Financial Accounts and Flow of Funds

Briggs, Phil, The Reserve Bank of New Zealand Bulletin

1 Introduction

The Reserve Bank is currently redeveloping its statistical collections from financial institutions. These redevelopments are partly being driven by the need to collect additional data on the soundness of financial institutions and the financial system. However the Bank will also be aiming to make its redeveloped surveys consistent with the requirements of the System of National Accounts (SNA). The data from these surveys can be used in the production of financial accounts and flow of funds tables for New Zealand.

Financial accounts show net transactions in financial assets and liabilities for each sector of the economy. Summing the net transactions for assets and subtracting the net transactions for liabilities gives the net change in financial position for a sector. This net change figure, as we will see later, can be used as a check on the accuracy of the estimated saving for the sector.

A flow of funds approach takes the analysis further, showing financial claims between sectors, and the net transactions between them. Flow of funds tables show 'who borrows from whom'. They therefore show the financial exposure of each sector to other sectors, where one of these other sectors is 'the rest of the world'.

The Bank's survey redevelopment work is being undertaken in close consultation with Statistics New Zealand to ensure that the survey data meets, as far as possible, the requirements of the latest United Nations (UN) guidelines for the preparation of national accounts the SNA08 manual. (1)

This article outlines the structure of SNA sector accounts, and briefly describes financial accounts and flow of funds tables. The article also outlines the work that the Reserve Bank is planning in this area. Finally it looks at how a full SNA balance sheet for the New Zealand household sector might be assembled, and produces experimental estimates for some of the items that are currently missing from the Reserve Bank's tables on household assets and liabilities.

2 Sector accounts

In the national accounts, economic entities--or, more formally, institutional sector units--are grouped into sectors based on the nature of the economic activity that they undertake. In general, there are Ave sectors within the domestic economy:

* The non-financial business sector

* The financial business sector

* The general government sector

* The non-profit institutions serving households sector

* The household sector.

However, these sectors are often split into subsectors. For example, non-financial businesses can be broken down into private corporations, private unincorporated businesses, and government enterprises. The sectoral data that Statistics New Zealand (SNZ) currently produces use a total of nine domestic sectors or subsectors. (2) SNZ also uses a sector to cover 'Rest of world', which includes overseas entities that have dealings with New Zealand entities. SNZ is currently reviewing its institutional sector classification. (3) The review is likely to result in a classification that aligns closely with SNA08.

[FIGURE 1 OMITTED]

Sectoral data are generally used to look at a sector's income, expenditure, saving, investment, funding, and borrowing and lending. These items relate to economic flows. Sectoral data can also be produced for economic stocks, such as assets and liabilities, which show how wealth is being accumulated. (4)

In the SNA a sequence of inter-related accounts is produced for each sector, and these are shown in diagrammatic form in figure 1. We will look initially at the first three accounts in the centre of the diagram, which show economic flows over a particular time period, say a year:

* The production account shows components of the sector's GDP. These components are for the income measure of GDP. One of these components--operating surplus--is used in the next account.

* In the income and outlay account, other income, such as interest receipts and government transfers, is added to operating surplus. Income is then adjusted to account for various payments, such as interest and tax. The residual, after an adjustment to account for depreciation in the sector's capital stock, is saving, which is used in the next account.

* The capital account shows the funding of capital expenditure--of which saving is a major component--and expenditure on capital items, which includes spending on land, buildings and plant. Funding less expenditure equals 'net lending'. If a sector's net lending is positive then it has funds that it can lend to other sectors. Alternatively, the sector can use these funds to pay off its debt. Either way, the sector's net financial assets will increase. If net lending is negative then the sector's net financial assets will decrease.

We turn now to the financial account, which also shows economic flows over a time period. These flows are for 'net transactions' in various types of financial assets and liabilities. In general terms, a sector's net transactions for a particular asset type will equal its acquisitions of that asset, less its disposals of that asset. However, for interest bearing assets, the accrued income for the asset over the period also needs to be included. (5) Net transactions in financial liabilities are calculated in a similar fashion. In summary the financial account shows the financial flows going into, or out of, all types of financial assets and liabilities. The sum of the flows into financial assets minus the sum of the flows into financial liabilities is the 'net change in financial position' for the sector. This figure shows the sector's net …

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Publication information: Article title: Financial Accounts and Flow of Funds. Contributors: Briggs, Phil - Author. Journal title: The Reserve Bank of New Zealand Bulletin. Volume: 75. Issue: 4 Publication date: December 2012. Page number: 26+. © 2009 Reserve Bank of New Zealand. COPYRIGHT 2012 Gale Group.

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