B A N K P R O F I T A B I L I T Y

PROPOSALS FOR A REVISION OF OECD BANKING STATISTICS

AND INDICATORS

Working Party on Financial Statistics13-14 October 2008

By Hakan Atasoy, Consultant

PURPOSE

Review the list of financial statement items included in “OECD-Bank Profitability” publication in accordance with the IMF’s “Financial Soundness Indicators (FSI)” for deposit takers

Take into account evolving international accounting standards and their impact on banking statistics. Vast implementation of these standards among the member countries (25 over 30 and 2 from 2011 for listed companies)

This document has been presented after taking into account the discussions of the countries’ volunteer experts in electronic discussion group (EDG)

BALANCE SHEET

ASSETS Cash and balances with central bank

Loans and receivables due from banks

Loans and receivables due from customers

Financial assets at fair value through profit or loss

Available for sale financial assets

Held to maturity investments

Derivatives-hedge accounting

Tangible and intangible assets

Interest in associates and joint ventures

Other assets

ACCOUNTING FOR ASSETS Loans and receivables: Amortized cost (IAS 39)

Held to maturity investments: Amortized cost (IAS 39)

Financial assets at fair value through profit or loss: Fair value (IAS 39)

Available for sale financial assets: Fair value. Unrealized gains and losses disclosed in total equity (IAS 39)

Derivatives-Hedge accounting: Fair value (IAS 39)

Tangible and intangible assets: Cost model or Revaluation model (IAS 16, 38, 40)

Interest in associates and Joint ventures: Equity method (IAS 28, 31)

MODIFICATIONS-ASSETS

Classification based on intentions of management. Similar classification in US GAAP (FASB 115, FASB 159).

Not instrument based approach. However, subdivisions by instruments added (Debt, Equity instrument etc).

Loans and receivables cover both loans and deposit placements in line with bank reporting practices.

Tradable loans or loans that have active market classified as trading, available for sale or held to maturity. Loans can be designated as fair value after initial recognition.

Financial derivatives divided as trading and hedging. Trading derivatives disclosed in Fair Value through Profit or Loss.

LIABILITIES

Financial liabilities at fair value through profit or loss

Due to banks

Due to customers

Debt certificates

Subordinated liabilities

Derivatives-hedge accounting

Provisions

Other liabilities

Total equity

ACCOUNTING FOR LIABILITIES

Financial liabilities measured at fair value (IAS 39) Financial liabilities at fair value through profit or loss (trading derivatives, short selling, liabilities intended for repurchase in the short term, liabilities designated at fair value) Derivatives-hedge accounting

Financial liabilities measured at amortized cost (IAS 39) Due to banks Due to customers Debt certificates Subordinated liabilities

Provisions (IAS 19, 37)

MODIFICATIONS-LIABILITIES

Due to banks and due to customers cover both loan borrowings and deposits in line with bank reporting practices.

Provision for contingencies and charges and subordinated liabilities disclosed separately.

Negative values from trading derivatives disclosed in financial liabilities at fair value through profit or loss; negative values from hedging derivatives disclosed in derivatives-hedge accounting.

Detailed breakdown of total equity: Capital & reserves, Revaluation changes, Net profit or loss and Minority interest.

Goodwill not deducted from total equity but an asset of the acquirer.

INCOME STATEMENT

INCOME STATEMENT

Total profit or loss from continuing operations Net interest income: (Interest income – Interest expense) Net non-interest income: (Dividend income + Net fees & commissions + Gains / Losses on financial instruments + Share of earnings of associates & Joint ventures + Other income) Operating expenses: (Staff expenses + Administrative expenses + Other expenses) Impairment losses on financial assets: (Loans + Other) Tax expense

Total profit or loss from discontinued operations after tax

Net profit

MODIFICATIONS-INCOME STATEMENT

Seperation of income statement as continuing and discontinued operations in accordance with IFRS 7. Similar seperation in US GAAP (SFAS 144).

No extraordinary item in accordance with IAS 1.

Fees and commissions shown on a net basis.

New added items Dividend income Share of earnings of associates & joint ventures Administrative expenses.

FINANCIAL SOUNDNESS INDICATORS AND MEMORANDUM ITEMS

FSI – Capital Adequacy

Regulatory capital to risk weighted assets (ECB + IMF-core)

Regulatory tier 1 capital to risk weighted assets (ECB + IMF-core)

Tier 1 capital to assets (IMF-encouraged; Tier 1 used as numerator for cross-border consolidated data)

Required memorandum items: Regulatory capital, Risk weighted assets, Tier 1 capital

Defer to Basel I and Basel II as the standards for compiling supervisory-based underlying series, acknowledging national variations in implementation.

FSI – Asset Quality-I Nonperforming loans to gross loans (ECB, IMF-core)

Nonperforming loans net of specific provisions to regulatory capital (ECB, IMF-core)

Sectoral distribution of loans to gross loans (ECB, IMF-core)

Residential real estate loans to gross loans (ECB, IMF-encouraged)

Commercial real estate loans to gross loans (IMF-encouraged)

Foreign currency denominated loans to gross loans (IMF-encouraged)

Foreign currency denominated liabilities to total liabilities (IMF-encouraged)

Gross asset/liability position in financial derivatives to tier 1 capital (IMF-encouraged, tier 1 used as denominator for cross-border consolidated data)

Large exposures to regulatory capital (IMF-encouraged)

FSI – Asset Quality-II

Required memorandum items: Gross loans (Gross loans ≠ Loans and receivables) Non-performing loans (Non-performing loans ≠ Impaired loans) Specific provisions (Specific provisions ≠ Allowances for impairment) Sectoral distribution of gross loans Residential/Commercial real estate loans Foreign currency denominated loans/liabilities Large exposures

Definitions of the memorandum items in line with IMF Guide.

FSI – Earnings & Profitability-I

Return on equity-Net income to average tier 1 capital (ECB, IMF-core, tier 1 used as denominator for cross-border consolidated data)

Return on assets-Net income to average assets (ECB, IMF-core)

Return on risk weighted assets-Net income to average RWA (ECB)

Total profit or loss before tax from continuing operations to average assets (ECB)

Net interest income to average assets (ECB)

Net non-interest income to average assets (ECB)

Operating expenses to average assets (ECB)

Net impairment losses on financial assets to average assets (ECB)

FSI – Earnings & Profitability-II

Net interest income to total income (ECB, IMF-core but a slight difference in definition)

Net non-interest income to total income (ECB)

Net fees and commissions income to total income

Gains (losses) on financial instruments to total income (ECB, IMF-encouraged but a slight difference in definition)

Operating expenses to total income (ECB, IMF-core but a slight difference in definition)

Staff expenses to operating expenses (ECB, IMF-encouraged but a slight difference in definition)

FSI – Earnings & Profitability-III

Required memorandum items: Average assets Average tier 1 capital Average risk weighted assets

Slight differences for some ratios: Total income includes fees and commissions on net basis Fees and commissions expense not classified as operating expenses in line with reporting practices Total income and expense excludes profit from discontinued operations.

FSI – Liquidity and Sensitivity to Market Risk-I

Core liquid assets to total assets (IMF-core)

Broad liquid assets to total assets (IMF-core)

Core liquid assets to short-term liabilities (ECB, IMF-core)

Broad liquid assets to short-term liabilities (ECB, IMF-core)

Customer deposits to gross non-interbank loans (IMF-encouraged)

Cash and loans to banks to amounts due to banks (ECB)

Net open position in foreign exchange to regulatory capital (IMF-core)

Net open position in equities to regulatory capital (IMF-encouraged)

FSI – Liquidity and Sensitivity to Market Risk-II

Required memorandum items: Core/Broad liquid assets Short-term liabilities Customer deposits (Customer deposits ≠ Due to customers) Net open position in foreign exchange Net open position in equities

Definitions of the memorandum items in line with IMF Guide.

Consolidation and Coverage

IMF : DCCBCS and/or CBCSDI

ECB: CBCSDI excluding insurance sector

IAS 27: Cross sector consolidation basis irrespective of sector

OECD: Proposal in line with IMF

Current Coverage: Commercial banks, Cooperative banks, Savings banks

Possible Extension of the coverage, in line with IMF: Development banks, Credit unions, investment banks, mortgage banks, building societies, micro-finance institutions and any other financial institutions that take deposits Institutions that are banks in legal sense but not deposit takers

THANK YOU