0

7,2 (1)

0,2

0,4

-0,1

0,2 (1)

0 (1)

0

0

0

The country has not yet implemented calculations on imports of FISIM

The country has not yet implemented calculations on imports and exports of FISIM

12

About 90% of this impact is explained by an increase of final consumption of
households, corresponding to FISIM allocated on loans and deposits of households
as final consumers.

This demonstrates that the breakdown of the households sector in order to determine
loans and deposits of households as final consumers is crucial for the reliability of
the results.

It should be noticed that the impact on GDP is similar in the Member States – apart
the case of Luxembourg which exports a large proportion of FISIM produced.

5.5.2

Average impact on GNI by country

If FISIM was allocated, exports less imports of FISIM would, in the transition from
GDP to GNI, be counterbalanced, for the same amount, by the change in interest
payable less receivable from the rest of the world.

This impact would be quite low (between – 0.3 % and + 0.4 % of GDP), except the
case of Luxembourg where the exports of FISIM (7.2 % of GDP) would be
counterbalanced by an important increase of interest payable less receivable from the
rest of the world. This would lead for this country to an impact on GNI of 1 %, rather
than 8.2 % on GDP.

It can be observed, from a statistical point of view, that the impact of allocating
FISIM is quite similar on GNI in all Member States (around 1.3 %), including the
Luxembourg case.

5.5.3

Average impact on GDP by method and country

The methods of calculating the reference interest rate were described in Chapter III.
The impacts on GDP are quite similar whatever the internal reference rate used

Method 1 Method 2 Method 3 Method 4a Method 4b Method 4c

1,44%
1,44%
1,23%
1,76%
1,26%
1,03%
1,07%
8,23%
1,31%

1,20%
1,51%
1,22%
1,08%
1,60%

1,75%
1,45%
1,41%
1,27%
1,48%
1,14%
1,25%
8,81%
1,50%

1,16%
1,62%
1,29%
1,20%
1,62%

1,69%
1,42%
-
1,93%
1,40%
-
0,89%
-
1,28%

1,19%
-
-
-
-

1,57%
1,64%
1,60%
1,60%
1,27%
1,06%
1,14%
7,80%
1,30%

1,19%
2,80%
1,16%
1,01%
1,79%

1,50%
1,54%
1,42%
1,68%
1,26%
1,05%
1,10%
8,02%
1,31%

1,20%
2,16%
1,19%
1,04%
1,70%

1,66%
1,55%
1,51%
1,43%
1,38%
1,09%
1,19%
8,40%
1,40%

1,16%
2,21%
1,23%
1,10%
1,71%

Average of
methods
1,60%
1,51%
1,43%
1,61%
1,34%
1,07%
1,11%
8,24%
1,35%

1,18%
2,06%
1,22%
1,09%
1,69%

1,26%

1,38%

1,21%

1,34%

1,40%

1,35%

Belgium
Denmark
Germany
Greece
Spain
France
Italy
Luxembourg
The
Netherlands
Austria
Portugal
Finland
Sweden
The United
Kingdom

Weighted
average of EU

This table expresses the average of all years.

13

Method 1 based on the inter-bank rate corresponds in average to an increase of
1.26 % of GDP.

Method 2, which also includes the rate of bonds, has on average a slightly higher
effect (1.38 % of GDP) for the years under study.

Since, for the years under study, the long term rates were higher than the inter-bank
rates, the reference rate in method 2 is generally higher than the reference rate in
method 1. As the stocks having an impact on GDP (mainly loans and deposits of
households as consumers) are higher on the deposits side than on the loans side, the
impact on GDP of allocating FISIM increases when the reference rate is higher.

Method 3 has a lower impact, but cannot be implemented by several Member States
as they cannot break down loans and deposits according to their maturity. Moreover,
as it introduces two reference rates (one for long term transactions, another for short
term transactions) this method has the drawback of systematically eliminating the
“matching benefits”, which is the use by FIs of short term deposits to finance loans
with longer maturity. Method 3 should be dropped, according to the opinion of most
Member States.

Method 4a measures only the gap between loan and deposit interest rates, neither of
which has any measurable relationship to the pure interest concept (both include an
element of service charge, but
the size of this service element within each is
unknown). Several Member States questioned the relevance of this convention.

Methods 4b and 4c are a mixture of method 4a and of methods 1 and 2, respectively.

From a methodological point of view, the reference rate should measure the pure cost
of funds appropriate to a borrowing or lending transaction, without any element of
service charge or of risk. Therefore, methods 1 and 2 are conceptually better than
methods 4, but methods 4 were introduced in the regulation because it was supposed
they would bring more stable results, as the proportion of FISIM allocated to loans
and deposits respectively should be more stable.

5.5.4

Index of “volatility”

To test the stability of the results, the “volatility” in the results of each method has
been measured as follows:

Index of “volatility” of the allocation of FISIM, based on the results by country and
by method

impact

on

=

GDP

year
impact

+
-1n
on

GDP

impact
n
year

on

GDP

year

n

The average index of “volatility” by method and country (average of all years, in %)
is the following:

14

Average of
methods (*)

11,3%

7,2%

4,4%

Method 1 Method 2

Method 3

Method 4a Method 4b Method 4c

Denmark

Germany

Greece

Spain

France

Italy

Austria

Portugal

Finland

Sweden

Belgium

16,7%

9,8%

10,6%

8,3%

2,6%

7,9%

4,9%

8,6%

-

8,6%

5,9%

5,3%

12,4%

7,0%

4,1%

9,2%

6,8%

5,1%

25,8%

30,1%

27,5%

10,9%

18,4%

13,0%

19,6%

21,9%

17,9%

21,6%

13,7%

17,7%

16,0%

17,4%

4,4%

4,1%

-

11,9%

8,9%

18,9%

The Netherlands

7,6%

6,8%

8,7%

10,5%

4,4%

4,9%

16,7%

21%

18,1%

11,7%

9,3%

12,7%

-

-

-

-

United Kingdom

4,6%

3,4%

6,0%

5,1%

8,7%

4,2%

4,5%

7,2%

7,2%

4,5%

4,4%

5,3%

7,2%

8,7%

4,7%

7,7%

7,5%

6,2%

15,7%

13,1%

12,8%

15,9%

11,9%

14,4%

11,2%

13,5%

14,4%

10,9%

12,4%

11,9%

4,5%

4,0%

3,9%

4,1%

Weighed
Average of the
EU

7,6%

7,3%

16,2%

6,7%

6,7%

6,4%

6,9%

(*)

Excluding method 3

Not surprisingly, method 4a is, on average, less volatile. However, the difference
with methods 1 and 2 is not significant: about 1% on average. However, the above
table shows that the levels of volatility of the different methods are quite different
among Member States, and generally among methods in the same Member State.

It needs to be clear that the level of volatility of FISIM (7 %) is comparable to the
volatility of other industries. For example, agriculture (including agriculture, hunting,
forestry and fishing) which is a large industry representing, in average, 2 % of GDP
at the European Union level has on the same period an index of volatility of 5 %.
Some other series in the accounts demonstrate a level of volatility close to the level
of volatility of FISIM. It should therefore be noted that the volatility of FISIM should
not preclude its inclusion on a properly allocated basis.

It would be important to know if the average volatility of FISIM comes from stock
changes (expressed in % of GDP) or from interest rates changes.

15

An index of “volatility” based on the total of resident stocks of loans and deposits (in
% of GDP), plus the total exported stocks of loans and deposits (in % of GDP),
minus the total imported stocks of loans and deposits (for intermediate consumption,
in % of GDP) has been calculated:

=

(stocks of loans + deposits year n + 1) - (stocks of loans + deposits year n)
stocks of loans + deposits year n

These amounts were expressed in terms of GDP, to be consistent with the general
index of volatility previously presented.

The result of the index of volatility of the stocks having an impact on the GDP is
4,5%. This means that – if interest rates remained unchanged – the volatility of
FISIM having an impact on GDP would be 4,5% and not 7,6% (result obtained with
method 1 for current prices). In any case, it should be taken into account that the
result of the index of volatility likewise depends on the financial structure of the
countries.

The weighted EU average of volatility of stocks is quite low, and this means quite
stable FISIM at constant prices.

5.5.5

FISIM at constant prices

The evolution of FISIM at current prices depends of the changes of two components
of the calculation: the volume component (changes in deflated stocks of loans and
deposits) and the price component (changes in the levels of the difference between
interest on loans and the reference rate, and of the difference between the reference
rate and interest on deposits).

The FISIM regulation includes a formula to allocate FISIM at constant prices. This
formula can be presented in an simple way:

FISIM on the loans to the institutional sector at constant prices of 1995

=

Stock of loans at constant 1995 prices

x

base year (1995) FISIM margin

The same formula would apply to deposits.

Most Member States have chosen the implicit price deflator for domestic final
demand as price index.

It is clear from this formula that FISIM at constant prices only includes the evolution
of stocks of loans and deposits, deflated by a general price index.

As already explained in the previous section, the volatility of FISIM due to the
volume component is quite low in average. This conclusion can also be drawn from
the analysis of FISIM at constant prices and in particular from the analysis of the
impact of allocating FISIM on the growth of GDP at constant prices.

Starting from the calculations of FISIM at constant prices, provided by Member
States, a weighted average volatility of this impact of FISIM on GDP has been
calculated: it corresponds to 4.4%.

16

The average volatility of constant prices FISIM corresponding to the households
is also the case for constant prices FISIM
final consumption is low (3.0%), it
corresponding to the final consumption of general government and non profit
institutions serving households (1.8%). But the higher volatility of exports and
imports explains the global result obtained (4.4%) and means more stability for GNI
at constant prices then for GDP at constant prices.

One can conclude from these calculations that the average volatility of FISIM at
constant prices (4.4%) and the proportion of FISIM on total GDP (1.3%) are too low
to significantly disturb the rate of growth of GDP at constant prices.

6.

CHOICE OF A METHOD OF ALLOCATION OF FISIM

The regulation introduced six trial methods (see part III) for the choice of a reference
rate. In the trial period, Member States were required to compare the results on the
allocation of FISIM by using the internal reference rate calculated according to each
of these six methods.

Which is the best method to allocate FISIM ?

Method 3 which introduces two reference rates (one for long term transactions,
another for short term transactions) is difficult to implement and has the conceptual
inconvenient to systematically eliminate the “matching benefits”, which is the use by
FIs of short term deposits to finance loans with longer maturity. It should be
eliminated.

Methods 4 (4a, 4b and 4c) are based on the average of lending and deposits rates
which are undertaken with the resident institutional sectors. Defined as an average,
the reference rate is therefore supposed to produce more stable results, as a situation
in which the reference rate is close to loans rates in one year and close to deposits
rates the following year would be avoided.

But the volatility calculations have demonstrated that the volatility of methods 4 are
not significantly lower than the volatility of methods 1 and 2. Therefore, these latter
two methods are to be preferred because they better reflect the pure cost of funds
appropriate to a borrowing or lending transaction, excluding any element of service
charge or risk, which is from a methodological point of view the definition of a good
reference rate.

The choice to be made is therefore between methods 1 and 2.

Method 1 is based on the inter bank rate.

Method 2 is based on the inter bank rate, but also includes the rate of bonds in order
to apply to transactions over a wider maturity band.

The reference rate under both methods can be considered free of service charge and
risk and gives quite stable results. Both methods satisfy the preferences expressed by
Member States, which have put forward two criteria for the identification of a
relevant reference interest rate. These criteria are the need of having an interest rate
fairly close to the concept of “pure interest rate” and giving the most reliable results
with regard to available data.

17

During the trial period, method 2 generally gave a higher reference rate than method
1, as long term rates were higher than inter bank rates. But the difference between the
two methods was not significant.

Eurostat recommends the use of method 1, based on the inter bank rate, which is the
most straightforward to calculate and the most easily understood by users of national
accounts. The choice of method 1 is fully consistent with the 1993 SNA (System of
National Accounts) which recommends (paragraph 6.128) the inter bank rate as
representing the pure cost of borrowing funds – that is the rate from which the risk
premium has been eliminated to the greatest possible extent and which does not
include any intermediation services.

The trial exercise has shown that this method gave quite stable and similar results
among Member States, despite certain data problems which are common to all
methods.

7.

CONCLUSION

The Council Regulation (EC) No 448/98 has defined different methods of allocating
FISIM in national accounts and has introduced a trial period in order to test these
methods.

Member States have implemented the test exercise for the allocation of FISIM for the
period 1995 to 2001.

The Commission considers that the results of the trial period are positive. According
to Regulation (EC) NO 448/98, the Commission will therefore before the end of
2002 issue a Commission Regulation for the allocation of FISIM in national
accounts, using method 1.

According to this draft Commission Regulation, Member States would have to
allocate FISIM in their national accounts from calendar year 2005.

The Commission will discuss with Member States the possible period for which
backwards calculations could be made. Further discussions will take place inside the
FISIM Task Force, concerning the allocation of FISIM in regional and quarterly
accounts.

The Commission recommends that to avoid confusion new figures should be used for
budgetary purposes, GNI being approximately 1% higher for all Member States.
However, according to Regulation (EC) 448/98, the allocation of FISIM will not be
taken into account for the European Union budget and its own resources unless the
Council, acting unanimously, on the proposal of the Commission, takes such a
decision.

18