How complete and how comparable are data on non-financial corporates,

household sector balance sheets, and housing markets

across countries?

Luci EllisHead of Financial Stability Department

Reserve Bank of Australia

Context

• Current crisis unusually triggered by US household sector– Arrears rates rose and prices fell sharply,

before macro slowdown or credit tightening

• Other financial/banking crises triggered by excesses in nonfinancial corporates (CRE, LBO)

• But many observers pre-crisis thought US households less vulnerable than those elsewhere– What information didn’t they know, that could have

stopped them being led astray?

Encouraged FSIs in IMF Guide

• Nonfinancial corporations sector – Total debt to equity– Return on equity– Earnings to interest and principal expenses– Net foreign exchange exposure to equity– Number of applications for protection from creditors

• Households – Household debt to GDP– Household debt service and principal payments to

income

Source: IMF Financial Soundness Indicators Compilation Guide 2006.

General Principles for Constructing Suitable Indicators

• Relevant: provides an informative reading on vulnerabilities and build-ups of imbalances

• Based on evidence: grounded in both theory and empirical evidence

• Risk-oriented: focussed on tail risks and tails of distributions, not just averages

Assessing the Size of Changes in Macro-financial Indicators

• Macro ratios covered by existing SNA etc– Financial accounts, income, business assets?

• But financial stability is about tail risks: distribution matters (leverage, interest burden etc)

– Housing: LTVs etc– Corporates: listed firms’ disclosures– Limited international comparability: surveys,

different disclosure regimes, proprietary data

Measuring Housing Prices

• Stock versus transactions– And inclusion of appraisals in transactions

• Quality adjustment– Repeat-sales, hedonics, stratification

• Coverage of sample– Cities, whole country, particular dwelling or

buyer type?

• Source of data– Land titles records, lender, real estate agent

Assessing Extent of Vulnerabilities• Aggregate ratios often used

– But these can lead us badly astray– Don’t capture tail of distribution– Ratios of aggregates are not ratio of average

US Canada Spain Australia NZ UK

0

50

100

150

200

0

50

100

150

200

House Prices and Household DebtPercentage point change in ratios to household income*

(2000 to 2006)

* Household income is after tax, before interest payments.Sources: BIS; Standard & Poor’s; national sources

House prices Household debt

% pts % pts

Assessing Extent of Vulnerabilities• Aggregate ratios often used

– But these can lead us badly astray– Don’t capture tail of distribution– Ratios of aggregates are not ratio of average

• Need theoretical and analytical grounding– e.g. aggregate debt-income ratios not constant if

long-run average inflation or credit constraints change

• Institutions matter (eg penalties for default)• Market segment matters (owners or landlords?)

• Measuring (sustainable) lending standards

Assessing the Extent of the Damage

• How badly have things gone wrong?

• What implications for macroeconomy / financial system?

• Different measures– NPLs, impaired assets, arrears, foreclosures– Model effect on consumption, investment,

financial sector’s loan losses, etc

0

1

2

3

4

5

0

1

2

3

4

5

Non-performing Housing LoansPer cent of loans*

* Per cent of loans by value. Includes ‘impaired’ loans unless otherwise stated.For Australia, only includes loans 90+ days in arrears prior to September 2003.

** Banks only.+ Per cent of loans by number that are 90+ days in arrears.Sources: APRA; Bank of Spain; Canadian Bankers’ Association; Council of Mortgage Lenders; FDIC

2009

US

% %

200520011997

Australia**

UK

Spain

Canada**

1993

+

+

0

2

4

6

8

10

12

0

2

4

6

8

10

12

US Residential Mortgage ArrearsPer cent of outstandings

Sources: Federal Reserve; Mortgage Bankers Association

2009

MBA: 30+ days orin foreclosure

%

Federal Reserve:30+ days

%

2005200119971993198919851981

Concluding Remarks

• FSIs (or other rules of thumb) are not a substitute for human analysis

• Macro indicators alone can lead us astray

• Institutional details matter

• Be aware of distribution across agents

• “Soft signals” might be informative– Especially the existence of practices unique to

that country