WHAT ARE FINANCIAL ACCOUNTS?
In Europe, quarterly financial accounts are statistical reports primarily compiled by the national central banks of the European Union. They contain information on financial instruments by economic sector, as well as domestic sectors and the rest of the world.
Financial account statistics make it possible to obtain information on the impact of various financial instruments (e.g. deposits, securities, loans) on economic sectors (financial and non-financial corporations, households and government), as well as on the movement of these instruments between domestic sectors and the rest of the world.
To have an idea of the place financial accounts take in types of statistics and what they offer for the analysis of economic processes, it should be borne in mind that financial accounts are part of national accounts, i.e. the financial part of the overall economic statistics.
In Europe and elsewhere in the world, they are compiled on the basis of uniform principles to ensure comparability of data.
Financial account statistics help economic policy makers to obtain information on the behaviour trends of household finances and provide an opportunity to adjust the economic policy. When analysing financial account information, analysts and politicians may find reasonable solutions, e.g. how to attract financing for new projects, how to stimulate household borrowing from credit institutions.
WHO ARE THESE DATA IMPORTANT FOR?
The key commissioners and users of quarterly financial accounts are several international institutions (the European Central Bank (ECB), Statistical Office of the European Union (Eurostat), International Monetary Fund and Organisation for Economic Co-operation and Development (OECD)). The European System of Central Banks receives an up-to-date economic snapshot by financial instrument in the form of financial account statistics once a quarter, and it is used for drawing up the financial accounts of the entire Eurosystem. Meanwhile, when obtaining financial instrument data on households and non-financial corporations (e.g. commercial companies producing goods for sale or providing non-financial services) of the Eurosystem countries, the Governing Council of the ECB can base its regular monetary policy decisions of the Eurosystem on the most recent data of the European economy.
The Eurosystem increasingly needs to receive such information more often. The latest conclusion based on experience gained during the crisis is that in the case of provisional data timeliness matters more than their absolute accuracy through longer reconciliation with other statistical reports, e.g. government financial data. A monetary policy decision-maker should receive provisional figures of important indicators in due time rather than rely on the figures of the previous period that may not reflect the existing situation.
The crisis has taught us to follow the data on non-financial corporation and household sectors closely. As early as in 2004, Latvijas Banka warned that excessively rapid cash inflow, i.e. lending and budget expenditure on account of the budget deficit threatens to overheat the economy. The transaction amounts of loans to non-financial corporations and households and of issued debt securities in the pre-crisis period reflected in financial accounts suggest that Latvia considerably exceeded the threshold currently defined under the European Union's Macroeconomic Imbalance Prodecure, i.e. 15% of gross domestic product (GDP; see Chart 1).
Such a statistical warning mechanism would have been very useful for the Eurosystem before 2008 and would have helped to spot the emerging problem.
WHAT IS BEHIND FINANCIAL ACCOUNTS?
Financial accounts reflect the financial instruments (e.g. loans, securities) used in operation of several economic sectors, i.e. non-financial corporations, financial corporations, government and households. Quarterly financial accounts make it possible to look for interrelations of financial instruments among these sectors, finding out, e.g. which sector borrows more and which one has more excess funds for lending (see Chart 2).
Statistics of individual sectors, e.g. banking data show that "the results of this quarter are as follows" (specific figures represent the amount of deposits and loans), while the financial account system offers an opportunity to see this information in the general picture of all sectors through integration and reconciliation of financial instrument data of individual sectors (see Chart 3).
Moreover, since statisticians in Latvia and worldwide use the same breakdown by residence, economic sector and financial instrument, and financial accounts are compiled according to uniform principles, it is possible to compare economic development trends of Latvia and other countries.
WHAT IS THE CONTRIBUTION BY STATISTICIANS OF LATVIJAS BANKA?
Production of information, ensuring continuity and balancing of financial instruments to ensure data consistency across sectors represent the most considerable amount of work in the process of compilation of financial accounts. Statisticians of Latvijas Banka closely follow the application of the one-stop-shop principle when receiving stock data from respondents and ensure data continuity, i.e. comparability of data when their production requirements or data sources themselves change.
Following the receipt of data on the outstanding amounts of financial instruments for all sectors, these data are checked and then flows of financial instruments during the respective quarter are calculated, i.e. transaction amounts, revaluation adjustments (exchange rate and price adjustments) and other adjustments.
Then statisticians of Latvijas Banka balance financial instruments which is the toughest challenge. Mutually inconsistent records received from various sources have to be checked, and further decisions on data reconciliation among sectors have to be made. As a result of the elimination of discrepancies, a data set on financial instruments which is consistent among sectors is established.
WHAT WILL YOU FIND IN FINANCIAL ACCOUNTS ONLY?
It is only the quarterly financial account statistics that provide users of statistics with so up-to-date data of financial instruments on households as an integral part of the economic system. Naturally, households themselves do not submit data; these are primarily calculations by statisticians of the national central banks carried out on the basis of quarterly data provided by other sectors (concerning the overall amount of loans to households, their securities holdings, etc.). This is useful for operational analysis of economic developments and decision-making. There is one more advantage provided by financial accounts you will not find anywhere else: the interaction of financial instruments among domestic sectors and between these sectors and the rest of the world, i.e. you will receive an answer to the question "who-to-whom", e.g. you will learn that non-financial corporations have granted a certain amount of loans to households. Who-to-whom breakdown comprises data on deposits, short- and long-term loans, short- and long-term debt securities, listed shares and of investment fund units and shares.