Question

Contrast the modern construct for F ISIM with a measure that subtracts deposits from the financial sector’s lending to measure value added in the sector. How will these two measures differ in terms of size and sensitivity to risk? Can you give differing views of a world without finance for each to be the proper measure of value added?

Answer 1

FISIM stands for Financial Intermediation Services Indirectly Measured. In the System of National Accounts it is an estimate of the value of the services provided by financial intermediaries, such as banks, for which no explicit charges are made; instead these services are paid for as part of the margin between rates applied to savers and borrowers. The supposition is that savers would receive a lower interest rate and borrowers pay a higher interest rate if all financial services had explicit charges.

One method of calculating it is as the total property income receivable by financial intermediaries minus their total interest payable, excluding the value of any property income receivable from the investment of their own funds, as such income does not arise from financial intermediation.

Update in FISIM methodology

• For the gross domestic product (GDP) estimates published in July 2016 the CSO has changed the methodology
• used to calculate FISIM, bringing it into line with the European System of Accounts (ESA 2010) standards. This
• revised methodology has been applied to estimates from 2010 onwards. Up to now, the published Euro Interbank
• Offered Rates (Euribor) have been used as the basis for estimating the reference rate (i.e. the rate at which banks
• lend to each other) in the FISIM calculations. The estimates now use survey data, which provide details of loan and
• deposit principal amounts and their associated interest flows, to calculate both the reference rate and the loan and
• deposit rates charged/offered to customers. Data is collected in a joint survey by the Central Bank of Ireland and the
• CSO. This change in calculation methods has generally given a higher estimate of the reference rate, as Irish banks
• were not obtaining the very low Euribor rate prevailing in the aftermath of the banking crisis. A higher reference rate
• implies a lower FISIM margin on loans. Since most of the FISIM is earned on loans, the estimate of the total domestic
• FISIM charge has been reduced. The revised approach has drawn on improved data for imports and exports of
• FISIM; there are upward revisions to both measures resulting in an overall increase in net exports. In aggregate, the
• revised FISIM methodology has resulted in slight increases to GDP estimates in most years since 2010.

‘Negative FISIM’

As the criss-crossing of the green and red lines above suggests, there were times in the last three years when the rate paid to depositors was higher than the rate paid to other banks. This produces a negative FISIM charge, which might be thought of as making losses on deposits in order to shore up capital ratios. As the graph shows, banks continued to pay out

less on deposits than they were receiving in interest on loans, so these losses were offset.

Who earns FISIM?

FISIM is earned by what are known as financial intermediaries; this category includes all entities that takedeposits and/or give loans. In addition to the traditional banks, companies such as financial vehicle corporations

(FVCs) also earn FISIM. The term ‘bank’ in this note should be taken to include all categories of financial intermediaries.

Who pays FISIM?

FISIM is calculated for households, businesses and public bodies that borrow from banks domestically or have deposits with them. In addition, Irish banks lend abroad and take deposits from other countries: the interest on these transactions gives rise to FISIM exports. Similarly, Irish people may put their money on deposit in foreign countries and obtain loans from abroad: the associated FISIM charges are treated as an import of a service. The values of FISIM by category in recent years are shown in Figure 2. As in the example of personal customers above, banks have generally gained a much smaller FISIM charge on the deposits they held than on

loans they gave, so most of the FISIM shown below is earned on loans. Values fell between 2010 and 2013 as rates fell and the volumes of loans declined