www.ebook3000.com A Flow-of-Funds Perspective on the Financial Crisis www.ebook3000.com Palgrave Studies in Economics and Banking Series Editor: Professor Richard Werner This series focuses on the economic implications of banking, bridging the usual divide between economics and banking/finance Titles in the series facilitate a deeper understanding of the interaction between banking and the economy, enabling readers to better understand the role and importance of banking in economic activity, and promote a better integration of banking and finance into policy models at theoretical and empirical levels Titles include: A Flow-of-Funds Perspective on the Financial Crisis, Volume I: Money, Credit and Sectoral Balance Sheets Bernhard Winkler, Ad van Riet and Peter Bull (editors) A Flow-of-Funds Perspective on the Financial Crisis, Volume II: Macroeconomic Imbalances and Risks to Financial Stability Bernhard Winkler, Ad van Riet and Peter Bull (editors) Palgrave Studies in Economics and Banking Series Standing Order ISBN: 978–1137–33135–9 (outside North America only) You can receive future titles in this series as they are published by placing a standing order Please contact your bookseller or, in case of difficulty, write to us at the address below with your name and address, the title of the series and the ISBN quoted above Customer Services Department, Macmillan Distribution Ltd, Houndmills, Basingstoke, Hampshire RG21 6XS, England www.ebook3000.com A Flow-of-Funds Perspective on the Financial Crisis Volume II: Macroeconomic Imbalances and Risks to Financial Stability Edited by Bernhard Winkler Senior Advisor, European Central Bank, Frankfurt am Main, Germany Ad van Riet Senior Advisor, European Central Bank, Frankfurt am Main, Germany Peter Bull Director General Statistics (retired), European Central Bank, Frankfurt am Main, Germany www.ebook3000.com Editorial matter, selection and introduction © Bernhard Winkler, Ad van Riet and Peter Bull on behalf of the European Central Bank 2014 Foreword and remaining chapters © Respective authors or their affiliations 2014 Softcover reprint of the hardcover 1st edition 2014 978-1-137-35300-9 All rights reserved No reproduction, copy or transmission of this publication may be made without written permission No portion of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, Saffron House, 6–10 Kirby Street, London EC1N 8TS Any person who does any unauthorized act in relation to this publication may be liable to criminal prosecution and civil claims for damages The authors have asserted thier rights to be identified as the authors of this work in accordance with the Copyright, Designs and Patents Act 1988 First published 2014 by PALGRAVE MACMILLAN Palgrave Macmillan in the UK is an imprint of Macmillan Publishers Limited, registered in England, company number 785998, of Houndmills, Basingstoke, Hampshire RG21 6XS Palgrave Macmillan in the US is a division of St Martin’s Press LLC, 175 Fifth Avenue, New York, NY 10010 Palgrave Macmillan is the global academic imprint of the above companies and has companies and representatives throughout the world Palgrave® and Macmillan® are registered trademarks in the United States, the United Kingdom, Europe and other countries ISBN 978-1-349-46946-8 ISBN 978-1-137-35301-6 (eBook) DOI 10.1057/9781137353016 This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources Logging, pulping and manufacturing processes are expected to conform to the environmental regulations of the country of origin A catalogue record for this book is available from the British Library A catalog record for this book is available from the Library of Congress www.ebook3000.com Contents List of Figures and Diagrams vii List of Tables xii Foreword V´ıtor Constˆancio xiii Notes on the Editors xvi Notes on the Contributors Part I xvii Introduction and Overview Bernhard Winkler, Ad van Riet and Peter Bull Flow of Funds and Macrofinancial Analysis Tobin LIVES: Integrating Evolving Credit Market Architecture into Flow-of-Funds Based Macro-Models John Duca and John Muellbauer 11 Growing Fragilities? Balance Sheets in The Great Moderation Richard Barwell and Oliver Burrows Japan’s Flow-of-Funds Accounts: Main Characteristics and Measures for Enhancement Shuji Kobayakawa and Ryoichi Okuma 110 Conceptual Framework of Financial Accounts: The Case of Slovenia Janez Fabijan 128 40 Part II Flow of Funds and Macroeconomic Imbalances in Europe The Financial Crisis in the Light of the Euro Area Accounts: Selected Issues Philippe de Rougemont and Bernhard Winkler 155 The Surveillance of Macroeconomic Imbalances in the EU: The Sectoral Perspective Carlos Cuerpo and Alexandr Hobza 199 v www.ebook3000.com vi Contents Debt, Assets and Imbalances in the Euro Area: An Aggregate View Christophe Van Nieuwenhuyze 230 Part III Flow of Funds and Financial Stability 10 11 Towards a Systemic Risk Indicator Based on Contingent Claim Analysis Nuno Silva, Nuno Ribeiro, Ant´onio Antunes 263 The Role of Financial Accounts Data in Financial Stability Analysis: The Case of Lithuania Virgilijus Rutkauskas 286 Analysis of the Sectoral Financial Interlinkages of the Financial Sector in Austria against the Background of the Recent Financial Crisis Michael Andreasch Index 305 327 www.ebook3000.com Figures and Diagrams Figures 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 3.9 3.10 3.11 3B.1 3B.2 3B.3 3.12 The financial accelerator operating in the US sub-prime crisis The evolving funding of US home mortgages The components of net liquid assets as ratios to income Housing and illiquid financial assets as ratios to income Consumer Credit Conditions Index The time varying m.p.c out of housing wealth, proportional to HLI Estimated contributions of CCI, housing wealth/income and net liquid assets/income to the consumption/ income/income ratio Estimated contributions of real interest rates, permanent income/income and illiquid financial assets/income to the consumption/income ratio UK annual growth and inflation outcomes over the past 150 years The distribution of quarterly growth in UK nominal GDP Global financial markets UK sectoral debt/GDP Asset prices Balance sheet growth and financing flows in the Great Moderation Macro flow variables Sectoral net lending balances Corporate NAFL/GDP Household NAFL/GDP Savings, the CAD and the CFG: cumulated flows from 1998 to 2007 Securitised lending as a share of all lending to UK households and companies Quarterly global issuance of RMBS by nationality of risk Investor base in UK prime RMBS by rating, as of 2004–06 Distribution of housing equity and financial assets (net of unsecured debt and excluding pension assets) across the household population vii www.ebook3000.com 13 21 26 26 27 29 30 31 41 42 42 43 44 64 66 67 68 69 75 78 78 81 85 viii List of Figures and Diagrams 3.13 3.14 3.15 3.16 3.17 3.18 3.19 3.20 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 4.10 4B.1 4B.2 4B.3 5.1 5.2 5B.1 5B.2 5B.3 5.3 5.4 6.1 6.2 Buy-to-let rental yield Loan-to-income ratios Bank lending to corporates Corporate investment and savings Buyout deals Equity buybacks Syndicated lending by purpose of borrowing, 2004–07 The UK banking sector in the Great Moderation Flow-of-funds accounts in Japan, the United States and the euro area Financial assets and liabilities of main sectors Financial surplus or deficit of main sectors Financial assets of financial intermediaries: Japan, euro area and United States Financial assets of households: Japan, euro area and United States Treasury securities held by main sectors: Japan and United States Who lends to whom among main sectors in 2011: Japan and euro area Amounts outstanding of securitised products JGBs’ remaining and original maturities at the end of fiscal year 2011 Who holds whose shares in the Japanese stock market Financial assets of households Personal deposits by district Loans and bills discounted by district Conceptual framework of statistical information system Matrix of integrated reporting requirements Flow of the hierarchical dimension: sector Level of possible aggregation of the four-dimensional value of a variable: report item ‘loans, excluding syndicated loans’ Multidimensional space of the study of banks’ credit activity: data warehouse model Modular connectivity of analytics in the general ledger with the double-entry treatment of business events via ‘settlement accounts’ and a system of matrix reporting Leverage ratio and contribution by sector for euro area (left) and Slovenia (right) Euro area gross disposable income Euro area savings www.ebook3000.com 86 86 88 89 92 94 94 96 111 112 113 114 115 117 118 120 120 122 124 125 126 136 140 141 142 142 144 147 160 161 List of Figures and Diagrams ix 6.3 6.4 6.5 6.6 6.7 6.8 6.9 6.10 6.11 6.12 6.13 6.14 6B.1 6.15 6.16 6.17 6.18 6.19 6.20 7.1 7.2 7.3 7.4 7.5 7.6 7.7 7.8 7.9 7.10 7.11 Euro area gross capital formation Euro area net lending(+)/net borrowing(−) Net lending(+)/net borrowing(−) by country grouping Differentials between external surplus group and external deficit group in saving and investment ratios Differentials between external surplus group and external deficit group in sectoral saving ratios Ratio of the gross operating surplus to value added of NFCs Compensation of employees paid by NFCs Relative share of banking in NFC consolidated debt in the euro area/in the US External financing of non-financial corporations, by source of funds Loans granted by non-financial corporations and their trade credit receivable and payable Households’ financial investment Euro area governments’ acquisition of financial assets Change in financial institutions’ leverage ratio Leverage by sector Change in net worth of euro area households Corporate debt and assets to value added Corporate gearing: leverage and Tobin’s Q Capital ratios of financial institutions excluding mutual funds Wholesale financing by MFIs Current account positions in the EU Net international investment positions in selected EU countries Net lending/borrowing by sector: ‘surplus’ countries in the euro area Net lending/borrowing by sector: ‘deficit’ countries in the euro area Indebtedness of euro area countries (2011, sectoral decomposition, % of GDP) Indebtedness of euro area countries (2011, sectoral decomposition, % of financial assets) Household leverage dynamics, euro area Non-financial corporations leverage dynamics, euro area Credit flows, non-financial corporates Credit flows, households Change in total liabilities, financial sector www.ebook3000.com 162 164 167 169 170 172 173 175 176 177 179 180 185 186 188 189 190 192 193 201 201 203 204 209 210 212 212 214 214 215 322 Michael Andreasch important – entities belonging to the sector, ‘other financial intermediaries except insurance corporations’ (acting on behalf of both other domestic banks and non-resident banks), the losses of the banking sector are affected in the following rounds by this effect In addition, it is necessary to take into consideration the growing importance of the government in providing additional equity funds following the failure of Lehman Brothers Based on the simulated transmission in ten rounds, the total losses of the value of equity issued by other monetary financial institutions would amount to roughly 16 per cent 11.4.2 The role of wholesale funding for banks in Austria In addition, the role of short-term wholesale funding for Austrian banks has been examined, based on the developments of intrasectoral financial flows within the banking sector, especially after the default of Lehman Brothers In general, during the financial crisis, the strong and opaque connections between banks proved to be one of the major problems for counterparties, investors and supervisors in assessing the risks for credit institutions and the entire banking system The increased build-up of short-term inter-bank liabilities played a crucial role in some international banks’ rapid total asset growth, which, in turn, contributed to contagion effects when confidence dwindled in the inter-bank market after the onset of the crisis In 2008, investment banks like Bear Stearns and Lehman Brothers were hit particularly hard: within a few days, they were cut off from inter-bank funding sources The severe liquidity crunch resulted in the takeover of Bear Stearns by another bank, while Lehman Brothers had to file for bankruptcy protection These events quickly affected other financial institutions and money market funds and drastically intensified the financial crisis around the world The analysis of the importance of short-term wholesale funding for Austrian banks is based on financial accounts data adjusted for certain structural features of the Austrian banking system Specifically, the data on decentralised sectors and their multiple tiers artificially inflate the share of wholesale funding, a distortion which needs to be addressed Therefore, only deposits and debt securities with short maturities (with original maturities of up to 12 months) held in the inter-bank market, but which were not held in the same multi-tiered sector (because they are not considered as wholesale funding), were counted towards short-term wholesale funding instruments.4 At end 2011, these types of funding accounted for Sectoral Financial Interlinkages in Austria 323 around ten per cent of Austrian banks’ total financial liabilities (excluding equity capital), at the same level as at the end of 2006 Including cross-border inter-bank deposits (including also deposits of own foreign subsidiaries or branch offices), the share nearly doubled in 2011 Even though the available data on linkages to foreign inter-bank market participants are thus less granular and include intra-group transactions, these results highlight the level-shift in the relatively low importance of volatile, short-term wholesale funding in the refinancing of Austrian banks (also because the role of investment banking is rather insignificant for them) Figure 11.6 plots the development of wholesale funding in relation to the overall financial liabilities of the MFI sector since 2006, exploring the proportion of both wholesale funding within the domestic MFI sector, excluding the central bank, and wholesale funding including cross-border deposits with non-resident banks 11.5 Summary and conclusions The financial assets of the Austrian financial sector totalled approximately C1,412 billion in December 2011, which is roughly five times the size of Austria’s annual nominal GDP The financial sector’s share in gross value added in the economy was close to per cent Against the background of the financial crisis, the inter-bank deposits of MFIs rose dramatically in 2008, with no significant lasting effect on wholesale financing because the bulk of new financial investment was made within the same multi-tiered banking sector and decreased in the following two years Both the ratio of financial assets to GDP and Austrian MFIs’ share in gross value added corresponded to the EU-27 average Austria’s financial sector had the highest share of financial linkages of financial assets within the financial sector, which might be attributable in part to the high volume of deposits and securities holdings of banks within the decentralised banking sector The financial linkage within the financial sector located in Austria and with counterparts belonging to the financial sector located abroad amounted to 60 per cent of the overall financial assets of the domestic financial sector This contribution also reviewed the attempt to use financial accounts data for supervisory purposes The main interest is the contribution to the compilation of wholesale bank funding The combined data derived from financial accounts and supervisory data showed that wholesale funding for domestic banks accounted for between 18 and 26 per cent of the total liabilities, showing a decreasing importance in the last years Monetary financial institutes1 Central bank 106 58 11 1 Pension funds Financial corporations Nonfinancial corporations Government 48 116 Nonfinancial sectors Total economy 223 107 330 24 32 Rest of the World Total Households Other financial institutes 78 Insurance corporations 17 Stocks in 2011 (% of GDP) Non-MMF investment funds Monetary financial institutes Central bank Non-MMF investment funds2 45 28 16 12 0 S.121 S.122 S.123 IF Creditor sectors De bt Other financial institutes3 24 17 1 14 10 S.123/4 Insurance corporations 33 14 19 16 S.125 V Pension funds 0 0 0 0 S.125 P Financial corporations 469 181 288 128 50 16 62 160 18 24 106 S.12 Nonfinancial corporations 150 80 70 44 41 26 3 19 S.11 Government 43 39 27 13 13 0 1 S.13 Households4 169 12 157 22 21 135 26 12 83 S.14/5 361 95 266 93 13 75 173 29 16 108 11 N-S.12 Nonfinancial sector Table 11A.1 From-whom-to-whom table of the financial accounts in Austria for the reference period 2011 Appendix Total economy 830 276 554 221 55 29 137 333 33 22 40 215 19 S.1 Rest of the world 278 153 59 93 125 103 12 S.2 31 832 374 55 89 230 458 35 25 45 318 Total 3 118 421 Distribution of the liabilities (%) Central bank 25 Monetary financial institutes 25 2 Non-MMF investment funds 15 Other financial institutes 68 Insurance corporations Pension funds 0 Financial corporations 23 Nonfinancial corporations 25 Government 12 Households4 86 Nonfinancial sectors 31 Total economy 27 Rest of the World 225 10 142 Total 308 30 223 17 1 129 302 16 23 48 57 43 100 0 0 0 0 185 2,058 85 0 90 1 91 100 25 33 53 74 11 35 27 18 89 34 35 21 23 34 13 11 27 61 39 100 6 18 12 36 67 12 2 17 27 30 47 53 100 10 0 10 17 235 16 3 0 30 30 21 11 63 93 100 23 26 25 75 100 29 19 59 49 16 80 12 13 93 100 35 34 35 15 83 100 38 32 15 25 32 28 30 48 21 26 74 26 100 61 68 88 89 94 100 73 60 33 98 59 67 12 26 40 16 27 67 33 100 39 32 12 11 27 40 67 41 33 37 1 45 33 21 55 100 100 100 100 100 100 100 100 100 100 100 100 100 38 55 28 11 45 100 Notes: including money market funds, excluding central bank excluding money market funds, including financial auxiliaries, including NPISHs Source: OeNB (Financial accounts) 24 0 32 18 14 35 68 32 100 42 10 58 14 72 28 100 21 0 23 2 27 73 100 of the assets (%) 12 15 0 28 36 64 100 Distribution Central bank Monetary financial institutes Non-MMF investment funds Other financial institutes Insurance corporations Pension funds Financial corporations Nonfinancial corporations Government Households4 Nonfinancial sectors Total economy Rest of the World Total Table 11A.1 Continued D e D e 326 Michael Andreasch Notes Cut-off date: April 2012 The peak in nominal values was in 2008, but due to the slowdown of the economy in 2009 the slight decrease in absolute values turned into a slight increase in terms of GDP Data have been derived from Eurostat’s database on annual financial accounts: the cut-off date was March 2012 Unfortunately, the supervisory statistics not include data on the maturity of deposits Therefore, all deposits were included, as they were assumed to be of a short-term nature References ECB (2012) ‘The Interplay of Financial Intermediaries and Its Impact on Monetary Analysis’, Monthly Bulletin, January, 59–73 IMF and Financial Stability Board (2010) The Financial Crisis and Information Gaps – Progress Report, Action Plans and Timetables, May Kavonius, I.K and O Castr´en (2009) ‘Balance Sheet Interlinkages and MacroFinancial Risk Analysis in the Euro Area’, ECB Working Paper, No 1124 Index AAA credit ratings, 79–80, 98 accounting, 138–9 accounting framework, 74–7, 98, 102 model, 52–5 stylised, 46–9 for UK, 49–52 ageing population, 163, 202, 256n8, 308 aggregate consumption, 33–4 Alert Mechanism Report (AMR), 205 Andreasch, Michael, 7, 305 Antunes, Antonio, ´ 6, 263 arbitrage, 80 Argentina, 290 Asian economies, 43, 74, 290 asset-backed commercial paper (ABCP), 79–80 asset-backed securities (ABS), 77–81 asset markets, 17 asset prices, 17, 32, 44, 55, 72, 98, 99, 102, 105n2, 149, 216–17 assets, 239 asset-to-income ratio, 30–1 asymmetric information, 34, 35 austerity measures, 222–3 Austria, 7, 238, 246 financial sector interlinkages, 305–26 wholesale funding in, 322–3 automatic fiscal stabilisers, 162 Backus, D., 12, 13, 16–17 balance of payments, 244–6 balance sheets, 40–109 accounting framework, 49–55, 74–7, 98, 102 banks, 87 bilateral, 266–7 corporate, 66–72, 87–95 developments in UK, 1994-2007, 43, 49–52, 56–63 expansion, 65–95, 102 financial intermediaries, 190–1 growth and financing flows, 64 household, 66, 69, 73–7, 102 matrix, 51–2 model, 52–5 rest of world, 95–8 restructuring, 90–2, 93, 207 sectoral, 48, 50, 204–5 stylised accounting framework, 46–9 variables, bank bailouts, 178 bank deposits, 77 bank lending, 74–5, 77, 80, 85–88, 174–78 Bank of England, 45, 51, 75 Bank of Japan, 2, 110–11, 119, 121, 123 Bank of Lithuania, 6–7, 303 Bank of Slovenia, 130–2, 135–44, 149 banks, 12 balance sheets, 87 debt-to-asset ratios, 193 foreign-owned, 95 role in balance sheet expansion, 70, 72 solvency, 87 supervision of, 130–1 UK, 3–4, 95–8 wholesale funding for, 322–3 Barwell, Richard, 3, 40 Basel II, 19 Belgium, 237, 238, 239, 244, 252 ‘belt-tightening’ adjustment, 222 Benati, L., 40 Bernanke, B.S., 11, 16, 235, 254 Blake, D., 17 Blinder, A., 11, 16, 72, 98 boom-bust cycles, 2, 14–15, 19, 32, 43, 87, 191 Bowie Bonds, 108n19 Brainard, W.C., 11, 12, 14–17, 34 Breeden, D., 17 327 328 Index bubbles, 3, 19–20, 22, 32, 46, 55, 68, 72, 84, 87, 98, 187, 199, 202 budget constraints, 46 budget deficits, 251, 258n21 Bull, Peter, Burrows, Oliver, 3, 40 business cycle, 12, 13, 17 buy-to-let (BtL) investment, 84, 86 capital asset pricing model (CAPM), 17 capital flight, 257n20 capital flows, 41, 42, 202, 225, 253 capital formation, 161–3, 195n9, 216 capital gains, 87, 90 capital markets, 65, 67, 70, 252–3 capital ratios, 183, 191–5 central banks, 2, 11, 129–30, 265, 311–12 China, 253 classical economics, 16 cluster analysis, 225–6 collateralised debt obligations (CDOs), 19, 79 commercial real estate (CRE), 88–92, 106n31 Commodity Futures Modernization Act, 19 competitiveness, 244 consolidated debt, 233–4, 236–7, 240, 255 consolidation, 183–4, 197n29, 197n30, 231 Constˆancio, V´ıtor, xiii–xiv construction, 12, 18, 20 consumer credit, 3, 14, 17–19, 26–8, 32, 73 Consumer Credit Conditions Index, 26–8, 31–3 consumer spending, 20 consumption, 3, 12–14, 16–17, 20, 33–4, 73–4, 168 consumption function, 3, 13, 14, 22–33 consumption-to-income ratio, 30–2 contingent claim analysis, 263–85 applying at sectoral level, 265–73 in forward-looking context, 273–9 corporate balance sheets, 66–72, 87–95 corporate debt, 3, 70, 92, 95 corporate funding, 174–8 corporate investment, 163, 171, 216, 221–3 corporate leverage, 187–94 corporate margins, 171–4 corporate profits, 171–4 coverage ratio, 221 Cowles Foundation, 33 credit availability, 3, 14, 17, 73 bubbles, 84, 87 conditions, 26–8 constraints, 16, 34 contraction, 12 expansion, 3, 55, 73–95 flows, 43, 207, 214, 224–5 home equity, 14, 18–20, 25, 28 household, 3, 14, 17–19, 26–8, 32, 73 ratings, 79 risk, 79, 106n20, 275 standards, 35n3 supply and demand, 72, 208, 213, 216–20, 224 credit default swaps (CDS), 19 credit markets, 12, 14 U.S., 18–22 cross-border financial flows, 203, 287 cross-sectoral claims, 97–8 Cuerpo, Carlos, 5, 199 current account deficits, 6, 74, 75, 84, 202 current account imbalances, 231, 244–6 current account surpluses, 202 customer funding gap (CFG), 74, 75, 77 Cyprus, 212–13, 237 data warehouse technology, 141, 143 debt adjustment, via sectoral financial balances, 246–51 as asset, 180–1 balance of payments and, 244–6 Index 329 competitiveness and, 244 consolidated, 240 corporate, 3, 70, 92, 95 cross-country comparison, 236–9 economic growth and, 239–44 euro area, 179–94, 208–13, 230–58, 288–9 financial stability and, 240–4 gross, 234–6, 241, 242, 243, 255, 257n14, 298 household, 181, 237–8 issuance, 70 macroeconomic concepts, 232–6 maturity, 267 measuring indebtedness, 182–94 net, 234–6, 241, 242, 243, 255, 256n6 non-consolidated vs consolidated, 233–4, 236–7, 240, 255 optimal level of, 207 overhang, size of, 208–13 paradox of thrift, 181–2 private sector, 2, 31, 73, 74, 85–7, 179–80, 181, 206–7, 237–8, 251–3 public sector, 2, 179–80, 206–7, 234–5, 239, 251–3 sectoral positions, 232–9 servicing costs, 223 debt default barrier, 267, 272–3, 278 debt-service-to-income ratio, 184 debt-to-asset ratio, 184, 187, 191, 193 debt-to-capital ratio, 183 debt-to-income ratio, 21–2, 182–3, 187 debt-to-value added ratio, 189 default barrier, 267, 272–3, 278 default risk, 80 deficit countries, 5–6, 145, 165, 173, 194, 201–4, 231, 245–51, 253, 254 deficit reduction, 162 deleveraging, 34, 48, 88, 149, 176, 181–4, 194–5, 206–24 extent, speed, and duration of, 222–4 likelihood of, 213–20 net financial asset (NFA) positions and, 220–2 paradox of deleveraging, 181–2 depository institutions, 115–16, 118–19, 121 deregulation, 14, 18, 19, 287 derivatives, 19 De Rougemont, Philippe, 4, 155 detailed flow-of-funds accounts (D-FFA), 118, 127n7 discretionary buffer, 270–1 disintermediation, 174–8 disposable income, 160 Dolde, W., 16 domestic demand, 202–3 DotCom bubble, 3, 32, 88 double-entry accounting, 138–9 down payments, 20 Duca, John, 3, 11 dynamic stochastic general equilibrium (DSGE), 12 Economic and Monetary Union (EMU), 129, 199, 247 economic growth, 239–44, 286 economic policy, 128, 134 emerging economies, 43, 74 employee compensation, 171–3, 196n21 endogenous risk, 294 equity buybacks, 90, 94 investors, 107n12, 121, 122 issuance, 71 markets, 67, 121, 122 prices, 67–9 ratio, 183 value, 267, 268–73 volatility, 265–6, 267, 268–73 yield, 15 Estonia, 212, 213, 216, 217, 238, 239 Euler equations, 23, 34 euro area, 128 austerity measures, 220–3 balance of payments, 244–6 capital formation, 162–3 competition in, 133 current account imbalances, 244–6 debt, 179–94, 208–13, 230–58, 288–9 330 Index euro area – continued deficit countries, 5–6, 145, 165, 173, 194, 201–4, 231, 245–51, 253, 254 disposable income in, 160 economic growth in, 240–4 financial balances in, 246–51 financial crisis in, 155–198 financial intermediation in, 115–16, 174–9, 194 financial sector, 146, 315–18 financial stability in, 239–45 flow-of-funds accounts in, 111 government deficits, 163–5 government securities, 118 integrated reporting requirements, 139–41, 143 inter-bank placements, 127n6 lending and borrowing in, 118–19 leverage, 179–94 macroeconomic imbalances in, 4–6, 199–229 net financial assets, 220–2, 239, 244–6, 251–3 net lending/net borrowing, 159–65, 194, 203–4 ‘real convergence’ in, 128 regional imbalances, 165–74, 194 savings and investment patterns, 161, 168–71 surplus countries, 5–6, 165, 194, 201–4, 231–2, 245–51, 253 systemic risk indicator for, 263–85 Euro Area Accounts (EAA), 155–198 intermediation patterns, 174–79 net lending/net borrowing, 159–5 regional imbalances, 165–74 European Banking Authority (EBA), 144 European Central Bank (ECB), 2, 4–5, 129, 131, 319 European Supervisory Authorities (ESAs), 130 European Systemic Risk Board (ESRB), 130 European System of Accounts, 131, 132 European System of Central Banks (ESCB), 130 European Union current account positions in, 201, 202 debt positions, 5–6 net international investment positions, 201 surveillance framework, exogenous risk, 294 expectations, 14, 17, 70 expenditures, 157, 159 external financing, 174–8 Fabijan, Janez, 4, 128 Fannie Mae, 18, 19, 21, 35n4 Federal Housing Administration (FHA), 21 Federal Reserve, see US Federal Reserve financial accelerator, 12, 13, 235 financial accounts, 49–52 conceptual framework of, 129–37 financial stability and, 286–304, 318–23 Slovenia, 128–51 statistics of, 132, 135–48 two-pillar system, 131–7 financial crisis, see global financial crisis financial deepening ratios, 288 financial flows, 43–52, 98–102, 310–12 financial innovation, 14, 43 financial instruments, 131 financial intermediaries/intermediation, 5, 80, 129, 137, 145, 309, 312 balance sheets, 190–1 changes in, 174–79, 194 international comparisons, 114–16 reporting systems, 133, 135 role of, 134 Slovenia, 148–9 financial markets of 1990s, 55 global, 42 financial modelling, Yale school and, 15–17 financial sector, 146 assets and liabilities, 112 Index 331 Austria, interlinkages, 305–26 financial position of, 313–18 real economy and, 11–36, 134, 287–9 supervision of, 130–1 total liabilities, change in, 215 financial stability, 6–8, 52, 54, 134, 239–42 analysis of, 286–304, 318–19 defined, 289–92 financial accounts and, 286–304, 318–23 safeguarding, 293–4 threats to, 296 financial systems fragility, 70–2, 80, 85–7, 92–5 interconnectedness of, 294–5 Japan, structural changes in, 17 UK, 95–98 Finland, 239, 244 first-time home buyers, 20, 238 Fiscal Compact, 230 fiscal policy, 72 flow of funds analysis, 1–3, 44–6 cross-border, 287 financial stability and, 6–8 macroeconomic imbalances and, 4–6, 199–229 macrofinancial analysis and, 2–4, 11–36 network exposure for financial sector, 319–23 wholesale funding, 84 Yale school and, 15–17 flow-of-funds accounts, 1, 2, 256n1 Austria, 305–26 euro area, 111, 155–198 Japan, 110–27 United States, 111 foreign capital, 221 foreign funding, 84, 85–7 foreign-owned banks, 95 France, 238 Freddie Mac, 18, 19, 21, 35n4 Friedman-Ando-Modigliani consumption function, 23–4, 25 fuzzy clustering, 225–6 GDP growth, 240–2, 256n10, 286 general equilibrium, 15 George, Eddie, 41 Germany, 221–2, 237, 238, 244, 289 Gertler, M., 11, 16, 235, 254 Ginnie Mae, 18, 21 global financial crisis, 1–2, 11, 32, 40, 119, 290 in euro area, 4–5, 155–98 financing during, 309–12 macroeconomic imbalances and, 200–4 in Slovenia, 149–50 global financial markets, 42 global trade imbalances, 74 Godley, W., 44, 46, 52, 54 government bonds, 105n7, 113, 178–9 government debt, see public sector debt governments, 265 acquisition of financial assets by, 178, 180 deficits, 251, 258n21 discretionary buffer, 270–1 equity and equity volatility, 270–1 financial intermediation, 178–9 intermediation role of, government sponsored enterprises (GSEs), 18, 19, 21, 35n4 granularity, 48, 133, 134, 141 Great East Japan Earthquake, 123–6 Great Moderation, 3, 18, 40–5, 52 balance sheets, 56–64 credit expansion, 73–95 expansion, 65–95 in retrospect, 55–98 tech boom, 55, 65–72 UK banking sector in, 95–8 Great Recession, 12 Greece, 238, 239, 242, 244 Greenspan, Alan, 107n8, 221 gross capital formation, 162–3, 195n9, 216 332 Index gross debt, 234–6, 241, 242, 243, 255, 257n14, 288 gross debt-to-GDP ratio, 288 gross disposable income, 160 Hobza, Alexandr, 5, 199 home equity credit, 14, 18–20, 25, 28 horizontal integration, 156, 181 household net lending, 74–5, 76 households, 265, 309 balance sheets, 66, 69, 73–7, 102 behaviour, consumption by, 168 credit, 3, 14, 17, 18–19, 26–8, 32, 73 credit flows, 214 debt, 3, 31, 73, 74, 77, 85–7, 181, 206–7, 237–9 deposits, 115–16 equity and equity volatility, 269–70 financial assets, 111, 112 financial intermediation, 178–9 income, 160–1 investment, 163, 178, 179, 216 lending by, 159, 163, 168, 195n8 leverage, 187–94, 212 portfolios, 3, 25–33 revenues, 159 risky to non-risk assets, 219 savings, 99, 161, 162, 221–2 house prices, 20, 24, 35n2, 35n5, 73–4, 77, 81, 84–5, 87, 216–17, 218 housing equity, 85 housing liquidity index (HLI), 28–9, 31, 32–3 housing markets, 12, 14–15, 18–22, 162–3, 216–17 housing wealth, 23–5, 28–30, 32 Iacoveilleo, M., 12 illiquid assets, 23, 25, 26, 32 income, 157, 160–3 indebtedness, 182–95, 206–13 see also debt inflation, 12, 43, 72 information systems, 129–30, 135–48, 150 initial public offerings (IPO), 68 insurance corporations, 115, 130, 265 Insurance Supervision Agency, 130 interaction effects, 34 inter-bank market, 178 interconnectedness, 6–7, 263–4, 288, 294–5 in Austria, 305–26 financial sector, 305–26 in Lithuania, 295–303 interest rate ceilings, 16 interest rates, 15–16, 74, 243, 267 international investment position (IIP), 145 International Monetary Fund (IMF), 138, 319 intra-financial sector growth, 97–8 intra-sector funding, 177 inventories, 195n9, 216 investment, 160–3, 168–71, 178, 216, 221–2 Ireland, 131, 213, 216, 217, 221, 238, 244 Italy, 220, 221, 238, 239 Japan financial intermediation in, 115 financial systems, impact of Great East Japan Earthquake, 123–6 lending and borrowing in, 118–19, 121 stock market, 122 Japanese government bonds (JGBs), 113 Japan flow-of-funds accounts (J-FFA), 110–27 financial surpluses or deficits, 113–15 further development of, 119–23 international comparisons, 114–16 stocks and flows, 111–14 sub-categories of transaction items and sectors, 116–19 Kindleberger, C., 87, 102 Kobayakawa, Shuji, 4, 111 Index 333 latent interactive variable equation system (LIVES), 14–15 Lavoie, M., 44, 46, 52, 54 Lehman Brothers, 5, 119, 155, 156, 160, 163, 175, 190–1, 322 lending standards, 80, 84 leverage active, 183–4 corporate, 187–94 household, 187–94 methodology, 184–5 notional, 185, 191 by sector, 186 total economy, 186–7 leveraged buyouts, 90, 92 leverage multiplier, 183 leverage ratios, 19, 99, 182–94 leveraging up, 48 liabilities, 268 life-cycle consumption function, 3, 13, 14, 22–5, 36n7 life insurance, 178 liquid assets, 23, 25, 26, 30, 32 Lithuania, 6–7 financial liabilities, 296–303 financial stability analysis, 286–304 government liabilities, 301 household liabilities, 302 interconnectedness in, 295–303 monetary financial institutions (MFIs), 299 net financial worth, 296, 297 non-financial corporations, 298 loan defaults, 33 loans-to-deposit ratio, 213, 215 loan-to-income ratio, 86 loan-to-value ratio, 12, 22 Luxembourg, 237, 238, 239, 242, 244 M3, 178 Maastricht Treaty, 230, 233, 251, 252, 258n21 Macroeconomic Imbalance Procedure (MIP), 199, 200–7, 224, 226n3, 230, 232 macroeconomic imbalances analysis of, 207–24 in Europe, 4–6 financial crisis and, 200–4 scoreboard, 234 surveillance of, 199–229 tools for, 200–7 macroeconomic statistics, 132, 135–48 macrofinancial analysis, 2–4, 11–36 macro flow variables, 66 macroprudential policy, 102 macroprudential risk analysis, Malta, 238, 244, 246 Mannesmann, 70 market financing, 149, 174–5, 196n22 market-value principle, 185 mergers and acquisitions (M&As), 69–70, 188–9 Merton, R., 263–4, 265, 266, 274, 275 Mexico, 289 Minsky moments, 34 Minsky’s Financial Instability Hypothesis, 84, 90 Modigliani, F., 16 monetarism, 12, 15–16, 34 monetary financial institutions (MFIs), 139–40, 143, 174, 175, 192–3, 265 Austria, 307–12 equity and equity volatility, 268–9 housing loans, 218 Lithuania, 299 wholesale funding, 321 monetary policy, 72, 129–30, 133 monetary transmission, 16 money circulation of, 45 role of, 14 money market funds (MMFs), 307–8 money markets, 193 money supply, 12, 134 moral hazard, 197n25 mortgage-backed securities (MBS), 19–22, 77–81 mortgage credit, 3, 14, 18–21, 27–8, 32, 218, 238 mortgage markets, 14 Muellbauer, John, 3, 11 mutual funds, 178 national accounts system, 1, 50, 127n4, 133 334 Index national central bank (NCB), 130 national financial accounts, see flow-of-funds accounts negative feedbacks, 13 net acquisition of financial assets (NAFA), 46, 48 net acquisition of liabilities (NAFL), 46, 48 net assets-to-value added ratio, 189–90 net borrowing, 159–68, 194, 203–4, 246–51, 288 net debt, 234–6, 241, 242, 243, 255, 256n6 net financial assets (NFA), 220–2, 244–6, 251–3, 256n8 net financial worth, 296, 297 Netherlands, 217, 237–8, 244 net lending (NL), 46, 159–68, 194, 195n8, 203–4, 246–51, 288 network analysis, 319–23 net worth, 197n33, 269–70 New Keynesianism, 12 non-bank loans, 108n18 non-consolidated debt, 233–4, 236–7, 240, 255 non-financial accounts, 131, 132–3, 146 non-financial corporations (NFCs), 5, 51, 97–8, 121, 131, 150, 159, 168, 233, 265, 309 assets and liabilities, 112 capital formation, 216 credit flows, 214 debt and leverage, 188–94 equity and equity volatility, 268–9 funding by, 174–8 leverage, 212 leverage and, 187 Lithuania, 298 margins and profits, 171–4 retained earnings, 171, 173–4 savings, 217 volatile assets to total assets, 219 non-price competitiveness, 226n2 non-profit institutions, 131, 233 notional leverage, 185, 191 off-balance sheet securitisation, 82–3 Office for National Statistics (ONS), 50, 103–4 oil exports, 43 Okuma, Ryoichi, 4, 110 originate and hold model, 80 originate-to-distribute model, 192–3 other financial institutions (OFIs), 265, 322 other monetary financial institutions (OMFI), 265, 267, 278, 279 paradox of deleveraging, 181–2 paradox of thrift, 181–2 pension assets, 23, 25, 72, 85, 178 pension funds, 115, 256n7, 265 permanent income, 366 pillar analysis, 131 portfolio balance, 12 portfolio choices, 3, 25–33, 77 Portugal, 6, 221, 237, 244, 266 position data, 312–15 positive feedbacks, 13 price appreciation, 84–5 principal component analysis, 225–6 private debt-to-GDP ratio, 222–3 private non-financial corporations (PNFCs), 51 private sector debt, 2, 179–80, 206–7, 237–8, 251–3 deleveraging, 220–4 leverage, 225–6 productivity, 67–9, 203 public debt-to-GDP ratio, 256n10 public sector debt, 2, 160, 163–5, 179–80, 234–5, 239, 251–3, 257n11 Purvis, D., 12, 13, 16–17, 32 quantity constraints, 16 Index 335 rational expectations, permanent income hypothesis (REPIH) model, 22–3, 24 real business cycle theory, 12 ‘real convergence’, 128 real economy, 43 finance and, 287–9 financial flows and, 43–52 financial sector and, 11–36, 134 real estate commercial, 88–92, 106n31 prices, 20, 24, 35n5, 43, 73–4, 77, 81, 84–5, 87, 216–18 real estate investment trusts (REITs), 21 real-financial linkages, 3, 11–36 regulatory arbitrage, 80 Reis, R., 72, 98 reporting requirements, 129 representative consumer, 17 reserve requirements, 16 residential mortgage backed securities (RMBS), 77–81 rest of world (RoW), 265, 271–2, 278–9 retail funding, retained earnings, 157, 171 revenue, 157, 159 Ribeiro, Nuno, 6, 263 risk credit, 79, 106n20, 275 default, 80 endogenous, 294 exogenous, 294 systemic, 6, 34, 35, 263, 294–5 risk-free interest rate, 267 Rougemont, Philippe de, 155 Russia, 290 Rutkauskas, Virgilijus, 6, 286 savings, 157, 160–3, 168–71, 217, 221–2, 252–3 savings rate, 13–15, 18, 45, 74, 75, 169–70 Schinasi, G., 291, 292–3 sectoral accounts, 195n2 concepts, 157–9 data, 146–8 financial balances, 246–51 net lending/net borrowing, 159–68, 195n11, 203–4 sectoral balance sheets, 203–4 sectoral level contingent claim analysis at, 265–73 model assumptions, 267–73 sectoral net lending, 5, 67 sector rotation, Securities and Exchange Commission (SEC), 19 Securities Market Agency, 130 securitisation, 74–5, 77–83, 107n18 shocks, 6, 33, 34, 87, 263, 264, 273–5, 279–80, 290 shock transmission mechanism, 275–9 Silva, Nuno, 6, 263 Slovakia, 213, 221, 237 Slovenia, 4, 130–53, 216, 221 Bank of Slovenia, 130–2, 135–44, 149 EU integration by, 139 financial accounts framework, 129–37 financial intermediation in, 148–9 impact of financial crisis in, 148–50 international investment position (IIP), 145 sectoral accounts, 146–8 statistical information system, 144–8 supervisors in, 130–1 Solow, R., 16 sovereign debt crisis, 176, 204, 251, 263, 309 Spain, 212, 213, 216, 217, 221, 237, 289 special purpose vehicles (SPVs), 77, 79–81, 253 spillover effects, 34, 65 Stability and Growth Pact, 230 stability frontier, 278–80, 281 statistical information systems, 135–48, 150 stock-flow consistency, 156 stock market wealth, 32, 122 structural equation, 33–4 336 Index sub-prime mortgage crisis, 12, 13, 18–22, 35n4, 80, 155 surplus countries, 5–6, 165, 194, 201–4, 231–2, 245–51, 253 surveillance, of macroeconomic imbalances, 199–229 sustainability, 234–5 syndicated loan market, 109n33 systemic risk, 34, 35 analysis of, 6, 294–5 indicator, 263–85 literature on, 263 System of National Accounts (SNA), 1, 50, 127n4, 133 taxation, 252, 270 Tax Reform Act, 25 tech boom, 55, 65–72 technological advances, 18, 65 3Com, 68–9 tipping point, 280 Tobin, James, 3, 11, 12, 14–17, 34 Tobin’s Q, 15, 183, 190 total economy leverage, 186–7 trade credit, 177–8, 197n23, 197n24 trade imbalances, 75, 99 treasury securities, 117, 118 Treaty of Stability, Coordination and Governance, 230 Treaty on the Functioning of the EU, 133 two-pillar system, 131–7 uncertainty, 17, 34, 35n6, 216 unemployment, 33 United Kingdom, 3–4 accounting framework for, 49–52 annual growth and inflation, 40–1 asset prices, 44 corporate sector, 67–72 distribution of quarterly growth, 42 financial system, 95–8 Great Moderation in, 40–5, 55–98 sectoral debt/GDP, 43 United States consolidated debt ratio, 240 consumption in, 3, 12–14, 20, 22–34 credit markets, 14, 18–22 financial intermediation in, 115–16 flow-of-funds accounts, 111 government securities, 117, 118 productivity, 67–8 savings rate, 13–14, 15, 18 securitisation, 77–81 sub-prime mortgage crisis, 12, 13, 18–22, 35n4, 80, 155 US Federal Reserve, 2, 130 Van Nieuwenhuyze, Christophe, 5, 230 van Riet, Ad, vector autoregression (VAR), 17 vertical integration, 156, 181 Vodafone, 70 wage growth, 171–3, 196n21 wealth effects, 16, 23, 43, 75 wholesale funding, 4, 45, 74–5, 77–81, 84–7, 192–3, 321–3 who-to-whom accounts, 266–7 Winkler, Bernhard, 1, 2, 4, 155 Yale school, 11–12, 14–17