Annex 5:2 Definitions Relating to the Consolidated Balance Sheet; Instrument Categories of Liabilities and Assets

Definitions relating to the consolidated balance sheet

1. Various definitions relating to the MFI balance sheet are set out below: definition of residence, the MFI reporting population, assets and liabilities included in the consolidated balance sheet, maturity at issue, sector classifications, and accounting issues. Notes on various instrument categories in the MFI balance sheet follow.

2. Residence is determined by the centre of economic interest. An economic unit is resident in a territory when it has engaged for a year or more in economic activities in that territory (ESA 1.30). In Stage Three, the resident status will remain country specific (although in aggregated statistics the key distinction will be between residents of the single currency area and others).

3. For purposes of compilation of statistics for the single currency area, the reporting population consists of MFIs located in the territories comprising the area. These are:

• institutions incorporated and located in the territory, including subsidiaries of parent companies located outside that territory;
• branches of institutions that have their head office outside that territory.

Subsidiaries are separated incorporated entities in which another entity has a majority or full participation, whereas branches are unincorporated entities (without independent legal status) totally owned by the parent.

4. MFIs will be required to consolidate for statistical purposes the business of all their offices (head office and/or branches) located within the same national territory. Furthermore, head offices will be permitted to consolidate in their statistical returns the business of any subsidiaries that are MFIs located in the national territory (but keeping the business of credit institutions and other MFIs separate, for possible reserve requirement reasons). No consolidation will be permitted across national boundaries for the purposes of statistical returns.

5. Institutions located in off-shore financial centres will be treated statistically as residents of the territories in which they are located.

6. Definitions of the categories of assets and liabilities included in the consolidated balance sheet will take account of features of different financial systems. Maturity analyses (see below) may provide a substitute for consistency in instrument definition where instruments are not fully comparable between financial markets. The compilation guide to be prepared by the EMI will give further guidance.

7. As explained in the main text, relevant asset and liability items of MFIs' balance sheets will be classed according to maturity at issue (i.e. original maturity) or period of notice (for deposits redeemable at notice). Maturity at issue (original maturity) refers to the fixed period of life of a financial instrument before which it cannot be redeemed (e.g. debt securities) or before which it can be redeemed only with some kind of penalty (e.g. some types of deposits). The period of notice corresponds to the time between the moment the holder gives notice of intention to redeem the instrument and the date the holder is allowed to convert it into cash without incurring a penalty. Financial instruments will be classified according to the period of notice only when there is not an agreed maturity.

8. ESA 95 provides the standard for sector classification. The definition of MFIs was discussed above. Banking institutions located outside the EU are referred to as "banks" rather than as MFIs, because the term "MFI" applies only in the EU. Similarly, the term "non-MFI" applies only to the EU; for other countries the term "non-banks" is appropriate. "Non-MFIs" comprises the following sectors and sub-sectors.

• General Government. Resident units which are principally engaged in the production of non-market goods and services, intended for individual and collective consumption and/or in the redistribution of national income and wealth (ESA 2.68. - 2.70).
• Central Government. Administrative departments of the State and other central agencies whose competence extends over the whole economic territory, except for the administration of social security funds (ESA 2.71.).
• State Government. Separate institutional units exercising some of the functions of government at a level below that of central government and above that of local government, except for the administration of social security funds (ESA 2.72.).
• Local Government. Public administration whose competence extends only to a local part of the economic territory, excluding local agencies of social security funds (ESA 2.73.)
• Social security funds. Central, state and local institutional units whose principal activity is to provide social benefits (ESA 2.74.).

Other residents. Resident non-MFIs other than the General Government. These comprise:

• Other financial intermediaries. Non-monetary financial corporations and quasi-corporations (excluding insurance corporations and pension funds) principally engaged in financial intermediation by incurring liabilities in forms other than currency, deposits and/or close substitutes for deposits from institutional units other than MFIs (ESA 2.53. - 2.67).
• Insurance corporations and pension funds. Non-monetary financial corporations and quasi-corporations principally engaged in financial intermediation as the consequence of the pooling of risks (ESA 2.60. - 2.67).
• Non-financial corporations. Corporations and quasi-corporations not engaged in financial intermediation but principally in the production of market goods and non- financial services (ESA 2.21 - 2.31).
• Households. Individuals or groups of individuals as consumers, and producers of goods and non-financial services exclusively for their own final consumption, and as producers of market goods and non-financial and financial services provided that their activities are not those of quasi-corporations. Included are non-profit institutions which serve households and which are principally engaged in the production of non-market goods and services intended for particular groups of households (ESA 2.75. - 2.88.).

9. Accounting rules followed by MFIs in drawing up their accounts are likely to comply with the EU Bank Accounts Directive (BAD) (86/635/EEC). In most cases it is likely that statistical needs can be met by rearranging information which banks will be required to provide to meet accounting standards. The EMI will prepare guidelines for the compilation at national level of banking data to be reported to the ECB in Stage Three. It should be noted, however, that ESA 95 will also be a legal standard.

Instrument categories in the layered approach

Liabilities

Currency in circulation. Notes and coins in circulation that are commonly used to make payments.

Deposit liabilities. Amounts owed to creditors by reporting MFIs, other than those arising from issuing securities. For the purposes of the reporting scheme, this category should be broken down into overnight deposits, deposits with agreed maturity, deposits redeemable at notice and repurchase agreements.

• Overnight deposits. Deposits which are convertible into currency and which are transferable on demand by cheque, banker's order, debit entry or similar means, without significant delay, restriction or penalty. Balances outstanding on prepaid cards issued by MFIs are to be included and identified separately under this item. This item excludes deposits which are withdrawable on demand but which are not transferable.
• Deposits with agreed maturity. Non-transferable deposits which cannot be converted into currency before an agreed fixed term or that can only be converted into currency before that agreed term provided that the holder is charged some kind of penalty. This item also includes administratively regulated savings deposits where the maturity related criterion is not relevant, (classified in the maturity band "over 2-years").
• Deposits redeemable at notice. Non-transferable deposits without any agreed maturity which cannot be converted into currency without a period of prior notice, before the term of which the conversion into cash is not possible or possible only with a penalty. It includes deposits withdrawable on demand but which are not transferable (classified in the maturity band "up to and including 3 months") and investment accounts without period of notice or agreed maturity, but which contain restrictive drawing provisions (classified in the maturity band "over 3 months").
• Repurchase agreements. Counterpart of cash received in exchange for securities sold by reporting MFIs at a given price under a commitment to repurchase the same (or similar securities) at a fixed price on a specified future date.

Units or shares issued by money-market funds. Money-market funds are defined as Collective Investment Institutions which collect funds from the public by issuing marketable shares, other than equities, and whose investment policy is to provide a return close to that provided by money-market instruments. This investment policy is achieved mainly by investing most of their resources in money market assets, in instruments indexed to the money market or in bank deposits, or by shadowing the money market performance through the use of financial derivatives.

Debt securities issued. Securities other than equity or money-market paper issued by reporting MFIs, which are bearer instruments usually negotiable and traded on secondary markets or can be offset on the market, and which do not grant the holder any ownership rights over the issuing institution. This item includes bearer instruments (excluding those negotiated in money markets) which give the holder the unconditional right to a fixed or contractually determined income in the form of coupon payments and/or a stated fixed sum at a specific date (or dates) or starting from a date defined at the time of issue. Also included, in the category up to 1 year, are liabilities arising from the issue of marketable and non-marketable financial derivatives (excluding commitments to undertake future transactions, which should remain as an off-balance item), defined as financial instruments based on or derived from a different underlying instrument (usually another financial asset or commodity or index).

Money market paper. This consists of mainly short-term securities other than equity issued by reporting MFIs (see "Debt securities issued") traded on liquid markets or for which the issuer provides full liquidity. Certificates of deposit and commercial paper issued by MFIs are likely to fall into this category.

Capital and reserves. For the purposes of the reporting scheme, this comprises the amounts arising from the issue of equity capital by reporting MFIs to shareholders or other proprietors, representing for the holder property rights in the MFI and generally an entitlement to a share in its profits and to a share in its own funds in the event of liquidation. Also included are funds arising from non-distributed benefits or funds set aside by reporting MFIs in anticipation of future likely payments and obligations.

Remaining liabilities. Liabilities not included elsewhere.

Assets

Cash. Holdings of domestic and foreign notes and coins in circulation that are commonly used to make payments.

Loans. For the purposes of the reporting scheme, this consists of funds lent by reporting MFIs to borrowers, which are not evidenced by negotiable documents. Loans represented by negotiable debt securities are excluded, and are instead shown under "Securities other than shares". Loans to households (excluding non-profit institutions serving households) resident in the reporting country or in other countries in the single currency area are to be broken down into:

• Consumer credit. Loans granted for the purpose of personal use in the consumption of goods and services.
• Lending for house purchase. Credit extended for the purpose of investing in housing (building and home improvements included).
• Other (residual). Loans granted for purposes not included elsewhere (business, debt consolidation, education, etc.).

Securities other than shares. Holdings of securities other than shares, other equity or money-market paper (see "Debt securities issued").

Shares and other equity. Holdings of securities which represent property rights on corporations or quasi-corporations. These securities generally entitle the holders to a share in the profits of corporations or quasi-corporations and to a share in their own funds in the event of liquidation.

Money market paper. This consists of holding of mainly short-term debt securities (see "Debt securities issued") traded on liquid markets or for which the issuer provides full liquidity. It should include holdings of units or shares issued by Collective Investment Institutions classified as MFIs (see "Units or shares issued by money-market funds").

Fixed assets. For the purposes of the reporting scheme, this consists of non-financial assets, tangible or intangible, which are intended to be used repeatedly for more than 1 year by reporting MFIs. They include land and buildings occupied by the MFIs, as well as equipment, software and other infrastructures.

Remaining assets. Assets not included elsewhere.

ECB - European Central Bank