Bulletin – March 2019 Finance Updates to Australia's Financial Aggregates – Appendix

Updates to Australia's Financial Aggregates

A number of changes are being made to the financial aggregates framework. Updates to Australia's Financial Aggregates provides a high level overview of the main changes and this appendix provides further details. In all of the tables in this appendix: ticks denote items that are included in the corresponding part of the aggregates; crosses show those that are not included; and entries in blue typeface indicate where changes have been made to any of the financial aggregates.

Credit lenders and money issuers

This section compares the financial institutions that are included as lenders and money issuers (the financial intermediaries in the monetary aggregates). Both sets are being simplified, which will improve the accuracy of the aggregates and make them easier to interpret and compile.

Tables A1 and A2 show all of the changes that are being made to the sets of lenders and money issuers. To summarise:

• Authorised deposit-taking institutions (ADI) that are not registered as banks, credit unions or building societies will now be included as lenders (previously they were excluded). This means that all ADIs will be treated consistently as lenders in the credit aggregates.
• The aggregates will transition towards no longer including lending by non-registered wholesale funders (NRWF).^[1] Except for the smallest NRWFs, these institutions should register with APRA (and hence be included in the credit aggregates) due to recent legislative changes.
• Cash management trusts (CMTs) will now be excluded as both lenders and money issuers.^[2] There are several problems with using CMT lending data, including potential double counting. The lending assets and money liabilities of CMTs are quite small (CMTs mostly provide finance by purchasing debt securities that are not included in credit).
• All non-bank ADIs will now be treated consistently as money issuers in all measures of money, which will affect the definitions of M1 and M3. This makes the money aggregates easier to understand and interpret. The set of financial intermediaries in M1 and M3 can now be thought of simply as all ADIs, while the set in broad money will be all ADIs and registered financial corporations.

Credit borrowers and money holders

This section compares the entities that are included as counterparties, either as borrowers or money holders. The changes made to these sets are designed to produce a consistent and complete set of financial aggregates. Tables A3 and A4 show all of the changes that are being made to the sets of borrowers and money holders. To summarise:

• NRWFs will no longer be included as lenders so they will be included as borrowers in the credit aggregates.
• CMTs will no longer be included as money issuers so they will now be included as money holders (in broad money). CMTs will continue to be included as a borrower type in the credit aggregates for the same reason.

Credit assets and money liabilities

This section details the assets and liabilities that will be included under the new methodology for the financial aggregates, and how these differ from the old methodology. Most of the changes made to these sets will improve the conceptual framework of the financial aggregates. However, they are unlikely to have a noticeable impact on the aggregates, as the affected credit assets and money liabilities are small relative to financial intermediaries' other credit assets and money liabilities.^[3]

Tables A5 and A6 show all of the changes that are being made to the sets of credit assets and money liabilities. To summarise:

• Bill endorsements will be excluded as assets in the updated credit aggregates. Bill endorsements are contingent assets of financial intermediaries, which means that no funds have actually been lent to a borrower by the financial intermediary (the actual funding associated with assets like this is contingent on a specific event happening at some point in the future; no funds get borrowed if this event does not occur). The generally accepted international practice is to exclude all contingent assets from financial aggregates.^[4] Bill acceptances reflect actual lending (i.e. they are not contingent assets) and will therefore remain in the credit aggregates.
• Short-term debt securities will be excluded as assets in the updated credit aggregates. The aggregates are meant to capture intermediated lending, but debt securities are a form of non-intermediated lending, since any entity (not just financial institutions) can purchase debt securities.
• All types of transaction deposits will be included in the new M1 measure. M1 is meant to be a relatively liquid measure of money that includes all deposits that are directly accessible and available on demand without penalty or restriction. For example, deposits held by households in online bank accounts where direct payments can be made to third parties are highly liquid. However, the current measure of M1 only includes cheque account deposits.
• Long-term certificates of deposit will be excluded from M3 and broad money. The values of these certificates tend to fluctuate in response to interest rate movements, which means they are considered to be a less reliable store of value, and hence not very ‘money-like’. Only short-term certificates of deposit will remain in M3 and broad money, as interest rates are less likely to have an impact on their value over the short term. This is consistent with the monetary aggregates framework provided by the IMF.

Footnotes

See RBA (2009) for further details on how wholesale funders not registered with APRA were included in the old methodology for the credit aggregates. [1]

Cash management trusts are managed investment vehicles that invest a collective pool of capital provided by investors in short-term money markets. [2]

One particularly extreme example of this is that bill endorsements by registered financial institutions are currently zero. [3]

The Reserve Bank's updated methodology for the financial aggregates draws from the International Monetary Fund's (IMF) Monetary and Financial Statistics Manual and Compilation Guide. The IMF does not recommend including bill endorsements in the credit aggregates, and these assets are also excluded by a number of other central banks. [4]