IV. INSTITUTIONAL UNITS AND SECTORS
D. The financial corporations sector and its sub-sectors (S.12)
| 4.77. | The financial corporations sector consists of all resident corporations or quasi-corporations principally engaged in financial intermediation or in auxiliary financial activities which are closely related to financial intermediation. Because financial intermediation is inherently different from most other types of productive activity and because of the importance of financial intermediation in the economy, financial corporations are distinguished from non-financial corporations at the first level of sectoring in the System. |
1. Financial intermediation
| 4.78. | Financial intermediation may be defined as a productive activity in which an institutional unit incurs liabilities on its own account for the purpose of acquiring financial assets by engaging in financial transactions on the market. The role of financial intermediaries is to channel funds from lenders to borrowers by intermediating between them. They collect funds from lenders and transform, or repackage, them in ways which suit the requirements of borrowers. They obtain funds by incurring liabilities on their own account, not only by taking deposits but also by issuing bills, bonds or other securities. They use these funds to acquire financial assets, principally by making advances or loans to others but also by purchasing bills, bonds or other securities. A financial intermediary does not simply act as an agent for other institutional units but places itself at risk by incurring liabilities on its own account. |
2. Financial enterprises
| 4.79. | Financial enterprises are defined in the System as enterprises that are principally engaged in financial intermediation or in auxiliary financial activities which are closely related to financial intermediation. They thus include enterprises whose principal function is to facilitate financial intermediation without necessarily engaging in financial intermediation themselves. Financial enterprises consist of all those enterprises (i.e., institutional units as distinct from establishments) whose principal activity is classified under Divisions 65, 66 and 67 of the International Standard Industrial Classification of All Economic Activities (ISIC) Rev.3. |
| 4.80. | The provision of services that are auxiliary to financial intermediation may be carried out as secondary activities of financial intermediaries or they may be provided by specialist agencies or brokers. The latter consist of agencies such as securities brokers, flotation companies, loan brokers, etc. There are also other agencies whose principal function is to guarantee, by endorsement, bills or similar instruments intended for discounting or refinancing by financial enterprises and also institutions that arrange hedging instruments, such as swaps, options and futures which have evolved as a result of wide-ranging financial innovation. These enterprises provide services which border very closely on financial intermediation, but they may not constitute true financial intermediation as the enterprises may not acquire financial assets and put themselves at risk by incurring liabilities on their own account. However, it is becoming increasingly difficult to draw a clear distinction between true intermediation and certain other financial activities. The boundary between financial intermediation and many of the services which are auxiliary to financial intermediation has become rather blurred as a result of continuous evolution and innovation in financial markets. |
| 4.81. | However, this is not the only reason for classifying financial auxiliaries as financial enterprises in the System. As already mentioned, corporations whose principal function is financial intermediation also tend to provide a wide range of auxiliary services themselves as secondary activities. As a corporation as a whole has to be allocated to a sector, the auxiliary activities of financial corporations would fall within the financial corporate sector of the System anyway, even if financial auxiliaries themselves were to be excluded. |
3. Unincorporated financial enterprises
| 4.82. | Individuals or households may engage in financial activities such as money lending or buying and selling foreign currency. Unincorporated financial enterprises of this kind are included in the financial corporations sector only if they qualify as proper financial intermediaries or auxiliaries and as quasi-corporations. In particular, they must have complete sets of accounts that are separable from those of their owners in their personal capacities. As large unincorporated financial enterprises may be subject to government regulation and control, they may well be obliged to keep such accounts. However, money lenders, currency changers and similar individuals engaged in financial activities on a small scale are unlikely to qualify, in which case they cannot be treated as quasi-corporations and are not included in the financial corporations sector. |
4. The sub-sectors of the financial corporations sector
| 4.83. | Financial corporations and quasi-corporations are grouped into the following sub-sectors:
(a) The central bank;
(b) Other depository corporations, of which:
(i) Deposit money corporations;
(ii)Other;
(c) Other financial intermediaries, except insurance corporations and pension funds;
(d) Financial auxiliaries;
(e) Insurance corporations and pension funds. |
| 4.84. | In addition, financial corporations and quasi-corporations may also be sub-divided according to whether they are subject to public, private or foreign control as follows:
(a) Public financial corporations;
(b) National private financial corporations;
(c) Foreign controlled financial corporations.
The criteria for determining control are exactly the same as for non-financial corporations. |
| 4.85. | The first level of sub-sectoring the financial corporations sector is the breakdown into the five categories of financial corporation listed above (central bank, other depository corporations, etc.), the division between public, private and foreign controlled corporations being made at the second level of sub-sectoring. The second breakdown is not relevant to the central bank. The corporations and quasi-corporations which make up the five sub-sectors at the first level are described below. |
The central bank (S.121)
| 4.86. | This sub-sector consists of the central bank together with any other agencies or bodies which regulate or supervise financial corporations and which are themselves separate institutional units. The central bank is the public financial corporation which is a monetary authority: that is, which issues banknotes and sometimes coins and may hold all or part of the international reserves of the country. The central bank also has liabilities in the form of demand or reserve deposits of other depository corporations and often government deposits. |
| 4.87. | In some countries, some monetary authority-type functions, such as the maintenance of the international reserves or the issue of currency, may be carried out by an agency, or agencies, of central government which remain financially integrated with central government and are directly controlled and managed by government itself as a matter of policy. Such agencies are not separate institutional units from government and must, therefore, remain in the general government sector. |
Other depository corporations (S.122)
| 4.88. | This sub-sector consists of all resident financial corporations and quasi-corporations, except the central bank, whose principal activity is financial intermediation and which have liabilities in the form of deposits or financial instruments such as short-term certificates of deposit which are close substitutes for deposits in mobilizing financial resources and which are included in measures of money broadly defined. |
| 4.89. | Traditionally, money has been interpreted as a financial instrument which may be used as a unit of account, a medium of exchange, and a store of value. A narrow concept of money is one which focuses on money as an asset which is immediately, universally and legally accepted as a means of payment. Narrow money therefore consists of currency (including coin) plus deposits which are repayable on demand and immediately transferable by cheque, standing order or other means of transferring deposits for the purpose of making payments. In the past, only deposits with certain types of financial corporations, typically called "banks", were universally acceptable for this purpose. However, two developments have led to the use of a more broadly based concept of money. The first is that, as a result of increasing competition and financial innovation, banks have been able to offer other kinds of deposits or facilities which are very close substitutes for narrow money and which can be used for payment purposes with little or no delay or financial penalty, without being technically transferable deposits payable on demand. The second is that deposits with other kinds of financial corporations (not necessarily describing themselves as "banks") which in the past may not have been repayable on demand or used as a means of payment, have become increasingly transferable, again as a result of financial innovation. They have also become increasingly close substitutes for narrow money on deposit with banks. A broad concept of money is one which embraces all these new kinds of deposits and quasi-deposit liabilities of depository corporations. The need for broader measures of money has been generally accepted for purposes of economic analysis and policy-making, as relationships previously observed to hold between narrow measures of money and levels of economic activity have tended to break down. |
| 4.90. | Given the wide variation in institutional arrangements between countries whose financial systems and markets are at different stages of development and also the continuous innovation in financial markets and instruments over time, it is not possible to provide precise, operational definitions of narrow or broad money which would be appropriate and analytically useful across a range of different countries and which would continue to be valid over any long period of time. The System does not, therefore, attempt to provide such definitions even though it recognizes the usefulness and importance of the concepts of narrow and broad money themselves. |
| 4.91. | As stated above, the sub-sector "other depository corporations" covers those corporations which have liabilities in the form of deposits or close substitutes for deposits which are included in measures of broad money. "Other depository corporations" cannot be simply described as "banks", however, because they may possibly include some corporations which may not call themselves banks, and which may not be permitted to do so in some countries, while some other corporations describing themselves as "banks" may not in fact be depository corporations as defined above. In general, there is no one-to-one correspondence between "depository corporations" and "banks". |
| 4.92. | When the financial instruments and arrangements within a country are such that it is meaningful and analytically useful to identify a sub-set of depository corporations whose deposits correspond to money in the narrow sense, it is recommended that they should be separately identified. This sub-set is described as "deposit money corporations". It may not always be feasible, however, to subdivide "other depository corporations" in this way, as explained further in paragraph 4.94 below. |
Deposit money corporations (S.1221)
| 4.93. | These consist of resident depository corporations and quasi-corporations which have any liabilities in the form of deposits payable on demand, transferable by cheque or otherwise usable for making payments. Such deposits are included in the concept of money in a narrow sense. These corporations include so-called "clearing banks" which participate in a common clearing system organized to facilitate the transfer of deposits between them by cheques or other means. |
Other (S.1222)
| 4.94. | These consist of all other resident depository corporations and quasi-corporations which have liabilities in the form of deposits that may not be readily transferable or in the form of financial instruments such as short-term certificates of deposit which are close substitutes for deposits and included in measures of money broadly defined. These corporations compete for funds with deposit money corporations in financial markets even if they unable, or unwilling, to incur liabilities in the form of transferable deposits. They may include corporations described as savings banks (including trustee savings banks and savings banks and loan associations), credit cooperatives and mortgage banks or building societies. It must be emphasized that such corporations are described in different ways in different countries and they can only be identified by examining their functions rather than their names. They may also include post office savings banks or other savings banks controlled by the government, provided these are separate institutional units from government. As a result of financial innovation, improved technology in the field of computers and communications, and also financial deregulation in many countries, some of the corporations included under this heading take deposits which, although not readily transferable by traditional methods, may increasingly be used for payments purposes and be gradually transformed into deposits which are partially or even wholly transferable without much delay, difficulty or cost. This simply underlines the difficulty of drawing a clear distinction between narrow and broad money, and the fact that the distinction between "deposit money corporations" and "other" depository corporations may be too blurred to be operational in some countries. |
Other financial intermediaries except insurance corporations and pension funds (S.123)
| 4.95. | This sub-sector consists of all resident corporations and quasi-corporations primarily engaged in financial intermediation except depository corporations, insurance corporations and pension funds. Financial corporations included under the present heading are those which raise funds on financial markets, but not in the form of deposits, and use them to acquire other kinds of financial assets. The types of corporations which may be included under this heading are those engaged in financing investment or capital formation; for example, investment corporations, corporations engaged in financial leasing, hire purchase corporations and other corporations engaged in the provision of personal finance or consumer credit. |
Financial auxiliaries (S.124)
| 4.96. | This sub-sector consists of all resident corporations and quasi-corporations engaged primarily in activities closely related to financial intermediation but which do not themselves perform an intermediation role. They consist of corporations such as securities brokers, loan brokers, flotation corporations, insurance brokers, etc. They also include corporations whose principal function is to guarantee, by endorsement, bills or similar instruments intended for discounting or refinancing by financial corporations, and also corporations which arrange hedging instruments such as swaps, options, and futures or other instruments which are continually being developed as a result of wide-ranging financial innovation. |
Insurance corporations and pension funds (S.125)
| 4.97. | This sub-sector consists of resident insurance corporations and quasi-corporations and autonomous pension funds. Insurance corporations consist of incorporated, mutual and other entities whose principal function is to provide life, accident, sickness, fire or other forms of insurance to individual institutional units or groups of units. |
| 4.98. | The pension funds included here are those which are constituted in such a way that they are separate institutional units from the units which create them. They are established for purposes of providing benefits on retirement for specific groups of employees. They have their own assets and liabilities and they engage in financial transactions in the market on their own account. These funds are organized, and directed, by individual private or government employers, or jointly by individual employers and their employees; and the employees and/or employers make regular contributions. They do not cover pension arrangements for the employees of private or government entities which do not include a separately organized fund nor an arrangement organized by a non-government employer in which the reserves of the fund are simply added to that employer's own reserves or invested in securities issued by that employer. |
5. The sub-sectoring of some special cases
| 4.99. | It is useful to specify the treatment of a number of special cases including corporations which lie close to the boundary between the financial and non-financial corporations sectors. |
Holding corporations
| 4.100. | As explained earlier in the chapter, holding corporations are corporations that control a group of subsidiary corporations and whose principal activity is owning and directing the group. Holding corporations are classified as financial if the preponderant type of activity of the group of corporations as a whole is financial. In the absence of suitable information about the relative sizes of the subsidiaries, a holding corporation may be classified as financial if a simple majority of the corporations it controls are financial. Similarly, financial holding corporations may be allocated to sub-sectors according to the type of financial activity mainly carried out by the group it controls. For example, if the group of corporations is mainly concerned with insurance, the holding corporation will itself be classified in the sub-sector, insurance corporations and pension funds. If there is no single type of financial activity which is clearly predominant within the group, the holding corporation should be classified in the sub-sector, other financial intermediaries except insurance corporations and pension funds. |
Regulatory bodies
| 4.101. | Bodies which regulate or supervise financial corporations may be classified as financial or non-financial according to their status. Such bodies which form part of government and cannot be treated as separate institutional units - i.e., cannot be treated as quasi-corporations - must remain in the general government sector and cannot be allocated to the financial corporate sector. When such bodies are separate institutional units they are to be included with the central bank. |
Secondary financial activities
| 4.102. | One form of financial innovation has been a substantial growth in activity of a kind traditionally carried out by, or through, financial corporations but which may also be done directly by non-financial enterprises themselves. For example, there is a tendency in some countries for producers or retailers of goods to provide consumer credit directly to their customers. Another example is the tendency for non-financial enterprises in some countries to raise funds themselves by selling their own obligations directly on the money or capital markets. However, provided that:
(a) A non-financial enterprise does not create a new institutional unit, such as a subsidiary corporation, to carry out the financial activity; and
(b) The financial activity remains secondary to the principal activity of the enterprise;
the enterprise as a whole must continue to be classified as non-financial. |
| 4.103. | The same principle applies to the sub-sectoring of financial corporations. For example, many central banks also engage in some commercial banking. However, as a single institutional unit, the central bank as a whole, including its commercial banking activities, is classified in the sub-sector "central banks". For the same reason, central bank or monetary authority-type functions carried out by agencies within the central government which are not separate institutional units from government are not allocated to the central bank sub-sector. |
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