The evolution of financial structure in the G-7 over 1997-2010.

Davis, E. Philip

As background for this special issue of the Review, this article provides an overview of recent developments in financial structure in the major industrial countries using national flow of funds balance sheet data. We focus in particular on changes in the size and composition of the balance sheet for the major sectors--households, companies, general government, foreign and financial as well as banks and institutional investors separately. Two recent subperiods are distinguished, namely the 'great moderation' of high growth and low inflation from roughly 1997-2006 and then the crisis period 2007--10. We discern elements of convergence--notably in corporate leverage--but also some continuing contrasts--such as household debt--between market- and bank-dominated financial systems, while highlighting that short-run changes arising from the conjuncture may blur longer-term trends in financial structure. Looking ahead, the data highlight common challenges from public and household debt, albeit to an extent that varies markedly between countries. Bank deleveraging and recapitalisation appear slow, while a subsector including shadow banks continues to grow except in the US. There are contrasts between France and Italy on the one hand and Germany on the other which underline the vulnerability of the former in the ongoing Euro Area crisis.

Keywords: Financial structure; flow of funds; Great Moderation; sub-prime crisis; G-7

JEL Classifications: E44; G10; P52

I. Introduction

Developments in the aggregate flow-of-funds balance sheets of the main institutional sectors of the G-7 can cast light not only on ongoing financing behaviour during periods of economic and financial instability but also illustrate the relevance of some of the main stylised facts in the economic literature on financial structure--particularly those relating to the contrast between bank- and market-dominated economies. Such differences between bank-dominated countries such as Germany, Japan, France and Italy, and market-oriented countries such as the UK, US and Canada, would be expected to include higher corporate debt, higher bank holdings of equity and lower household debt in bank-dominated than market-oriented countries.

In this context, Byrne and Davis (2003) reviewed these data over 1970-2000, while now the availability of a further decade of data, viewed in particular in the light of the financial crisis of 2007-9, makes it appropriate to revisit balance sheets and evaluate both ongoing structural shifts in sector financing and the particular impact of the major imbalances viewed over 1997-2010 as a whole, as well as during the financial crisis itself. We can evaluate the overall evolution of financial structure during this challenging period, how the developments impacted on the different G-7 economies, and whether stylised facts need to be reconsidered. Did EMU for example generate a shift from bank to market intermediation in participating countries, as was widely predicted at the time of its inception (Davis, 1999)? What do the data tell us about financial stability?

The core of the article is a series of tables which summarise developments over the 'Great Moderation' (1997-2006) and then the financial crisis period (2007-10 year by year). The data are end-year and sectors used are the standard division of the flow of funds, namely households, companies, general government, foreign and financial, and three subcomponents of the financial sector, namely monetary financial institutions (including the central bank), mutual funds and insurance and pension funds. We have broken down assets into at most the following categories: deposits, money market instruments (MMI), loans, bonds, equity, mutual funds, insurance and pension funds, overseas securities, foreign direct investment, central bank reserves/SDRs/gold, derivatives and other assets. (1) Not all of these categories are available for all the G-7. A key aspect of the flow of funds is that the sectoral data are non-consolidated (except for the US) and accordingly capture intra- as well as inter-sector exposures and are hence relevant for financial stability analysis. They are all at market value with some exceptions such as foreign direct investment. Note that we choose to look at Germany, France and Italy separately rather than examining the aggregate EMU flow of funds data (Be Duc and Le Breton, 2009) since the financing patterns in these countries remain both distinct and relevant for economic policy and economic outturns.

The stylised facts of the financial crisis (Barrell and Davis, 2008) are that the seeds were sown in the Great Moderation. These included in particular historically low interest rates, driven partly by monetary policies and also by current account surpluses in East Asia and corresponding deficits elsewhere. In these circumstances the key vulnerability stemmed from rising household debt and related balance sheet conditions. But banks also undertook aggressive balance sheet expansion, financed by wholesale funding as well as securitisation, increasing leverage and reducing liquidity, leaving banks vulnerable to defaults in the household sector. Meanwhile, fiscal policy was flattered by the speed of growth and volume of tax revenues, leading to structural deficits.

Since the crisis, stylised facts are that we have seen a correction of imbalances in the household and external sector to some extent. Banks have sought to correct their balance sheet weaknesses, pressed also by regulators and the incoming Basel III rules. Fiscal positions have worsened markedly. Meanwhile monetary policies have eased in order to sustain activity in these advanced countries. As noted by Roe (2003), this contrasts with Emerging Market countries after similar crises such as the Asian crisis of 1997, which had to tighten monetary policies in the wake of crises owing to susceptibility to capital flight linked to foreign currency borrowing. The Euro Area is an interesting intermediate case, with fixed interest rates and exchange rates but scope for capital flight within the zone, as the current crisis shows.

2. Development in the size of key sector balance sheets

To what extent does the picture outlined above emerge from the sectoral balance sheets? Over the Great Moderation (1997-2006), a number of advanced countries witnessed a marked deterioration in their external positions, with the net foreign assets of the UK falling by 22 per cent of GDP, France by 18 per cent and Italy by 21 per cent (the sign for the home country is the opposite to the development for the foreign sector itself). The US position worsened by 8 per cent of GDP. However, the German position was flat while those in Canada and Japan improved markedly, by 27 per cent and 18 per cent of GDP respectively. While the exceptional situation in Japan is well known, that in Canada is very noteworthy.

Since the crisis, there has been a flattening of net external liabilities in the US, Italy and the UK, as well as broadly in Japan. On the other hand there has been a marked worsening in France and Canada, with France having seen the largest overall deterioration over 1997-2010. Meanwhile Germany saw a massive improvement, consistent with its positive performance in foreign trade over this period. Note however that these data include FDI at book value; (2) market value would for example tend to improve the UK external position (Berry et al., 2012). One interesting detail is the sharp deterioration in the US position in 2008, in the wake of the Lehmans crisis and the opposite for the UK. These appear to be temporary adjustments in the global financial markets that did not affect the underlying structural position of the country.

There is to some extent a divide between the countries, in the sense that the UK, US and Canada show net foreign liabilities while Germany and Japan show sizeable external assets, especially by the end of the period. These are counterparts of the 'global imbalances' where countries such as China and Korea have shared the net creditor positions of Germany and Japan. However, for the G-7, a bank/market divide (albeit one which is not predicted by the literature) was much clearer in 1997 than in 2010, with France and Italy having apparently transitioned from a balanced or net creditor position to a large net debtor position as they have absorbed net capital flows within EMU following current account deficits--and become more vulnerable to pressures from the international capital markets.

As regards household debt (calculated as housing credit plus consumer debt to facilitate comparability), over the Great Moderation, the stylised fact of rising borrowing was strongly borne out for the US and UK, which were at the epicentre of the crisis, with rises in debt of over 30 per cent of GDP. Much smaller rises of just over 10 per cent were shown in France and Canada, as well as in Italy where household credit markets are still developing. In Germany and Japan, household debt grew at broadly the same rate as GDP; in Japan this reflected the real estate market's slow recovery from the 1990s crash, and in Germany it links to the ready availability of rental accommodation that makes real estate purchase less attractive than elsewhere (Delamarre, 2011).

The crisis period has only seen marked retrenchment by US households, which has been mainly by means of default on mortgage debt. In the UK, as well as in Germany and Japan, debt has been flat, implying nonetheless some repayment of debt since GDP fell in real terms after the crisis. Meanwhile in Canada, France and Italy, rises in debt since the crisis have been similar to the Great Moderation. In Canada this has reflected buoyant house prices and is a major concern of the central bank. Households in France and Italy remain less indebted according to this measure, though the rise in the debt/GDP ratio over this period of uncertainty and economic weakness remains noteworthy and is equally of potential concern.

There is a clear divide between market-oriented Anglo-Saxon countries and the bank-dominated ones for household debt, with the UK, US and Canada showing much higher debt in 2010 than the other countries' households; Germany has transitioned to a lower group as debt/GDP remained constant.

Households' vulnerability to default as shown by the gross debt/GDP ratio could be mitigated by a rise in financial assets as shown by net financial wealth in table 3 (as well as the real asset of housing which is not included in the flow of funds for many countries). The exceptional case in the Great Moderation was the UK, where net financial wealth declined by over 40 per cent of GDP between 1997 and 2006. Canada was the only other example of this, with a fall equivalent to 19 per cent of GDP, with households evidently shifting strongly from financial to real gross assets as well as raising gross debt levels. All other countries saw a rise in net financial assets during the period of tranquil economic developments.

Net financial wealth fell in all cases during the crisis, driven largely by falls in share prices, with the much larger falls in the UK and US reflecting a greater exposure to such capital uncertain assets (see table 12 below). Recovery since 2008 has been correspondingly faster in the market-oriented countries. Of course, a weakness of net financial wealth as a measure of robustness is that it does not take into account distribution, where the rich may hold the financial assets and those on lower incomes have the debt and are thus vulnerable to default. This has been shown to be the case in the housing booms of the UK and US (Armstrong, 2012; Berry et al., 2012).

Banking data are not always easy to compare directly in the flow of funds since countries differ in their valuation or even inclusion of derivatives. Only the UK, Japan, France and Italy, for example, have data on derivatives as bank assets, and in 2010 the volumes were 290 per cent of GDP for the UK, 11 per cent for Japan, 25 per cent for France and 6 per cent for Italy. For comparability, we accordingly exclude derivatives from the following tables, while including the central bank with commercial banks (the so-called Monetary Financial Institutions sector). Table 4 shows that growth over 1997-2006 in bank assets was most marked in the UK, where even excluding derivatives the increase amounted to twice GDP, partly reflecting the growth of the international banking sector in London. Growth was also extremely sizeable in France (100 per cent of GDP) but less so in Germany and Italy (60 per cent of GDP) and the US (20 per cent of GDP), while in Canada and Japan growth was comparable to GDP itself over 1997-2006. Comparing rises in bank assets with their 'fundamental' uses, that is, the rises in private non-financial loans, there is a much larger rise in bank assets over 1997-2006 than in private non-financial loans, except in the US, despite rises in household borrowing. In the US securitisation or household debt help to account for this pattern. Elsewhere, banks evidently supplemented their traditional uses of funds by holding securities, lending abroad, lending to non-bank financial institutions and lending to each other. Of course, while the US was the source of most risky 'subprime' household debt, a great deal of it was securitised and partly exported to the EU and other countries, as the data capture.

Since 2007, there has been little evidence of retrenchment and deleveraging by MFIs, but this links to the expansion of central bank balance sheets as a means of liquidity support and quantitative easing (see Davis and Karim, 2011, on the UK). Central bank balance sheets had by end-2010 expanded to around 20 per cent of GDP in the US, UK and Euro Area from 5 per cent up to 2007 in the UK and US, and 10 per cent in the Euro Area. Without this growth there would have been flat or falling bank assets reflecting deleveraging, mark to market losses and defaults. Germany would appear to have seen the most deleveraging over 2007-2010; in the UK, US, France and Italy bank assets excluding the central bank are estimated to be higher in 2010 than in 2007. In Japan the central bank has grown from 16 per cent of GDP in 1997 to nearly 30 per cent in 2010 reflecting the ongoing financial crisis since the early 1990s. Again, the exception to slow growth or deleveraging is Canada, where MFI assets per se continue to grow after 2007, while the assets of the central bank only grew from 6 per cent of GDP in 2007 to 7 per cent in 2010.

Note that the size of MFI sectors still reflects the bank/market orientation of the countries, with bank dominated countries having bank asset ratios of over 300 per cent of GDP, and market-oriented ones below 200 per cent. The main exceptions are the UK, owing to the international financial centre, and Italy which, although bank-dominated, has a less developed financial sector than elsewhere.

An interesting series derivable by subtracting MFIs, mutual funds and the insurance and pension sector from the financial sector as a whole is 'other financial institutions'. These are the institutions, including investment banks, finance companies, special purpose vehicles for securitisations and banks' other off-balance sheet subsidiaries which proxy the growth of the shadow banking system (table 5). This differs from the sector often called 'other financial institutions' by excluding mutual funds. The table shows a huge difference between the Anglo-Saxon countries characterised by diverse and market-based financial systems and the others, with this group of institutions having assets of well over 50 per cent of GDP in the former at all times, and well below that benchmark elsewhere. This is to some extent an aspect of definition where in Germany, for example, MFIs include many institutions classified elsewhere as non-banks. But it also shows the ongoing contrasts between financial sectors. During the Great Moderation there was also rapid growth of these sectors in all three Anglo-Saxon countries; afterwards it is only in the US that there has been a marked fall--the UK and Canadian OFI sectors have grown by 30 per cent of GDP since 2006, suggesting potential macroprudential risks.

The outturn of the fiscal situation for general government liabilities is shown in table 6.3 Over the Great Moderation, the UK, Canada and Italy all saw declines in general government debt/GDP, owing to growth, the fiscal stance and some exceptional revenue growth (such as from the UK financial sector). Only in Japan, reflecting the ongoing economic crisis, and to a lesser extent Germany, were there rises over this period. Since the crisis, public debt ratios have risen sharply and universally, mostly by over 20 per cent of GDP, owing to the costs of dealing with the banking crisis but more generally due to the weaker economic situation and poor structural positions in 2006-7. Looking at the relative rises over 2007-10, this is lowest in Italy, which along with Canada was able to hold the debt/GDP constant over 2009-10. On the other hand looking at levels, these are highest in Italy and Japan, although the financial vulnerability of these countries differs since Italian debt is much more held abroad than that in Japan.

The stylised facts of the Great Moderation and the Subprime Crisis suggest that in most countries the corporate sector was more cautious in the period of rapid growth than the banks and households, and hence companies were less affected by the financial crisis. It remains important to evaluate this, as well as to consider how corporate balance sheets have contributed to changes in financial structure. Table 7 shows corporate debt/GDP and shows marked rises in debt over the Great Moderation in the UK, France and Italy of over 20 per cent of GDP. This growth does not bear out the idea of caution in the run-up to the financial crisis. Elsewhere corporate debt grew at rates broadly comparable to GDP.

Since the crisis, corporate debt has been flat in the UK, US and Canada, as well as in Japan, consistent with caution in terms of demand for credit but also elements of credit rationing by banks. On the other hand, the EMU countries Germany, France and Italy have seen ongoing rises in corporate debt/GDP since the crisis, although this is partly linked to declines in the denominator (ECB, 2011). As regards levels, the data do not show a clear distinction between market- and bank-dominated countries; rather there seem to be three groups, the US, Germany and Canada with lower levels, UK and Italy intermediate and France and Japan with high corporate debt.

Another 'bystander' in the crisis was the institutional investor sector, other than AIG there were no major insurance company failures although falls in share prices hit the value of pension funds and endowment funds. And of course financial saving by households is mainly in the form of insurance and pension claims, which apart from pay-as-you-go state pensions are also the main source of income for retirement. Patterns over the 1997-10 period are shown in table 8. The countries where pension claims had grown most strongly hitherto (UK and US) are shown now to be flat relative to GDP, even during the Great Moderation, a worrying development implying deterioration of the funded systems when demographic patterns would suggest continuing growth relative to GDP (Davis, 2004). There has been some catch-up in the insurance and pension sectors elsewhere, notably Japan and Canada, which are roughly level with the US. Since the crisis, insurance and pension claims have been moving in line with GDP, except in France where more rapid growth is apparent.

3. Key ratios of relevance to financial structure and financial stability

We now turn from sector size to some key ratios showing financial structure and systemic vulnerability. For example, as regards bank leverage, an aggregate measure of the leverage ratio (capital/unweighted assets) can be derived from the flow of funds and is shown in table 9. This non-risk-adjusted 'leverage ratio' was not a feature of Basel 1 or 2, which were in force over the period, but was always used in the US and its utility is now more widely appreciated. Note however this is not directly equivalent to regulatory ratios which have capital at book value--data in the flow of funds are at market value, implying an impact of share price changes. That said, these data suggest that the rise in leverage over the Great Moderation was most marked in the UK. Elsewhere there was a rise in leverage during 2006-8 in the US, Germany, Japan, France and Italy as defaults eroded capital and share prices fell. The data suggest a very large rise in leverage for Italian banks since the crisis, from an atypically low level up to 2007. For no country do the data suggest that recapitalisations of banks have resulted in a recovery of leverage ratios (at market value) to above 2007 levels by 2010, although the US, Germany and France show a rise from the low levels of 2008.

Did regulators allow banks' liquidity to fall during the Great Moderation, thus leaving them vulnerable to 'runs', not least given the absence of an international agreement on liquidity? On the asset side, liquidity is composed of money market instruments, securities and deposits (i.e. interbank loans). However, whereas deposits are liquid for an individual bank, the collapse of interbank markets meant that for the system as a whole they were not reliable repositories of liquidity. Equally, the securities data do not distinguish reliably liquid government bonds from corporate bonds and structured products. That said, table 10 shows that on both measures there is a small but consistent decline in liquid assets for banks, shown by the flow of funds in the UK, US and Italy up to 2007, while elsewhere these measures show rising or flat liquidity. Since the crisis, liquidity has risen in most jurisdictions, albeit partly reflecting changes in central bank balance sheets.

The classic indicator of corporate leverage is the debt-equity ratio. As shown in table 11, the UK and US both showed rising leverage over the Great Moderation while it declined elsewhere, very markedly in the case of the Japanese corporate sector. This is one case where the G-7 showed a sizeable convergence over the Great Moderation, which has only been partially reversed since 2007, as shown by the standard deviations at the foot of the table. The bank/market divide is no longer apparent in the way it once was for corporate leverage.

4. Sector portfolios

We conclude our overview of sectoral balance sheet changes by looking at some key portfolios over 1997, 2007, 2008 and 2010 (we limit the years to keep the tables manageable). The most relevant portfolios for assessing financial structure are arguably household assets, corporate liabilities and both sides of MFI balance sheets (excluding derivatives). A first point to note is that portfolios have not changed radically during this period, despite the financial turbulence. That said, household deposit holdings (table 12) (4) have risen overall in the Anglo-Saxon countries and fallen in France, exhibiting a degree of convergence. Direct holdings of securities have tended to fall in most countries, continuing a long-term trend to institutionalisation of saving. However, the most marked growth of institutional investment as a share of household financial assets is in the bank-dominated countries, Germany, France and Italy, also in line with the hypothesis that EMU would stimulate growth of institutional investors and securities markets (Davis, 1999), while countries dependent on pay-as you-go pensions would be obliged to stimulate growth of funded schemes.

Concerning corporate liabilities at market value, this is strongly driven by share prices, but we can also discern shifts between bank and market finance of corporate activity. Table 13s shows that the share of loans has declined in the US, Japan and Canada while in the UK it rose markedly even during the Great Moderation. Bond finance rose in a number of countries after 2007, reflecting the greater impact of the crisis on banks than on either industrial firms or securities markets. Concerning long-term trends, firms in the UK have the same proportion of loan finance as Germany, Italy and Japan, and more than in the US, Canada and France, highlighting vulnerability of UK firms to credit rationing after the financial crisis and a blurring of the traditional bank-market division.

Looking finally at banks' portfolios (again excluding derivatives), interbank markets are more active in Europe (including the UK) than elsewhere, while since the crisis some of the deposits will be with the central bank rather than other banks per se. (The size of US interbank markets is understated because US accounts are consolidated and show only net interbank liabilities.) Money market instruments are highest in Japan, Canada and France, two of which are traditionally seen as bank-dominated. There is a shift in virtually all countries from loans to bonds, consistent with the pattern of securitisation, although much of the shift has occurred since the crisis and may rather relate to the growing issuance of government debt and holding by banks. Concerning equity, it is notable that Germany and Japan no longer stand out as the 'house bank' countries with banks in the UK, Canada, France and Italy holding more equities as a share of total assets than in Germany and Japan. Again the bank-market division is blurring.

Concerning banks' liabilities (excluding derivatives), the UK banking sector is more dependent on deposits (including interbank) for funding than any other sector. The flow of funds unfortunately does not give a ready measure of short-term wholesale as opposed to retail funding. Although money markets contribute to wholesale funding, most is in the form of deposits. Meanwhile, the well developed bank bond markets in the EMU countries have helped their banks to reduce liquidity risk and interest rate risk, although only in Italy is the level since 1998 consistently higher than in 1997 prior to EMU. Some rise in the bond share of UK and US banks is also apparent, albeit at a much lower level. Equity shares show a measure of capital adequacy at market values; as noted the UK data are alone in showing a marked fall in the share over 1997-2007.

Conclusions

We have shown data from the flow of funds which depict the overall process of financial change which continued over the 2000s but was also strongly influenced by the period of low inflation and high growth known as the Great Moderation (1997-2006) and the financial crisis of 2007-9 (which of course is ongoing in some countries). It is possible that these periods, which we discuss below, had a strong temporary effect on balance sheets which may make long-run changes in financial structure harder to discern. Even during the Great Moderation and the crisis itself, the stylised facts often cited about financial change do not always hold.

For example, over the Great Moderation of 1997-2006, while rises in household debt, bank assets and assets of the foreign sectors--as well as non-banks--are, as expected, widely apparent, some stylised facts of the crisis are not borne out by the data, as for example some corporate as well as household sectors raised their debt levels markedly during the Great Moderation, while in some countries rising household debt was accompanied by falls in net financial wealth relative to output.

During the crisis, the impact of falling share prices is noteworthy, affecting balance sheets to the extent shown by portfolio distributions between capital certain and capital uncertain assets. Since the crisis, as expected, we have seen some strengthening of banks' balance sheets and reduction in asset growth, but not widespread falls in household debt/GDP--or corporate debt/GDP--which some would urge is also necessary for the deleveraging adjustment to take place fully. Fiscal difficulties across all of the G-7 are apparent from the data. Equally, the non-bank sector which proxies shadow banking continues to grow, except in the US where some retrenchment has taken place.

Comparing countries, the flow-of-funds data do not readily allow conclusions to be drawn concerning the success of post crisis measures; that said, Canada would appear to be less affected by the crisis than others and indeed is showing signs of a renewed credit and asset price boom, which is causing concern to the central bank (Bank of Canada, 2011). As discussed further below, the data suggest vulnerability at the end of 2010 for countries such as France and Italy according to key macroprudential indicators; within the Euro Area Germany is evidently much less vulnerable. Equally, the US would seem to have been more successful in deleveraging than the UK over the 2007-10 period, according to indicators such as household debt.

There is some evidence of convergence between former bank- and market-dominated countries such as in the corporate debt/equity ratio. Notably, corporates in countries such as Japan and Germany are much less leveraged than hitherto. Bank equity holdings in those countries, which was formerly crucial for corporate finance and corporate governance, have declined to below the level elsewhere. Institutional investment ratios are also converging, although we have questioned whether the flattening in the Anglo-Saxon countries is desirable. There remain some differences which are apparent across the traditional bank-market divide, with the size of banks being much greater in the latter, while non-banks are far larger in the latter. Household debt levels are also higher in the Anglo-Saxon countries.

There remain some idiosyncratic features across EMU countries that are apparent from the data, with France and Italy seeing marked growth of household and corporate debt relative to GDP after the onset of the subprime crisis, as well as rises in net external liabilities. Italian banks have seen a marked rise in leverage since the crisis as well. Such patterns may contribute to the vulnerability of these and other 'Southern' EMU countries in the current crisis afflicting the Euro Area. On a more positive note, rises in insurance and pension assets do suggest some improvement in the way these countries cope with the ageing of the population. And the bank bond market in EMU helps banks to reduce risk--if they are able to issue at all.

Appendix A. Balance sheet sectors and their aggregation

US

Households/personal sector: Household and non-profit organisations, non-farm non-corporate business, farms

Companies: non-farm non-financial corporate business

Government: state and local government, federal government

Foreign: rest of the world

Financial Institutions: Financial sector

Banks: US Chartered Commercial Banks, Savings Institutions, Credit Unions, Monetary Authority, Foreign banking offices, Bank holding companies, Banks in US affiliated areas

Insurance and pensions: Life Insurance Companies, Other Insurance Companies, Private Pension Funds, State and Local Government Employee Retirement Funds, Federal Government Retirement Funds

Mutual funds: Money Market Mutual Funds, Mutual Funds, Closed-End and Exchange Traded Funds

Canada

Households/personal sector: Persons and unincorporated business

Companies: Non-financial corporations including government business enterprises

Government: Government, social security funds Foreign: non residents

Financial Institutions: Financial corporations including government business enterprises

Banks: Total chartered banks and quasi banks, total monetary authorities

Insurance and pensions: insurance and pension funds Mutual funds: mutual funds

France

Household/personal: Households, self employed and non-profit organisations

Companies: Non-financial corporations

Government: General government

Foreign: Rest of the world

Financial institutions: Financial corporations

Banks: Monetary Financial Institutions

Insurance and pensions: Insurance corporations and pension funds

Mutual funds: Money market funds, other mutual funds

Italy

Household/personal: Households and non-profit organisations

Companies: Non-financial corporations

Government: General government

Foreign: Rest of the world

Financial institutions: Financial corporations

Banks: Monetary Financial Institutions

Insurance and pensions: Insurance corporations and pension funds

Mutual funds: not separately identified (part of 'other financial intermediaries')

Germany

Household/personal: private households

Companies: non-financial corporations

Government: general government

Foreign: rest of the world

Financial institutions: Monetary financial institutions, other financial intermediaries, insurance corporations

Banks: monetary financial institutions Insurance and pensions: insurance corporations

Mutual funds: not separately identified (part of 'other financial intermediaries')

Japan

Household/personal: households and private non-profit organisations serving households

Companies: non-financial corporations

Government: general government

Foreign: overseas

Financial institutions: financial institutions

Banks: central bank plus depository corporations

Insurance and pensions: insurance and pension funds

Mutual funds: Securities investment trusts

UK

Household/personal: households and NPISH

Companies: Non-financial corporations

Government: General government

Foreign: Rest of the World

Financial institutions: Financial corporations

Banks: Monetary financial institutions

Insurance and pensions: insurance corporations and pension funds

Mutual funds: unit trusts and investment trusts

Appendix B. Instruments

UK

Deposits: Total Currency and deposits

Money market instruments: MMIs issued by UK Monetary Financial Institutions, Money Market Instruments issued by other UK residents, MMIs issued by UK general government, UK Local authority bills

Equity: Quoted UK shares, Other UK equity (including direct investment in property), Unquoted UK shares, Rest of the World shares and other equity, UK shares and bonds issued by other UK residents

Mutual funds: UK mutual fund shares, Rest of the World Mutual fund shares

Bonds: Bonds issued by other UK residents, UK local authority bonds, Bonds issued by the UK central government, Bonds issued by Rest of the World

Loans: total loans

Life and pension claims: total insurance technical reserves

Overseas securities: na

Central bank reserves: na

Other: other accounts receivable/payable

Germany

Deposits: currency and deposits total

Money market instruments: money market paper

Equity: shares and other equity

Mutual funds: mutual fund shares

Bonds: bonds

Loans: loans

Life and pension claims: claims on insurance corporations

FDI: na

Central bank reserves: Monetary gold and special drawing rights

Other: other claims

France

Deposits: currency and deposits total

Money market instruments: short-term bonds

Equity: shares and other equity excluding mutual funds

Mutual funds: mutual fund shares

Bonds: long-term bonds

Loans: loans

Life and pension claims: claims on insurance corporations

FDI: na

Central bank reserves: Monetary gold and special drawing rights

Other: other claims

Italy

Deposits: currency and transferable deposits, other deposits

Money market instruments: short-term securities

Equity: shares and equity total

Mutual funds: mutual fund shares

Bonds: bonds

Loans: loans

Life and pension claims: insurance technical reserves

FDI: na

Central bank reserves: Monetary gold and special drawing rights

Other: other claims

Canada

Deposits: Canadian currency and deposits, foreign currency and deposits

Money market instruments: short-term paper

Equity: shares

Mutual funds: na

Bonds: Bonds

Loans: consumer credit, mortgages, bank loans, other loans

Life and pension claims: life insurance and pensions

FDI: foreign investments

Central bank reserves: official reserves

Other: Corporate claims, Government claims, Trade accounts payable, Other assets, Other liabilities

US

Deposits: Checkable deposits and currency, Time and savings deposits, net interbank transactions, foreign deposits

Money market instruments: Money market mutual fund shares, federal funds and security repurchase agreements, open market paper

Equity: corporate equities

Mutual funds: mutual fund shares

Bonds: Treasury securities, agency and GSE backed securities, municipal securities, corporate and foreign bonds

Loans: bank loans NEC, other loans and advances, mortgages, commercial mortgages, consumer credit, security credit, net interbank claims

Life and pension claims: life insurance reserves, pension fund reserves

FDI: US direct investment abroad/foreign direct investment in US Central bank reserves: gold and foreign exchange reserves, SDR certificates and treasury currency

Other: trade payable/receivable, taxes payable/receivable, proprietors equity in non corporate business, miscellaneous assets/liabilities, sector and instrument discrepancies

Japan

Deposits: Currency and deposits

Money market instruments: Treasury discount bills, Call loans and money, bills purchased and sold, commercial paper, Bank of Japan loans, repurchase agreements

Equity: shares and other equities

Mutual funds: investment trust beneficiary certificates

Bonds: industrial securities, Public corporation securities, central government securities and FILP bonds, local government securities, bank debentures, mortgage securities, structured financial instruments

Loans: loans

Life and pension claims: insurance and pension reserves

FDI: foreign direct investment

Overseas securities: outward investment in securities

Central bank reserves: gold and foreign exchange reserves

Other: other external claims and debts, deposits money, accounts receivable and payable, other assets and liabilities

REFERENCES

Armstrong, A. (2012), 'UK household rebalancing', National Institute Economic Review, 220, F4-9.

Bank of Canada (2011), Financial System Review December 2011, Bank of Canada, Ottawa

Barrell, R. and Davis, E.P. (2008), 'The evolution of the financial crisis of 2007-8', National Institute Economic Review, 206, pp. 5-14.

Be Duc, L. and Le Breton, G. (2009), 'Flow of funds analysis at the ECB, framework and applications', ECB Occasional Paper Series No. 105.

Berry, S., Corder, M. and Williams, R. (2012), 'What might be driving the need to rebalance in the United Kingdom', Bank of England Quarterly Bulletin, 52/1.

Byrne, J. and Davis, E.P. (2003), Financial Structure, Cambridge, Cambridge University Press.

Davis, E.P. (1999), 'lnstitutionalisation and EMU: implications for European Financial Markets', International Finance, 2, pp. 33-61.

--(2004), 'Is there a pensions crisis in the UK?', Geneva Papers on Risk and Insurance, 2004/3, pp. 343-370.

Davis, E.P. and Karim, D. (2011), 'Policy efficacy in the crisis, exit strategies and the return of growth' in Giudice, G., Kuenzel, R. and Springbett, T. (eds), UK Economy: The Crisis in Perspective, European Commission, Routledge.

Delamarre, F. (2011), 'Strengths and limitations of the French financial accounts for analysis of the last financial crisis from a macroeconomic viewpoint', background paper for IMF/OECD conference "Strengthening sectoral position and flow data in the macroeconomic accounts", February-March 2011.

ECB (2011), 'The financial crisis in the light of the euro area accounts; a flow of funds perspective', ECB Monthly Bulletin, October 2011, 99-120, European Central Bank.

Roe, A. (2003), 'Asymmetries between rich and poor countries in financial crisis responses--the need for a flow-of-funds approach', Economic Systems Research, 15, pp. 233-57.

NOTES

(1) See Appendix for detail of the sectoral and instrument breakdown, which follows Byrne and Davis (2003).

(2) Portfolio claims are at market value.

(3) This measure is wider than the one traditionally used for public debt and does include for example deposits in government financial institutions. We contend nonetheless that shifts and relative levels are consistent with the fiscal story.

(4) We omit from the table Japanese households' Trust Beneficiary Rights which in 1977 were 7 per cent of GDP and 3 per cent of assets, but which had faded to insignificance by 2010.

(5) Note that we omit from the table the unfunded pension commitments of German companies, which amount to around 10 per cent of GDP throughout, and 6 per cent of household financial assets.

E. Philip Davis, National Institute of Economic and Social Research. E-mail: e_philip_davis@msn.com. I thank Olivier de Bandt, Adeline Bachellerie and Franck Sedillot for help in obtaining data, and an anonymous referee for helpful comments.

Table 1. External net assets/GDP

 1997 2006 2007 2008 2009 2010

UK -0.07 -0.29 -0.24 -0.06 -0.23 -0.25
Us -0.10 -0.18 -0.15 -0.26 -0.20 -0.20
Germany 0.01 -0.01 0.03 0.14 0.15 0.16
Japan 0.24 0.42 0.48 0.45 0.55 0.51
Canada -0.33 -0.06 -0.08 -0.03 -0.07 -0.12
France 0.15 -0.03 -0.04 -0.12 -0.11 -0.12
Italy 0.01 -0.20 -0.24 -0.27 -0.27 -0.24

Table 2. Household debt (consumer and housing credit)/GDP

 1997 2006 2007 2008 2009 2010

UK 0.63 0.95 0.97 0.98 1.00 0.96
US 0.62 0.93 0.95 0.93 0.93 0.87
Germany 0.67 0.67 0.63 0.62 0.64 0.62
Japan 0.40 0.45 0.44 0.45 0.46 0.45
Canada 0.59 0.69 0.73 0.76 0.85 0.86
France 0.34 0.45 0.47 0.49 0.52 0.54
Italy 0.17 0.29 0.30 0.30 0.33 0.38

Table 3. Household net financial wealth/GDP

 1997 2006 2007 2008 2009 2010

UK 2.31 1.88 1.82 1.48 1.85 1.91
Us 2.38 2.53 2.52 1.80 2.10 2.29
Germany 0.87 1.15 1.20 1.12 1.23 1.26
Japan 1.72 2.41 2.34 2.24 2.46 2.42
Canada 1.47 1.28 1.24 1.21 1.34 1.29
France 1.16 1.37 1.35 1.20 1.35 1.39
Italy 1.82 2.03 1.88 1.83 1.84 1.75

Table 4. Bank assets (excluding derivatives)/GDP

 1997 2006 2007 2008 2009 2010 Memo: growth in
 assets over 1997-
 2006 less rise in
 fundamental
 assets

UK 3.03 4.91 5.12 5.62 5.64 5.38 1.22
US 0.87 1.06 1.10 1.31 1.34 1.30 -0.21
Germany 2.69 3.32 3.35 3.48 3.44 3.26 0.61
Japan 3.05 3.17 3.10 3.13 3.36 3.35 0.55
Canada 1.24 1.32 1.38 1.50 1.65 1.64 0.04
France 2.40 3.20 3.49 3.50 3.63 3.67 0.52
Italy 1.44 2.03 2.08 2.23 2.41 2.40 0.23

Note: The right-hand column shows the change in bank assets less
the rise in household plus corporate loans over 1997-2006, as a
proportion of GDP.

Table 5. Other financial institutions (excluding mutual
funds)/GDP

 1997 2006 2007 2008 2009 2010

UK 0.92 1.35 1.46 1.55 1.68 1.66
US 0.72 1.28 1.37 1.37 1.28 1.12
Germany 0.00 0.00 0.00 0.00 0.00 0.00
Japan 0.17 0.27 0.25 0.28 0.30 0.30
Canada 0.71 1.00 1.06 1.21 1.33 1.30
France 0.09 0.12 0.26 0.25 0.26 0.29
Italy 0.01 0.03 0.03 0.04 0.06 0.09

Table 6. General government liabilities/GDP

 1997 2006 2007 2008 2009 2010

UK 0.60 0.53 0.54 0.64 0.80 0.89
US 0.71 0.70 0.71 0.80 0.94 1.02
Germany 0.61 0.70 0.66 0.70 0.78 0.88
Japan 1.03 1.88 1.86 1.94 2.11 2.18
Canada 1.28 0.93 0.89 0.93 1.08 1.08
France 0.80 0.82 0.81 0.88 0.99 1.05
Italy 1.40 1.20 1.15 1.18 1.31 1.29

Table 7. Non-financial corporate debt/GDP

 1997 2006 2007 2008 2009 2010

UK 0.77 1.22 1.18 1.32 1.31 1.21
US 0.80 0.88 0.92 0.92 0.92 0.91
Germany 0.90 0.97 1.00 1.05 1.12 1.10
Japan 1.98 1.55 1.57 1.55 1.62 1.55
Canada 1.11 0.99 1.00 1.02 1.04 1.03
France 1.10 1.36 1.41 1.47 1.52 1.55
Italy 0.94 1.13 1.20 1.23 1.25 1.24

Table 8. Insurance and pensions/GDP

 1997 2006 2007 2008 2009 2010

UK 1.57 1.59 1.57 1.34 1.57 1.57
US 0.96 1.04 1.04 0.81 0.94 0.99
Germany 0.34 0.48 0.49 0.49 0.54 0.55
Japan 0.66 0.83 0.82 0.84 0.90 0.87
Canada 0.81 0.87 0.89 0.85 0.94 0.93
France 0.42 0.66 0.68 0.67 0.74 0.76
Italy 0.21 0.41 0.39 0.37 0.42 0.43

Table 9. Monetary financial institutions' equity/total assets
(excluding derivatives) ratios

 1997 2006 2007 2008 2009 2010

UK 0.04 0.02 0.02 0.02 0.02 0.02
US (a) 0.06 0.07 0.07 0.06 0.07 0.07
Germany 0.06 0.06 0.06 0.03 0.04 0.04
Japan 0.03 0.07 0.06 0.04 0.04 0.04
Canada 0.05 0.05 0.05 0.06 0.06 0.06
France 0.07 0.09 0.07 0.04 0.06 0.06
Italy 0.12 0.23 0.15 0.04 0.06 0.04

Note: (a) Based on Federal Reserve data.

Table 10. Monetary financial institutions' liquidity/total
assets (excluding derivatives)

 1997 2006 2007 2008 2009 2010

UK 0.53 0.52 0.49 0.50 0.53 0.52
US 0.27 0.25 0.24 0.24 0.32 0.34
Germany 0.42 0.50 0.51 0.52 0.50 0.47
Japan 0.27 0.43 0.44 0.47 0.48 0.50
Canada 0.18 0.16 0.16 0.18 0.18 0.19
France 0.52 0.50 0.51 0.54 0.53 0.51
Italy 0.40 0.35 0.36 0.40 0.42 0.39

(excluding deposits)

UK 0.16 0.13 0.13 0.12 0.16 0.16
US 0.25 0.24 0.23 0.19 0.26 0.28
Germany 0.18 0.33 0.34 0.36 0.38 0.39
Japan 0.14 0.29 0.29 0.31 0.33 0.35
Canada 0.14 0.14 0.14 0.16 0.17 0.16
France 0.15 0.19 0.18 0.21 0.20 0.19
Italy 0.20 0.12 0.12 0.15 0.18 0.21

Table 11. Corporate debt/equity ratio

 1997 2006 2007 2008 2009 2010

UK 0.47 0.78 0.76 1.12 0.92 0.79
US 0.76 0.81 0.82 1.32 1.03 0.92
Germany 1.33 1.14 1.08 1.57 1.50 1.35
Japan 3.00 0.96 1.22 1.94 1.77 1.76
Canada 1.80 1.20 1.20 1.24 1.12 1.12
France 0.89 0.57 0.55 0.88 0.73 0.72
Italy 1.38 1.01 1.10 1.13 1.23 1.30

Standard
Deviation 0.84 0.22 0.25 0.35 0.35 0.37

Table 12. Household financial assets portfolio distribution

 UK US Germany Japan (a) Canada

Deposits 1997 0.21 0.12 0.41 0.54 0.26
 2007 0.27 0.13 0.36 0.51 0.25
 2008 0.32 0.16 0.40 0.54 0.27
 2010 0.28 0.14 0.40 0.55 0.28

MMI 1997 0.00 0.03 0.00 0.00 0.00
 2007 0.00 0.03 0.00 0.00 0.00
 2008 0.00 0.04 0.00 0.00 0.00
 2010 0.00 0.02 0.00 0.00 0.00

Bonds 1997 0.02 0.08 0.08 0.06 0.05
 2007 0.01 0.09 0.07 0.04 0.03
 2008 0.01 0.10 0.06 0.05 0.03
 2010 0.01 0.10 0.05 0.04 0.02

Equities 1997 0.17 0.22 0.14 0.06 0.21
 2007 0.11 0.17 0.13 0.09 0.24
 2008 0.09 0.13 0.09 0.06 0.25
 2010 0.11 0.16 0.09 0.06 0.26

Mutual funds 1997 0.04 0.07 0.08 0.02 Na
 2007 0.04 0.08 0.10 0.05 Na
 2008 0.02 0.07 0.09 0.03 Na
 2010 0.03 0.09 0.09 0.03 Na

Ins and pen 1997 0.52 0.29 0.22 0.26 0.38
 2007 0.54 0.26 0.27 0.26 0.43
 2008 0.52 0.25 0.28 0.28 0.41
 2010 0.53 0.27 0.29 0.27 0.42

 France Italy

Deposits 1997 0.38 0.31
 2007 0.28 0.27
 2008 0.31 0.29
 2010 0.29 0.31

MMI 1997 0.00 0.05
 2007 0.00 0.02
 2008 0.00 0.02
 2010 0.00 0.01

Bonds 1997 0.04 0.20
 2007 0.01 0.18
 2008 0.02 0.18
 2010 0.01 0.19

Equities 1997 0.15 0.21
 2007 0.21 0.25
 2008 0.16 0.26
 2010 0.18 0.21

Mutual funds 1997 0.11 0.09
 2007 0.08 0.09
 2008 0.08 0.05
 2010 0.07 0.07

Ins and pen 1997 0.27 0.10
 2007 0.36 0.16
 2008 0.38 0.16
 2010 0.37 0.18

Note: (a) We omit from the table Japanese households' Trust
Beneficiary Rights, which in 1997 were 7 per cent of GDP and 3
per, of assets, but which had faded to insignificance by 2010.

Table 13. Corporate liabilities portfolio distribution

 UK US Germany Japan Canada

MMI 1997 0.01 0.01 0.00 0.01 0.03
 2007 0.01 0.00 0.01 0.01 0.02
 2008 0.01 0.01 0.01 0.01 0.02
 2010 0.01 0.00 0.00 0.01 0.02

Loans 1997 0.20 0.10 0.32 0.43 0.18
 2007 0.29 0.10 0.28 0.26 0.15
 2008 0.37 0.13 0.33 0.34 0.16
 2010 0.30 0.08 0.32 0.32 0.15

Bonds 1997 0.05 0.12 0.01 0.10 0.14
 2007 0.09 0.14 0.02 0.05 0.10
 2008 0.09 0.18 0.02 0.06 0.11
 2010 0.08 0.18 0.03 0.07 0.11

Equities 1997 0.68 0.57 0.43 0.25 0.36
 2007 0.57 0.55 0.48 0.45 0.45
 2008 0.47 0.43 0.39 0.34 0.45
 2010 0.56 0.52 0.43 0.36 0.47

 France Italy

MMI 1997 0.01 0.00
 2007 0.00 0.00
 2008 0.01 0.00
 2010 0.00 0.00

Loans 1997 0.24 0.30
 2007 0.20 0.31
 2008 0.27 0.32
 2010 0.23 0.34

Bonds 1997 0.05 0.01
 2007 0.03 0.02
 2008 0.04 0.02
 2010 0.05 0.03

Equities 1997 0.53 0.42
 2007 0.64 0.48
 2008 0.53 0.47
 2010 0.58 0.44

Table 14. Banks' assets

 UK US Germany Japan Canada

Deposits 1997 0.37 0.02 0.27 0.10 0.04
 2007 0.36 0.01 0.34 0.10 0.02
 2008 0.38 0.05 0.35 0.10 0.02
 2010 0.36 0.06 0.29 0.10 0.03

MMI 1997 0.05 0.01 0.00 0.05 0.06
 2007 0.02 0.01 0.01 0.07 0.05
 2008 0.02 0.01 0.01 0.09 0.05
 2010 0.01 0.00 0.01 0.11 0.04

Loans 1997 0.45 0.55 0.50 0.49 0.57
 2007 0.47 0.56 0.40 0.40 0.55
 2008 0.47 0.53 0.40 0.42 0.52
 2010 0.45 0.43 0.45 0.38 0.52

Bonds 1997 0.11 0.25 0.15 0.12 0.08
 2007 0.11 0.23 0.17 0.26 0.09
 2008 0.11 0.18 0.16 0.27 0.11
 2010 0.14 0.28 0.17 0.29 0.12

Equities 1997 0.02 0.00 0.05 0.03 0.03
 2007 0.05 0.00 0.03 0.04 0.05
 2008 0.03 0.00 0.02 0.02 0.04
 2010 0.04 0.00 0.02 0.03 0.06

 France Italy

Deposits 1997 0.37 0.20
 2007 0.33 0.24
 2008 0.34 0.25
 2010 0.32 0.18

MMI 1997 0.03 0.02
 2007 0.06 0.01
 2008 0.08 0.01
 2010 0.06 0.01

Loans 1997 0.36 0.54
 2007 0.32 0.54
 2008 0.33 0.51
 2010 0.34 0.52

Bonds 1997 0.12 0.18
 2007 0.13 0.11
 2008 0.13 0.15
 2010 0.13 0.20

Equities 1997 0.07 0.03
 2007 0.10 0.08
 2008 0.06 0.07
 2010 0.08 0.06

Table 15. Banks' liabilities

 UK US Germany Japan Canada

Deposits 1997 0.83 0.65 0.69 0.71 0.71
 2007 0.87 0.60 0.69 0.77 0.69
 2008 0.86 0.64 0.71 0.79 0.67
 2010 0.84 0.63 0.74 0.79 0.68

MMI 1997 0.08 0.08 0.00 0.04 0.00
 2007 0.05 0.07 0.01 0.04 0.00
 2008 0.05 0.04 0.02 0.03 0.00
 2010 0.04 0.05 0.01 0.04 0.00

Loans 1997 0.00 0.03 0.00 0.11 0.01
 2007 0.00 0.06 0.00 0.08 0.00
 2008 0.00 0.05 0.00 0.07 0.00
 2010 0.00 0.02 0.00 0.08 0.00

Bonds 1997 0.04 0.03 0.20 0.07 0.02
 2007 0.06 0.05 0.20 0.03 0.02
 2008 0.07 0.04 0.18 0.03 0.02
 2010 0.09 0.07 0.19 0.03 0.02

Equities 1997 0.05 0.05 0.07 0.03 0.05
 2007 0.02 0.11 0.06 0.06 0.05
 2008 0.02 0.09 0.03 0.04 0.06
 2010 0.02 0.10 0.04 0.04 0.07

 France Italy

Deposits 1997 0.68 0.70
 2007 0.65 0.62
 2008 0.68 0.69
 2010 0.64 0.69

MMI 1997 0.03 0.00
 2007 0.06 0.00
 2008 0.06 0.00
 2010 0.04 0.00

Loans 1997 0.01 0.03
 2007 0.01 0.02
 2008 0.01 0.02
 2010 0.02 0.02

Bonds 1997 0.12 0.13
 2007 0.10 0.18
 2008 0.11 0.22
 2010 0.13 0.23

Equities 1997 0.07 0.12
 2007 0.07 0.14
 2008 0.04 0.05
 2010 0.06 0.04