COMMISSION STAFF WORKING DOCUMENT Completing the Scoreboard for the Macroeconomic Imbalance Procedure: Financial Sector Indicator Accompanying the document REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE, THE COMMITTEE OF THE REGIONS AND THE EUROPEAN INVESTMENT BANK on the Alert Mechanism Report 2013, prepared in accordance with Articles 3 and 4 of the Regulation on the prevention and correction of macro-economic imbalances
Date: 2012-11-28
Institutions: European Commission
Subjects: EU Member State, economic disparity, economic recession, euro area, macroeconomics, public debt, report, structural adjustment

EUROPEAN 
COMMISSION 

Brussels, 28.11.2012  
SWD(2012) 420 final 

COMMISSION STAFF WORKING DOCUMENT 

Completing the Scoreboard for the Macroeconomic Imbalance Procedure: 
Financial Sector Indicator  

Accompanying the document 

REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE 
COUNCIL, THE EUROPEAN CENTRAL BANK, THE EUROPEAN ECONOMIC 
AND SOCIAL COMMITTEE, THE COMMITTEE OF THE REGIONS AND THE 
EUROPEAN INVESTMENT BANK 

on the Alert Mechanism Report 2013, 

prepared in accordance with Articles 3 and 4 of the Regulation on the prevention and 
correction of macro-economic imbalances 

{COM(2012) 751 final} 
{SWD(2012) 421 final}

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COMMISSION STAFF WORKING DOCUMENT 

Completing the Scoreboard for the Macroeconomic Imbalance Procedure: 
Financial Sector Indicator  

Accompanying the document 

REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE 
COUNCIL, THE EUROPEAN CENTRAL BANK, THE EUROPEAN ECONOMIC 
AND SOCIAL COMMITTEE, THE COMMITTEE OF THE REGIONS AND THE 
EUROPEAN INVESTMENT BANK 

on the Alert Mechanism Report 2013, 

prepared in accordance with Articles 3 and 4 of the Regulation on the prevention and 
correction of macro-economic imbalances 

The initial scoreboard performed well to support the first application of MIP 

In  December  2011,  after  the  conclusion  of  the  legislative  process,  the  '6-pack'  entered  into 
force, including a regulation setting up the Macroeconomic Imbalance Procedure (MIP)1. In 
February  2012,  the  first  step  in  the  MIP  was  taken,  when  the  Commission  adopted  and 
published the first Alert Mechanism Report (AMR)2. The role of the AMR is to identify, on 
the  basis  of  an  economic  reading  of  the  scoreboard,  which  Member  States  may  have  an 
imbalance and for which in-depth reviews (IDRs) are warranted. 

The AMR of February 2012 was based on a scoreboard established by the Commission in line 
with Article 4 of Regulation (EU) No 1176/2011. The scoreboard consisted of ten indicators 
covering the wide scope of surveillance under the MIP. The critical role of the scoreboard in 
the MIP should be recalled: The scoreboard is a filter with a view to signal issues for which 
more in-depth investigation is required, before concluding whether a Member State is affected 
by imbalances or excessive imbalances. As prescribed by Regulation (EU) No 1176/2011, no 
policy conclusions are drawn on the basis of a mechanical reading of the scoreboard, neither 
on the existence of imbalances or excessive imbalances, nor even on whether the situation is 
such that justifies an in-depth analysis. The scoreboard should be read and interpreted in its 
entirety  and  not  in  isolation  from  other  relevant  indicators  and  information,  including  the 
supporting set of so-called 'reading indicators,' which are also reported in the AMR.  

On  30  May  2012,  the  Commission  adopted  IDRs  for  twelve  Member  States  and  the 
appropriate  policy  recommendations  were  put  forward  in  the  context  of  the  European 

1  

2  

Regulation (EU) No 1176/2011 of the European Parliament and of the Council (OJ L 306, 23.11.2011, 
p. 25). 
COM(2012) 68 final, 14.2.2012. 

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Semester. The twelve Member States for which IDRs were prepared under the first round of 
MIP were considered to have imbalances3. 

While  adjustments  to  the  composition  of  the  scoreboard  are  under  the  responsibility  of  the 
Commission (Article 4(7) of Regulation (EU) No 1176/2011), the Commission is committed 
to  inform  and  work  closely  with  the  European  Parliament  and  Council  on  the  scoreboard 
design. Indeed, ahead of the first AMR, both the European Parliament and the Council were 
given the opportunity to provide their views on the Commission plans for the scoreboard.4 On 
this basis, the Council provided its views on 8 November 2011 and similarly did the European 
Parliament on 15 December 2011.  

The scoreboard should be completed with a financial sector indicator 

Although  the  first  vintage  of  the  MIP  scoreboard  already  captured  a  number  of  financial 
issues (like the private sector credit flow, the private sector debt and the public sector debt) 
the European Parliament5 and the Council6 supported the Commission's intention to add to the 
scoreboard,  in  time  to  the  second  round  of  MIP,  an  additional  indicator  aimed  at  better 
capturing  the  interlinkages  between  the  real  economy  and  the  financial  sector7.  In  turn,  the 
ESRB provided its comments and views on the initial design of the scoreboard as well as on 
the plans for an additional financial sector indicator8. 

Against this background the Commission services continued the technical work to develop a 
financial  sector  indicator.  This  work  is  now  completed  and  further  described  below.  It  is 
envisaged to include the chosen indicator in the scoreboard for the second Alert Mechanism 
Report.  

The identification of the new indicator has been supported by extensive technical work 

The  technical  work  to  identify  an  appropriate  financial  sector  indicator  for  the  MIP 
scoreboard  has  been  led  by  the  Commission  services,  but  has  drawn  on  the  expertise  and 
inputs from Member States, the ECB as well as the views provided by the ESRB last year.  

3  

4 

5 

6 

7 

8 

These  Member  States  were  Belgium,  Bulgaria,  Denmark,  Spain,  France,  Italy,  Cyprus,  Hungary, 
Slovenia, Finland, Sweden and the United Kingdom (see European Economy-Occasional Papers, 99 to 
110, and Commission Communication 'Action for Stability, Growth and Jobs' - COM(2012) 299 final, 
30.5.2012). 
'Scoreboard for the surveillance of macroeconomic  imbalances: envisaged initial design' - SEC(2011) 
1361 final, 8.11.2012 - subsequently published in European Economy—Occasional Papers, 92. 
Point 9 of the European Parliament Resolution of 15.12.2011: 'The European Parliament (…) [T]akes 
note  of  the  Commission's  intention  to  provide,  by  the  end  of  2012  and  in  time  for  the  subsequent 
European Semester, a new set of indicators and related thresholds for the financial sector'. 
Point 9 of the ECOFIN Council Conclusions of 8.11.2011: '(…) The Commission is also requested to 
present, before the end of 2012 and in line with the Regulation, suggestions on an indicator related to 
the financial sector, with a view to its inclusion for the 2013 European Semester.' 
Article 4(3)(a) of Regulation (EU) No 1176/2011 provides that the scoreboard should encompass, inter 
alia,  '(…)  internal  imbalances,  including  those  that  can  arise  from  public  and  private  indebtedness, 
financial and asset market developments including housing (...).' 
'Views of the ESRB on the Envisaged Scoreboard Indicators Relevant for Financial Market Stability,' 
available for download at http://www.esrb.europa.eu/pub/html/index.en.html. 

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As  it  was  the  case  for  the  indicators  selected  for  the  initial  design  of  the  scoreboard,  the 
technical  work  to  identify  a  suitable  financial  sector  indicator  was  guided  by  a  number  of 
principles.  

A  first  key  aspect  concerns  the  economic  relevance.  It  should  be  recognised  that  no  single 
indicator can capture all potential risks stemming from the financial sector. At the same time, 
the  propagation  of  feedback  loops,  or  in  other  words,  the  ability  to  magnify  or  attenuate 
vulnerabilities  is  a  key  dimension  that  the  scoreboard  should  capture.  This  is  also  valid  for 
other  vulnerabilities  and  issues  within  the  scope  of  MIP  surveillance.  However,  while  the 
scoreboard gathers a short list of relevant indicators, all available data and information need to 
be taken into account for the in-depth assessment of imbalances in Member States. 

A second guiding principle concerns simplicity. For communication purposes, it is important 
to  have  a  scoreboard  indicator  which  is  easy  to  grasp,  even  if  more  sophisticated  complex 
tools may be used in other steps of MIP (like in the IDRs). 

A  third  principle  concerns  regulatory  overlaps.  It  is  important  to  understand  to  what  extent 
the  indicators  are  the  object  of  other  surveillance  or  supervisory  processes.  A  scoreboard 
indicator  which  is  explicitly  included  in  financial  regulation  with  already  set  minimum 
requirements would be incongruous, both because of overlapping concerns and even more so 
because of endogeneity considerations.  

Finally,  data  considerations  are  also  important.  Data  availability  issues  must  be  taken  into 
account to ensure the quality of analysis and appropriate comparability of Member States. For 
example,  some  Member  States  do  not  yet  report  consolidated  data  in  the  financial  accounts 
and  balance  sheets  transmitted  to,  and  collected  by,  Eurostat.  Moreover,  while  data  are 
available at the most aggregated level data, they are not always available at a disaggregated 
level,  further  constraining  the  options.  Data  considerations  also  concern  timeliness,  as  the 
indicators which are selected for the scoreboard must be available on time for the AMR and 
other steps in the procedure. 

In  the  technical  discussions  between  the  Commission  services  and  the  Member  States'9 
experts,  several  indicators  have  been  considered.  A  large  consensus  emerged  that  the  two 
most relevant indicators to be considered for the scoreboard were: 

• 
• 

the growth rate of liabilities of the financial sector and 
the debt-to equity ratio, as an indicator measuring the leverage of the financial sector.  

Other indicators that were considered in detail were: 

• 

• 

the total financial liabilities over core financial liabilities, i.e. an indicator aiming to 
capture  the  stickiness  of  funding.  Core  liabilities  are  broadly  defined  as  financial 
institutions' liabilities to claimholders who are not financial intermediaries themselves. 
However,  this  indicator  was  judged  as  excessively  complex  and  difficult  to 
communicate to be used in the first filter of the procedure. 
the  loan-to-deposit  ratio,  i.e.  an  indicator  on  the  funding  structure  of  the  banking 
sector.  This  indicator  was  considered  as  very  sensitive  to  differences  in  the  liability 

9  

At the technical level, the Economic Policy Committee (EPC), through its LIME working group, have 
been involved. 

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• 

structures  and  alternative  financing  options  across  Member  States.  Therefore,  a 
common threshold for the AMR scoreboard would not be appropriate. Moreover, this 
indicator is relevant for the banking sector, but not for the financial sector as a whole. 
the share of short-term liabilities in total liabilities which measures the market-related 
refinancing  needs  of  the  financial  sector  in  a  Member  State.  Although  liquidity  has 
been key in the crisis, it is not the main objective of a financial indicator in the context 
of  the  MIP,  and  these  liquidity  difficulties  often  emerge  as  result  of  other 
vulnerabilities.  

These  three  indicators  scored  all  relatively  low  on  data  considerations,  given  the  required 
detailed  data,  which  could  create  problems  for  the  appropriate  comparability  of  Member 
States. 

It is therefore envisaged to include in the scoreboard the growth rate of financial sector 
liabilities  

On the basis of the technical discussions, it is envisaged to include the growth rate of financial 
sector  liabilities  in  the  scoreboard,  while  retaining  the  leverage  indicator  among  the  set  of 
reading  indicators,  thus  taking  into  account  both  in  the  overall  economic  reading.  In  the 
technical discussion, this option was supported by a vast majority of Member States' experts. 
The other indicators that were discussed, and all other data, will be considered in the in-depth 
reviews, as appropriate. 

The  growth  rate  of  financial  liabilities  has  several  advantages  and  fulfils  well  the  above 
mentioned guiding principles. The indicator is a very broad measure of the expansion of the 
exposure to potential risks in the financial sector. Experience has shown that a fast expansion 
of the financial sector has often preceded financial crises. Among the several indicators that 
were discussed at the technical level, it was the one that had better early-warning qualities. A 
very rapid growth of the liability side of the balance sheet may be driven by excessive credit. 
Other indicators in the scoreboard, such as credit and private sector indebtedness also provide 
additional  qualifying  information  in  this  respect.  Given  that  this  indicator  does  not  require 
instrument  disaggregation  which 
to  disentangling  difficulties  and 
is  more  prone 
reclassifications, the indicator provides a fairly reliable basis for comparison among Member 
States.  Moreover,  it  does  not  discriminate  against  different  funding  specificities  of  Member 
States. The indicator is not specific to the business model of a specific subsector. In principle, 
the size of the financial sector can be measured on the asset or the liability side of financial 
sectors’ balance sheet. The indicator is defined in a way that covers all financial corporations 
(sector  S.12  in  the  European  System  of  National  and  Regional  Accounts:  ESA),  this  is,  all 
corporations and quasi-corporations which are principally engaged in financial intermediation 
(financial  intermediaries)  and/or  in  auxiliary  financial  activities  (financial  auxiliaries).  The 
concept  of  liabilities  to  be  considered  is  very  wide:  it  covers  currency  and  deposits  (AF.2), 
securities  other  than  shares  (AF.3),  loans  (AF.4),  shares  and  other  equity  (AF.5)  insurance 
technical  reserves  (AF.6)  and  other  accounts  payable  (AF.7).  As  for  other  indicators,  the 
threshold  (an  annual  growth  rate  of  16.5  per  cent)  is  defined  as  the  third  quartile  of  the 
available  distribution.  As  established  in  Article  3(2)  of  Regulation  (EU)  No  1176/2011,  the 
interpretation of this indicator in the scoreboard will be neither mechanical, nor isolated from 
that of other indicators, but subject to an all-encompassing economic judgement. 

It is envisaged to complement this indicator with a debt-to-equity ratio indicator in the second 
layer of reading indicators: The debt-to-equity ratio indicator shows the relative proportion of 

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shareholders'  equity  and  debt  used  to  finance  assets.  The  ratio  provides  information  on  the 
leverage building up within the financial sector which can have an amplifying impact on the 
economic  cycle.  A  highly  leveraged  financial  system  may  amplify  unfavourable  economic 
developments, like a recession, or doubts on the solvency of the sovereign. While leverage is 
important for growth, excessive leverage carries the threat of the  amplification effect of the 
volatility  of  returns:  since  the  absolute  increase  in  value  of  returns  is  accelerated  when 
leverage is employed, so are the losses. A drawback, however is that the indicator is largely 
influenced  by  market  fluctuations  in  equity  prices  which  must  be  considered  in  the 
interpretation of the indicator. Moreover, given the heterogeneity of financial system, it is not 
appropriate to define a threshold that is common to all Member States. 

The  scoreboard  should  be  stable  but  the  technical  work  to  improve  the  quality  and 
comparability of statistics should continue 

The scoreboard must remain a simple and clear tool to work as a filter that helps focussing the 
surveillance  under  the  MIP.  In  this  context,  stability  in  the  scoreboard  design  over  time  is 
valuable. It is not foreseen at this point in time to add additional indicators to the scoreboard.  

Against this background, the Commission is committed to improve the quality of the data. As 
prescribed  by  Regulation  (EU)  No  1176/2011,  the  Commission  will  regularly  assess  the 
appropriateness  of  this  indicator,  and  of  the  whole  scoreboard,  and  modify  them  as 
appropriate.  To  this  end  the  Commission  will  continue  liaising  at  a  technical  level  with  the 
Member States (including the statistical authorities), the ECB and the ESRB to ensure that the 
scoreboard  remains  up  to  date  in  its  design  and  takes  into  account  statistical  developments. 
Moreover,  the  Commission  will  remain  attentive  to  the  need  of  adjusting  the  indicative 
thresholds. 

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Financial Corporations - Total Financial Liabilities (year-on-year  growth rate) 

2003 

9.3% 

2004 

2005 

2006 

2007 

2008 

2009 

2010 

15.3% 

15.7% 

11.0% 

12.1% 

-6.9% 

-5.0% 

-2.0% 

22.0% 

36.6% 

34.2% 

52.0% 

29.3% 

-3.5% 

2001 

4.1% 

7.0% 

10.5% 

6.9% 

3.0% 

2002 

-3.9% 

7.5% 

9.9% 

6.4% 

-0.5% 

n.a. 

0.8% 

6.9% 

5.2% 

-3.0% 

8.8% 

0.2% 

4.6% 

1.6% 

3.9% 

3.1% 

8.7% 

3.5% 

12.5% 

17.0% 

9.3% 

19.2% 

11.0% 

20.7% 

10.2% 

10.5% 

3.6% 

5.6% 

4.8% 

5.9% 

13.3% 

24.5% 

13.4% 

34.3% 

23.4% 

15.1% 

27.8% 

25.4% 

20.4% 

35.3% 

20.4% 

10.3% 

8.6% 

9.0% 

16.8% 

14.2% 

22.1% 

15.5% 

15.1% 

24.6% 

19.0% 

16.9% 

6.4% 

10.0% 

15.1% 

15.0% 

13.1% 

11.6% 

7.2% 

12.1% 

10.5% 

0.5% 

-2.7% 

2011 

4.7% 

5.6% 

0.9% 

5.0% 

2.1% 

0.9% 

3.7% 

0.9% 

-1.1% 

-2.4% 

8.6% 

7.8% 

0.1% 

-10.8% 

-10.1% 

-4.4% 

2.8% 

10.2% 

3.8% 

0.2% 

5.7% 

6.2% 

8.5% 

-2.2% 

3.0% 

1.7% 

-0.6% 

-3.4% 

3.7% 

7.3% 

3.8% 

5.6% 

6.5% 

1.9% 

8.0% 

6.5% 

4.6% 

4.7% 

2.5% 

7.8% 

-4.3% 

6.5% 

19.4% 

39.3% 

28.6% 

21.3% 

15.0% 

18.8% 

-6.0% 

-0.2% 

24.5% 

13.0% 

12.8% 

30.6% 

41.4% 

47.6% 

36.9% 

24.5% 

18.2% 

31.6% 

25.0% 

48.9% 

32.5% 

34.3% 

5.9% 

3.7% 

-8.3% 

-0.1% 

-3.2% 

-3.7% 

0.0% 

8.9% 

n.a. 

n.a. 

n.a. 

n.a. 

n.a. 

n.a. 

15.1% 

-11.8% 

15.1% 

9.6% 

7.9% 

24.5% 

17.8% 

18.5% 

12.5% 

9.0% 

6.1% 

6.7% 

12.4% 

11.3% 

0.4% 

-14.0% 

n.a. 

8.1% 

5.3% 

n.a. 

0.3% 

0.7% 

23.9% 

-11.6% 

6.2% 

2.6% 

32.9% 

13.1% 

n.a. 

18.2% 

12.3% 

42.6% 

n.a. 

9.4% 

6.6% 

0.1% 

9.6% 

9.3% 

9.5% 

6.8% 

n.a. 

29.4% 

14.3% 

22.3% 

10.0% 

-0.4% 

18.5% 

6.0% 

14.8% 

12.1% 

16.3% 

-0.6% 

6.1% 

6.8% 

1.4% 

7.2% 

11.3% 

16.5% 

10.0% 

9.4% 

11.8% 

-1.7% 

-1.7% 

-0.3% 

32.6% 

26.3% 

25.2% 

26.7% 

-7.4% 

10.9% 

17.0% 

-7.0% 

2.8% 

9.8% 

11.3% 

9.9% 

70.2% 

57.1% 

47.2% 

26.8% 

10.1% 

17.8% 

13.7% 

28.5% 

7.7% 

19.1% 

-7.5% 

24.8% 

5.4% 

0.2% 

6.6% 

8.9% 

9.5% 

8.6% 

7.4% 

10.0% 

-0.7% 

3.7% 

2.9% 

-3.4% 

-1.3% 

-5.0% 

2.2% 

1.2% 

8.3% 

0.5% 

7.8% 

3.3% 

13.3% 

14.6% 

13.6% 

12.2% 

10.5% 

16.4% 

6.5% 

18.9% 

30.8% 

-1.7% 

11.3% 

12.6% 

10.4% 

16.3% 

-7.0% 

5.0% 

30.0% 

22.5% 

13.7% 

3.5% 

6.9% 

-3.7% 

12.5% 

16.7% 

4.2% 

13.6% 

-11.3% 

11.4% 

11.8% 

BE 

BG 

CZ 

DK 

DE 

EE 

IE 

EL 

ES 

FR 

IT 

CY 

LV 

LT 

LU 

HU 

MT 

NL 

AT 

PL 

PT 

RO 

SI 

SK 

FI 

SE 

UK 

Source: Eurostat.  

Cut-off date: 6 November 2012. 

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