Introduction6.1 This chapter brings

Introduction
6.1 This chapter brings together the concepts and definitions
set out in Part I of the Guide to explain how
FSIs for deposit takers are to be calculated. The next
two chapters cover the calculation of FSIs for other
sectors and for financial market FSIs, respectively. The
final chapter in Part II covers real estate price indices.
Accounting Principles
6.2 To summarize the guidance in Chapters 2 and 3:
• The definition of deposit takers is provided in
Chapter 2 (paragraphs 2.4 to 2.12).
• Transactions and positions should be recorded on an
accrual basis, and only existing actual assets and liabilities
should be recognized (paragraphs 3.3 to 3.9).
• The Guide prefers valuation methods that can provide
the most realistic assessment at any time of the
value of an instrument or item. Market value is the
preferred basis of valuation of transactions, as well
as for positions in traded securities. For positions in
nontradable instruments, the Guide acknowledges
that nominal value (supported by appropriate provisioning
policies) may provide a more realistic
assessment of value than the application of fair
value (see paragraphs 3.20 to 3.33).
• Residence is defined in terms of where an institutional
unit has its center of economic interest (see
paragraphs 3.34 to 3.36).
• Transactions and positions in foreign currency
should be converted into a single unit of account
based on the market rate of exchange (see paragraphs
3.44 to 3.48).
• Short-term maturity is defined as one year or
less (or payable on demand), more than one year
is defined as long term (see paragraphs 3.49 to
3.50). Duration is also defined (see paragraphs
3.51 to 3.56).
6.3 Except where otherwise noted, these are the
concepts to be employed in compiling the underlying
series used to calculate FSIs.
Underlying Series
6.4 The underlying series to be used in calculating
individual FSIs are defined in Chapter 4. In describing
the FSIs below, some brief descriptions of the
underlying series are provided, together with crossreferences
to the more detailed definitions provided
in earlier chapters. The sector data should be compiled
on a consolidated-based approach as described
in Chapter 5; that is, it should encompass both consolidated
group reporting and consolidation adjustments
at the sector level (Box 5.1).
Calculation of FSIs
6.5 Most FSIs are calculated by comparing two
underlying series to produce a ratio, as described
below. For each ratio, the calculation should use data
with the same periodicity for both the numerator and
the denominator—either flows recognized during the
period, or end-period or average period positions,
depending on the ratio being calculated. The Guide
considers that for the production of time series, the
data for the shortest period available should be used
(for example, quarterly data). However, even when
higher frequency data are available, annual calculations
might also be considered, among other things,
to reduce the impact of seasonal factors.1
6.6 Given that this is a new field of financial and
economic statistics, and experience of compiling and
using FSIs at both the national and international level
is relatively limited, it is recognized that the definitions
underlying available data series for use in calculating
FSIs might differ among countries, as well as
from the guidance set out in the Guide. Any dissemination
of such FSI data should be accompanied by
metadata so that the basis of calculation is transparent.
6. Specification of Financial Soundness
Indicators for Deposit Takers
75
1See also the discussion in Chapter 11 on availability of data,
breaks in series, and seasonal factors.Financial Soundness Indicators: Compilation Guide
6.7 The Guide discusses the compilation of data on
a domestically controlled, cross-border consolidated
basis and domestic consolidated basis in Chapter 5
(paragraphs 5.31 and 5.33). However, the compilation
of FSIs in accordance with the Guide requires
data on a domestically controlled, cross-border consolidated
basis. Additional possibilities arise—for
example, separate ratios could be calculated for all
domestically incorporated deposit takers, foreign
controlled deposit takers, deposit takers that are
commercial banks, and deposit takers that are savings
banks. For all FSIs, ratios could be calculated
for groupings based on these or other structural disaggregations
of the financial sector.2
6.8 Depending on the analytical needs of users, the
guidance provided in the Guide is intended to allow
compilers the flexibility to calculate additional FSIs
that are not specifically described in this Guide, using
the concepts and definitions provided for the underlying
series.
Financial Soundness Indicators
6.9 There are 12 core and 14 encouraged FSIs for
deposit takers. Other than the two interest-rate-based
indicators, which are described in Chapter 8, the
agreed FSIs are set out in Table 6.1 and described in
this chapter. The core FSIs are indicated. For exposition
purposes, capital-based FSIs are presented first,
followed by asset-based FSIs, and then by income
and expense FSIs.3 Numerical examples of how to
compile and present these data series are provided in
Appendix V.4
6.10 During the drafting of, and consultation on, the
Guide, ideas for further developing or redefining
some of the FSIs described below were provided.
These ideas are set out in Appendix III as examples
of additional ratios that go beyond the agreed list but
that nonetheless countries might find of relevance to
their own national circumstances.
6.11 Monitoring interest rate risk for the deposittaking
sector is important and, in early drafts of the
Guide, two FSIs—duration of assets and duration of
liabilities—were included for this purpose. However,
given that the techniques for monitoring systemwide
interest rate risk are still being developed,
including by the BCBS,5 it is premature to include at
76
2Chapter 12 describes a range of possible structural indicators
that could be disseminated. 3This presentation is also adopted in the dissemination tables in
Chapter 12. However, it is recognized that alternative presentations
are possible, such as grouping return on equity and return on
assets together. 4In comments on an earlier draft, some experts proposed that
setting benchmarks for specific FSIs might be considered. Countries
could then judge their own ratios against these international
benchmarks. However, given the limited experience with FSIs at
the time of writing, the Guide does not provide such benchmarks,
nor is the Guide considered the appropriate vehicle for presenting
such information.
Table 6.1. Deposit Takers: Financial
Soundness Indicators
Capital-based
(i) Regulatory capital to risk-weighted assets (core)
(ii) Regulatory Tier 1 capital to risk-weighted assets
(core)
(iii) Capital to assets
(iv) Nonperforming loans net of provisions to capital
(core)
(v) Return on equity (net income to average capital
[equity]) (core)
(vi) Large exposures to capital
(vii) Net open position in foreign exchange to capital
(core)
(viii) Gross asset and liability positions in financial
derivatives to capital
(ix) Net open position in equities to capital
Asset-based
(x) Liquid assets to total assets (liquid asset ratio)
(core)
(xi) Liquid assets to short-term liabilities (core)
(xii) Customer deposits to total (noninterbank) loans
(xiii) Return on assets (net income to average total
assets) (core)
(xiv) Nonperforming loans to total gross loans (core)
(xv) Sectoral distribution of loans to total loans (core)
(xvi) Residential real estate loans to total loans
(xvii) Commercial real estate loans to total loans
(xviii) Geographical distribution of loans to total loans
(xix) Foreign-currency-denominated loans to total loans
(xx) Foreign-currency-denominated liabilities to total
liabilities
Income- and expense-based
(xxi) Interest margin to gross income (core)
(xxii) Trading income to total income
(xxiii) Noninterest expenses to gross income (core)
(xxiv) Personnel expenses to noninterest expenses
5See, for instance, BCBS (2003c). This publication outlines
both gap and duration models, as well as hybrid models whereby
duration-based weights are used in conjunction with a maturity/
repricing schedule.6 • Specification of Financial Soundness Indicators for Deposit Takers
this point specific indicators of interest rate risk in
the list of FSIs to be compiled. Research is continuing
on the various possible techniques to assess
interest rate risk, including duration and gap analysis,
as is described in Appendix VI.
6.12 Unless otherwise stated, all the line references
in this section refer to Table 4.1.
Capital-Based FSIs
6.13 Capital is defined in terms of the Tier 1 capital
(line 32), total regulatory capital (line 36), and capital
and reserves (line 30).
6.14 As noted by the Basel Committee in its Capital
Accord, Tier 1 capital is a common feature in all
countries’ banking systems, being the basis on which
market and supervisory judgments of capital adequacy
are made, and having a crucial bearing on
profit margins and on a bank’s ability to compete. It
is less affected than capital and reserves by periodto-period
unrealized valuation changes.
6.15 The data for capital and reserves (compiled
from balance sheet data) are the residual interests of
the owners in the assets of the sector after the deduction
of liabilities. These data provide a comprehensive
measure of the capital resources available to the
sector, not least to absorb losses. For instance, when
total capital is employed in the “return on equity”
FSI ratio, an insight is provided into the extent to
which available capital resources are being put to
profitable use, while when total capital is employed
in the “nonperforming loans net of provisions to capital”
ratio, an indication is provided of the extent to
which losses can be absorbed before the sector
becomes technically insolvent.
6.16 In the absence of Tier 1 data, funds contributed
by owners