Aggregate Balance Sheet Structure of Financial and Non-financial Sectors—Inter-sectoral Linkages

Analysis of stock variables in countries’ sectoral balance sheets (assets and liabilities of financial firms, non-financial firms, households, government, and sub-sectors of those sectors, as appropriate) and the consolidated aggregate balance sheet (for the country) can help highlight inter-sectoral linkages and can provide valuable information on the adequacy of financial structure and on the potential for financial instability. The bal­ance sheet analysis focuses on (a) the determinants and evolution of stocks of assets and liabilities and (b) the likely shocks to the stock variables, both of which can trigger large adjustments in flows (including cross-border capital flows, shifts in holdings of domestic or foreign currency assets, etc.). An approach of this type can, therefore, be a useful complement to the traditional flow analysis that is based on data related to fiscal, balance – of-payments, and financial programming. A classification of claims on and liabilities to any one sector from other sectors can reveal both the extent of access to financial services (in providing savings instruments, in offering credit intermediation, and in providing risk diversification and insurance) and the extent of inter-sectoral linkages that highlight the potential effect of shocks in one sector on the other. In addition, balance sheet data clas­sified by maturity, currency, contractual nature of liabilities (e. g., debt versus equity), and

Box 2.1 The Balance Sheet Approach—An Overview

 

shocks on these balance sheets typically are analyzed in financial sector assessments as part of the mac­roprudential analysis and the related stress-testing exercises. (See chapter 3 for further details.)

Data Availability and Limitations

A comprehensive analysis of sectoral balance sheets is often constrained by a lack of relevant data. The absence of this information often leads to a focus on a few key stock positions in the public sector balance sheet and in listed companies’ balance sheets. Therefore, for many countries, balance sheet information beyond what is readily available must be gathered before complete intersectoral analysis is feasible. Some efforts are under way to estab­lish good databases on balance sheets. The efforts to promote the compilation and dissemination of financial soundness indicators focuses on the needs of financial stability analysis. Other ongoing efforts in improving the providing of data to the Fund are designed to strengthen availability of detailed bal­ance sheet data on external and public sector assets and liabilities.

Although it is widely recognized that balance sheet analysis of the corporate sector is key to finan­cial stability analysis, the availability of data poses practical limitations. Typically, data are available only for listed companies; however, a much more comprehensive and differentiated analysis of the sector is needed to understand fully the access to financial services and vulnerabilities to financial risks of this sector.

Financial stability reports published by various countries have increasingly relied on systematic analysis of balance sheet data, thereby creating a demand for strengthened data compilation and dis­semination systems. When balance sheet data are not available in sufficient sectoral detail, the flow of funds information (data on changes in assets and liabilities of different sectors) can be a useful alterna­tive because the real and financial transactions that underpin the flow of funds accounts are the means by which balance sheet adjustments take place. Data from sectoral balance sheets and from the flow of funds suffer from a number of measurement difficul­ties: (a) available information is typically based on book (or transaction) values that may differ sharply from market values, (b) data on off-balance sheet exposures are not well captured, and (c) sharp portfo­lio adjustments in response to shifts in relative asset prices and new information may render data that are based on historical accounting records to become quickly outdated.

 

Applications and Policy Implications

Availability of comprehensive data on sectoral balance sheets permits the analysis of relationship between financial sector and real sectors (households, corpora­tions, etc.) and how the deterioration in one can be reinforced or offset by a strengthening of the other. In particular, capital account crises typically occur because of a sudden loss of confidence in the soundness of the balance sheets of one of the countries’ main sectors: the banking system, the corporate sector, the households, or the government. The negative impact of an initial adverse shock to a balance sheet will depend on the existing mismatches in the balance sheet. The cur­rency mismatch (a predominance of domestic currency assets over foreign currency liabilities) or a maturity mismatch (a predominance of long-term illiquid assets over short-term liquid liabilities) can expose the vul­nerability of a sector to sharp movements in exchange rate or interest rate or both, which arise from the initial confidence shock, and it can lead to spillover into other sectors, often snowballing in the process. For example, a capital structure mismatch of firms (a predominance of debt over own funds and equity liabilities in the bal­ance sheet) can result in unsustainable debt servicing burden because of an exchange rate or interest rate shock, thus leading to insolvency of firms, and illiquid­ity and insolvency of financial firms with exposures to the highly leveraged firms.

A loss of confidence in the banking system can lead, in turn, to runs on deposits and flight from currency, thereby exacerbating the initial currency and inter­est rate shock. Banking crisis also could trigger the realization of contingent liabilities of the government, as well as weaken the government balance sheet and threaten government debt sustainability. This type of interaction among balance sheets could magnify the negative impact of a shock on real output levels. Policy implications of the balance sheet analysis focus on policies to foster a buffering and hedging of private bal­ance sheets, including effective banking supervision to ensure strong risk management by banks, sound public debt and reserve management that effectively balances costs and rollover risks, and promotion of domestic capital markets to ensure currency diversification. Moreover, macroeconomic policy mix would need to take into account the constraints posed by the balance sheet mismatches such as the tradeoff between interest rate and exchange rate adjustments in the presence of maturity and exchange rate mismatches.

The financial sector’s balance sheets are key for the resilience of the economy. The relationship between the financial sector balance sheet and the corporate and household balance sheets as well as the impact of

 

Подпись: Table 2.6. Stylized Framework for Presenting Financial Interlinkages between Sectors in an Economy Sector A's balance sheet Assets of Sector A Liabilities of Sector A Financial claims on Financial obligations to Sector B Sector B by currency by currency by maturity by maturity Sector C by currency by maturity Sector C by currency by maturity
Sector D by currency by maturity

Подпись: Sector D by currency by maturityПодпись: Sector Eb by currency by maturitySector Eb by currency by maturity

Net worth/netb International investment13

Note: A = government sector; B = banking system; C = non-bank financial sector; D = non-financial private; E = rest of world.

a. Similar sectoral balance sheets can be constructed for each sector in line with those in the System of National Accounts (United Nations, Commission of the European Communities, International Monetary Fund, Organisation for Economic Co-opera­tion and Development, and World Bank 1993); the Monetary and Financial Statistics Manual (IMF 2000) also provides advice for compilation of accounts with limited data. In practice, presenting information on currency exposures and maturity may be chal­lenging in many countries.

b. When consolidating the sectoral balance sheets into the country’s balance sheet, the assets and liabilities held among resi­dents net out, leaving the country’s external balance relative to the rest of the world (nonresidents), which is shown as sector E. In the official balance-of-payments statistics, the difference between external financial assets and liabilities is the net interna­tional investment position. For other sectors, the difference between financial assets and liabilities is net worth or capital position of the sector.

quality of the assets can help to analyze how balance sheet imbalances in one sector could trigger changes in demand for financial assets of one or more sectors that could trigger financial instability. Recent work on the analytical uses and policy implications of balance sheet data—The Balance Sheet Approach—and some issues in compilation of balance sheet information are highlighted in box 2.1.

Illustrative sectoral balance sheets shown in table 2.6 highlight important information on sectoral interlinkages that will remain hidden in the consolidated country balance sheets. If sectoral balance sheet data can be disaggregated, as shown in the table, to allow the measurement of mismatches in the balance sheet by currency, maturity, and capital structure, then this type of information helps to analyze vulnerability to various shocks.

Some sources of sectoral balance sheet data are noted, as follows. Company finance statistics compiled by Bank of Korea (Financial Statements Analysis) provide balance sheet and income statements for listed and unlisted firms at a detailed level of indus­trial classification. Annual data on financial assets and liabilities of households in New Zealand are published in Reserve Bank of New Zealand Web site.19 Those kinds of data help to analyze the effects that macroeconomic shocks have on the soundness of firms and households. The framework for compiling and presenting a government balance sheet is presented in the Government Finance Statistics Manual (IMF 2001), and this framework has been applied in several countries (e. g., Ecuador, Uruguay). The issues in the compilation

of financial sector balance sheets are discussed in IMF’s Compilation Guide on Financial Soundness Indicators (IMF 2004). The balance sheet analysis of financial sector is routinely undertaken in all financial sector assessments as part of macroprudential analysis, which is explained in chapter 3.

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