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A Flow-of-Funds Perspective on the Financial Crisis

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Bernhard Winkler, Ad van Riet and Peter Bull (editors)
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A Flow-of-Funds
Perspective on the
Financial Crisis
Volume II: Macroeconomic Imbalances
and Risks to Financial Stability
Edited by

Bernhard Winkler
Senior Advisor, European Central Bank, Frankfurt am Main, Germany

Ad van Riet
Senior Advisor, European Central Bank, Frankfurt am Main, Germany

Peter Bull
Director General Statistics (retired), European Central Bank,
Frankfurt am Main, Germany

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Editorial matter, selection and introduction
© Bernhard Winkler, Ad van Riet and Peter Bull on
behalf of the European Central Bank 2014
Foreword and remaining chapters
© Respective authors or their affiliations 2014
Softcover reprint of the hardcover 1st edition 2014 978-1-137-35300-9

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Contents

List of Figures and Diagrams

vii

List of Tables

xii

Foreword
V´ıtor Constˆancio

xiii

Notes on the Editors

xvi

Notes on the Contributors
1

Part I
2

xvii

Introduction and Overview
Bernhard Winkler, Ad van Riet and Peter Bull

1

Flow of Funds and Macrofinancial Analysis

Tobin LIVES: Integrating Evolving Credit Market
Architecture into Flow-of-Funds Based Macro-Models
John Duca and John Muellbauer

11

3

Growing Fragilities? Balance Sheets in The Great Moderation
Richard Barwell and Oliver Burrows

4

Japan’s Flow-of-Funds Accounts: Main Characteristics and
Measures for Enhancement
Shuji Kobayakawa and Ryoichi Okuma

110

Conceptual Framework of Financial Accounts: The Case
of Slovenia

Janez Fabijan

128

5

40

Part II Flow of Funds and Macroeconomic
Imbalances in Europe
6

7

The Financial Crisis in the Light of the Euro Area Accounts:
Selected Issues
Philippe de Rougemont and Bernhard Winkler

155

The Surveillance of Macroeconomic Imbalances in the EU:
The Sectoral Perspective
Carlos Cuerpo and Alexandr Hobza

199

v

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vi Contents

8

Debt, Assets and Imbalances in the Euro Area: An
Aggregate View
Christophe Van Nieuwenhuyze

230

Part III Flow of Funds and Financial Stability
9

10

11

Towards a Systemic Risk Indicator Based on Contingent
Claim Analysis
Nuno Silva, Nuno Ribeiro, Ant´onio Antunes

263

The Role of Financial Accounts Data in Financial Stability
Analysis: The Case of Lithuania
Virgilijus Rutkauskas

286

Analysis of the Sectoral Financial Interlinkages of the
Financial Sector in Austria against the Background of the
Recent Financial Crisis
Michael Andreasch

Index

305
327

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Figures and Diagrams
Figures
2.1
2.2
2.3
2.4
2.5
2.6
2.7

2.8

3.1
3.2
3.3
3.4
3.5

3.6
3.7
3.8
3.9
3.10
3.11
3B.1
3B.2
3B.3
3.12

The financial accelerator operating in the US sub-prime
crisis
The evolving funding of US home mortgages
The components of net liquid assets as ratios to income
Housing and illiquid financial assets as ratios to income
Consumer Credit Conditions Index
The time varying m.p.c. out of housing wealth,
proportional to HLI
Estimated contributions of CCI, housing wealth/income
and net liquid assets/income to the consumption/
income/income ratio
Estimated contributions of real interest rates, permanent
income/income and illiquid financial assets/income to
the consumption/income ratio
UK annual growth and inflation outcomes over the past
150 years
The distribution of quarterly growth in UK nominal GDP
Global financial markets
UK sectoral debt/GDP

Asset prices
Balance sheet growth and financing flows in the Great
Moderation
Macro flow variables
Sectoral net lending balances
Corporate NAFL/GDP
Household NAFL/GDP
Savings, the CAD and the CFG: cumulated flows from
1998 to 2007
Securitised lending as a share of all lending to UK
households and companies
Quarterly global issuance of RMBS by nationality of risk
Investor base in UK prime RMBS by rating, as of 2004–06
Distribution of housing equity and financial assets (net
of unsecured debt and excluding pension assets) across
the household population

vii

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13
21
26
26
27
29

30

31
41
42
42
43
44
64
66
67
68
69
75
78
78
81

85


viii List of Figures and Diagrams

3.13
3.14
3.15
3.16
3.17
3.18
3.19
3.20
4.1

4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4B.1
4B.2
4B.3
5.1
5.2
5B.1
5B.2

5B.3
5.3

5.4
6.1
6.2

Buy-to-let rental yield
Loan-to-income ratios
Bank lending to corporates
Corporate investment and savings
Buyout deals
Equity buybacks

Syndicated lending by purpose of borrowing, 2004–07
The UK banking sector in the Great Moderation
Flow-of-funds accounts in Japan, the United States and
the euro area
Financial assets and liabilities of main sectors
Financial surplus or deficit of main sectors
Financial assets of financial intermediaries: Japan, euro
area and United States
Financial assets of households: Japan, euro area and
United States
Treasury securities held by main sectors: Japan and
United States
Who lends to whom among main sectors in 2011: Japan
and euro area
Amounts outstanding of securitised products
JGBs’ remaining and original maturities at the end of
fiscal year 2011
Who holds whose shares in the Japanese stock market
Financial assets of households
Personal deposits by district
Loans and bills discounted by district
Conceptual framework of statistical information system
Matrix of integrated reporting requirements
Flow of the hierarchical dimension: sector
Level of possible aggregation of the four-dimensional
value of a variable: report item ‘loans, excluding
syndicated loans’
Multidimensional space of the study of banks’ credit
activity: data warehouse model
Modular connectivity of analytics in the general ledger

with the double-entry treatment of business events via
‘settlement accounts’ and a system of matrix reporting
Leverage ratio and contribution by sector for euro area
(left) and Slovenia (right)
Euro area gross disposable income
Euro area savings

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86
86
88
89
92
94
94
96
111
112
113
114
115
117
118
120
120
122
124
125
126

136
140
141

142
142

144
147
160
161


List of Figures and Diagrams ix

6.3
6.4
6.5
6.6
6.7
6.8
6.9
6.10
6.11
6.12
6.13
6.14
6B.1
6.15
6.16

6.17
6.18
6.19
6.20
7.1
7.2
7.3
7.4
7.5
7.6
7.7
7.8
7.9
7.10
7.11

Euro area gross capital formation
Euro area net lending(+)/net borrowing(−)
Net lending(+)/net borrowing(−) by country grouping
Differentials between external surplus group and
external deficit group in saving and investment ratios
Differentials between external surplus group and
external deficit group in sectoral saving ratios
Ratio of the gross operating surplus to value
added of NFCs
Compensation of employees paid by NFCs
Relative share of banking in NFC consolidated debt in
the euro area/in the US
External financing of non-financial corporations, by
source of funds

Loans granted by non-financial corporations and their
trade credit receivable and payable
Households’ financial investment
Euro area governments’ acquisition of financial assets
Change in financial institutions’ leverage ratio
Leverage by sector
Change in net worth of euro area households
Corporate debt and assets to value added
Corporate gearing: leverage and Tobin’s Q
Capital ratios of financial institutions excluding mutual
funds
Wholesale financing by MFIs
Current account positions in the EU
Net international investment positions in selected EU
countries
Net lending/borrowing by sector: ‘surplus’ countries in
the euro area
Net lending/borrowing by sector: ‘deficit’ countries in
the euro area
Indebtedness of euro area countries (2011, sectoral
decomposition, % of GDP)
Indebtedness of euro area countries (2011, sectoral
decomposition, % of financial assets)
Household leverage dynamics, euro area
Non-financial corporations leverage dynamics, euro area
Credit flows, non-financial corporates
Credit flows, households
Change in total liabilities, financial sector

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162
164
167
169
170
172
173
175
176
177
179
180
185
186
188
189
190
192
193
201
201
203
204
209
210
212
212
214
214

215


x List of Figures and Diagrams

7.12
7.13
7.14
7.15
7.16
7.17
7.18
7.19
7.20
8.1
8.2
8.3
8.4
8.5
8.6
8.7
9.1
9.2
9.3
10.1
10.2
10.3
10.4
11.1
11.2

11.3
11.4
11.5

11.6

Loans-to-deposit ratio, financial corporates
Gross fixed capital formation, non-financial corporates
Gross savings, non-financial corporates
MFI loans for housing purposes
House price cycle
Volatile assets to total assets, non-financial corporates
Risky assets to non-risky assets, households
Euro area countries’ sectoral net financial assets in 2010
Private sector credit flows of euro area countries under
different deleveraging scenarios
Consolidated and non-consolidated gross debt of the
non-financial private sector
Gross debt (i) and net financial assets (ii) versus GDP
growth
Gross debt (i) and net financial assets (ii) versus ten-year
interest rate spread
Net financial asset position and current account balance
Financial balances: sectoral net lending (+)/net
borrowing (−) in the euro area
Financial balances: net lending (+)/net borrowing (−) of
surplus and deficit countries
Financial balances: sectoral net lending (+)/net
borrowing (−) of surplus and deficit countries
The shock transmission mechanism

Interactions between the general government
and OMFI
Probability of collapse of the financial system
Dynamics of total financial liabilities to nominal GDP in
EU27
Dynamics of some capital and financial accounts data in
EU27
Framework for maintaining financial system stability
Net financial worth of Lithuanian economy
From-whom-to-whom financing during the
financial crisis
Financial position of the financial sector
Intersectoral financial positions of the financial sector
Financial position of the financial sector in Europe
Simulated transmission of losses in equity due to the
assumption of 10 per cent of NPL by households granted
by domestic MFIs
Wholesale funding of domestic MFIs (excluding the
central bank)

215
216
217
218
218
219
219
220
223
236

241
243
245
247
249
250
276
279
282
289
290
293
297
310
314
316
317

320
321


List of Figures and Diagrams xi

Diagrams
3B.1
3.1
3.2
3B.2
3.3

3.4
3.5
11.1

A schematic of a balance sheet model
The national accounts treatment of an equity financed
cross-border takeover
The impact of household behaviour on balance sheet
growth
Stylised illustration of an off-balance sheet securitisation
programme
A commercial real estate bubble?
The implications of corporate balance sheet restructuring
The link between low household savings, recycled trade
imbalances, rising asset prices and increased leverage
Financial interlinkages in Austria

53
71
76
82
91
93
99
308


Tables
3.1
3.2

3.3
3.4
3.5
3.6
3.7
3A.1
5.1

Stylised flow matrix
Stylised balance sheet matrix
Balance sheet developments, 1994–96
Balance sheet developments, 1997–2000
Balance sheet developments, 2001–03
Balance sheet developments, 2004–07
Growth in cross-sectoral claims, 2000–07
Data quality in the ONS sectoral accounts
Net lending/borrowing as a balance between saving and
capital formation or between transactions in financial
assets and liabilities
6B.1 Simplified matrix presentation of the EAA
7.1
Indebtedness build-up and deleveraging patterns for
non-financial corporations and households
8A.1 Debt ratios, euro area
9.1
Summary of model assumptions
10.1 Financial liabilities of non-financial corporations at the
end of 2011
10.2 Financial liabilities of other monetary financial
institutions at the end of 2011

10.3 Financial liabilities of central government at the end
of 2011
10.4 Financial liabilities of households at the end of 2011
11A.1 From-whom-to-whom table of the financial accounts in
Austria for the reference period 2011

xii

47
49
56
58
60
62
97
103

148
158
211
255
268
298
299
301
302
324


Foreword

The biggest financial crisis in a lifetime has shown how important it
is to have a deep understanding of the financial balance sheets of the
main sectors of the economy and the financial flows that take place
between them. This type of information is essential for a proper understanding of the transmission of monetary and financial shocks through
the economy.
Against this background, the Directorate General Economics and
Directorate General Financial Stability of the European Central Bank
(ECB) jointly hosted a workshop on ‘A flow-of-funds perspective on
the financial crisis: lessons for macrofinancial analysis’ in Frankfurt am
Main, Germany, on 28–29 November 2011. This publication of the
workshop proceedings, complemented by a few invited contributions,
provides a comprehensive overview of a broad range of uses of the flow
of funds within the central bank community as well as in the academic
field. The flow-of-funds perspective on the financial crisis is presented
in two volumes. The first volume on ‘Money, credit and sectoral balance
sheets’ focuses on the role of flow-of-funds analysis in complementing
traditional monetary analysis centred on bank balance sheets and examines the portfolio and financing behaviour of non-financial sectors. The
second, companion volume on ‘Macroeconomic imbalances and risks to
financial stability’ explores the use of flow of funds for macrofinancial
analysis.
Flow-of-funds analysis, with its focus on financial flows, financial
intermediation and sectoral balance sheets, has had a good crisis, if
policy pertinence is the key criterion, unlike most of conventional
macroeconomics. While not a model, the flow of funds provides a
coherent framework to map out the successive and interrelated stages
of the banking, private debt, sovereign debt ‘stock’ and the associated
‘flow’ rebalancing crisis that policy-makers have been confronting since
the turn of the credit cycle in 2007. A cross-sectoral perspective, a key
role for financial intermediation, sectoral balance sheets and financial
quantities, had been notably absent from the dominant macroeconomic paradigm pursuing intertemporal optimisation in the allocation

of savings and investment by a representative agent in the presence
of complete and efficient markets. Such a stylised world is obviously
not very relevant for the challenges we are confronting in repairing
xiii


xiv Foreword

the financial system globally and completing the institutional fabric
underpinning monetary union in Europe (Constˆancio, 2012).
Following an overview by the editors, the present volume II of the
workshop proceedings is sub-divided into three parts, each of which
covers contributions from experts in the field. Part I on ‘Flow of Funds
and Macrofinancial Analysis’ illustrates the broad range of interlinkages between the financial side and the real side of the economy and
highlights the role of balance sheet variables and sectoral balance sheet
positions in the evolution of the financial crisis. The chapters provide a
range of examples of flow-of-funds analysis applied to the United States,
the United Kingdom, Japan and Slovenia.
The use of financial accounts in the context of balance sheet adjustment and sectoral rebalancing in the European context is taken up in
Part II on ‘Flow of Funds and Macroeconomic Imbalances in Europe’.
This part reflects on the use of financial accounts data for diagnosing
the evolution of the financial balance sheet and macroeconomic rebalancing in the euro area, in particular, based on euro area aggregate data
as well as cross-country evidence. Part III, entitled ‘Flow of Funds and
Financial Stability’, brings together contributions on the use of financial accounts for financial stability purposes. They focus on how to trace
cross-sectoral linkages that underpin the analysis of systemic risks.
What inspiration can policy-makers draw from flow-of-funds analysis? Can it provide some useful pointers on the challenges we have
been confronting during the evolution of the crisis in its successive
phases, with respect to crisis prevention, crisis management and crisis resolution? The flow-of-funds data, first of all, provide important
insights into the origins of the crisis, the building up of financial imbalances and vulnerabilities both globally and inside the euro area. They
also provide a rough map on evolving financial structures and changing patterns in financial intermediation. For crisis management – and

identification of financial stability risks, in particular – they further provide insights into cross-sectoral interdependence, which is relevant for
contagion and the propagation of shocks across different sectors of the
economy, via balance sheet interlinkages and risk transfer along intermediation chains (ECB, 2009). On crisis resolution, the flow-of-funds
map of assets and liabilities helps us think about orderly restructuring
of balance sheets and sustainable stock–flow dynamics of debt and savings flows. They also support reflections on burden sharing between
creditors and debtors, rebalancing between surplus and deficit sectors,
and risk transfer between private and public sectors. These are difficult
questions of the type that policy-makers have to confront every day.


Foreword xv

The contributions in this volume (and those in the companion volume I) may not necessarily answer such questions in a clear-cut way.
However, the flow of funds at least offers a framework in which asking
such questions is possible and meaningful. It is useful to recall the seminal work 80 years ago by economist-statistician Irving Fisher (1933) on
debt dynamics, based on a careful and systematic tabulation of balance
sheet data, as an early antecedent and complement to Copeland’s (1952)
‘moneyflows’ as the precursor to comprehensive flow-of-funds accounts.
Such ‘bottom-up’ economics would seem to provide a healthy antidote
to the self-referential ‘top-down’ modelling that has been prevalent in
recent decades.
V´ıtor Constˆancio
European Central Bank

References
Constˆancio, V. (2012) Completing and repairing EMU, Speech at the Hyman
P. Minsky Conference, Berlin, 26 November.
Copeland, M. (1952) A Study of Moneyflows in the United States (New York: NBER).
European Central Bank (2009) Financial Stability Review, Special feature C on ‘Balance sheet contagion and the transmission of risks in the euro area financial
system’, Frankfurt am Main, June.

Fisher, I. (1933) ‘The debt deflation theory of great depressions’, Econometrica, 1,
337–57.


Notes on the Editors
Bernhard Winkler worked at the Deutsche Bundesbank before joining the European Central Bank (ECB) in July 1998 as Economist in the
Directorate-General Research. Subsequently he held positions as Senior
Economist in the Monetary Policy Strategy Division and in the Counsel to the Executive Board as Adviser to Prof. Otmar Issing. Since May
2005 he is Senior Adviser in the Directorate Monetary Policy responsible,
inter alia, for flow-of-funds analysis at the ECB and the co-ordination of
financial projections as part of the quarterly macroeconomic projections
exercises. He has published on issues related to monetary and fiscal policy in a monetary union, on monetary policy communication and on
the Stability and Growth Pact as well as on cross-checking and the flow
of funds.
Ad van Riet joined De Nederlandsche Bank as Economist in 1987
and took up a (Senior) Economist position at the European Monetary
Institute in 1994. He joined the European Central Bank as Principal
Economist when it was established in 1998 and was then in charge
of the Monetary Policy Stance Unit. He became Head of the EU Countries Division in 2000 and Head of the Fiscal Policies Division in 2007.
Since September 2011 he is Senior Adviser in the Directorate General
Economics and Secretary of the ECB Occasional Paper Series. He has
published on European money demand, fiscal policy and structural
reforms.
Peter Bull joined the Bank of England in 1964. After some years in
the economics, international and foreign exchange areas, he moved to
statistics, latterly as Head of the Statistics Department in 1987–94. In
1994 he joined the European Monetary Institute in Frankfurt as Head
of Statistics, and remained as Director General Statistics when the European Central Bank was established in 1998. After retirement in autumn
2002 he has continued to work on related matters in the ECB and elsewhere. His more recent publications are in the field of national accounts
and statistics.

xvi


Notes on the Contributors
Michael Andreasch is Senior Expert working at the Oesterreichische
Nationalbank since 1981. Initially he worked in the area of balance
of payments statistics, focusing on the cross-border financial activities of the Austrian economy, and since 2000 in the area of financial
accounts. His main research interests are the financial interlinkage of
economic sectors and their relationship to the real economy, as well as
the integration of micro-data in macroeconomic aggregates mainly for
households.
´
Antonio
Antunes holds a BSc in Electrical Engineering from Instituto
Superior T´ecnico, Lisbon, and a PhD in Economics from Universidade
Nova de Lisboa. At Banco de Portugal, he first worked in the Financial
Stability Division, where he developed econometric models for predicting default rates in the corporate sector. He is currently Head of the
Monetary Policy Division. He has done research in macroeconomics and
empirical economics.
Richard Barwell is Senior European Economist for Royal Bank of
Scotland. He has published a book on macroprudential policy with Palgrave Macmillan. Before joining RBS he worked for the Bank of England
for the best part of a decade in both the Monetary Analysis and Financial Stability Directorates. Richard has a PhD in Labour Economics from
the London School of Economics.
Oliver Burrows is Senior Manager in the Financial Stability Directorate
of the Bank of England, where he has spent nine years in two separate spells. He works on assessing risks to UK financial stability for
the Bank’s Financial Policy Committee, with a particular focus on risks
related to the non-financial company and household sectors and to the
flow of funds within the UK financial system. He has previously worked
at a London-based macroeconomic hedge fund. Oliver has an MSc in

Economics from University College London.
Carlos Cuerpo joined the Spanish Corps of State Economists in 2008
and worked for a three-year period as Economic Analyst in the Spanish
Ministry of Economy and Competitiveness. In 2011 he started a secondment at the European Commission as a National Expert within the
Directorate General of Economic and Financial Affairs, carrying out
xvii


xviii Notes on the Contributors

responsibilities related to the Macroeconomic Imbalances Procedure,
notably, the analysis of real estate markets and private sector balance
sheets. He holds a MSc in Economic Analysis from the London School of
Economics. He has also worked as a lecturer, teaching courses at undergraduate and postgraduate levels in various institutions, including LSE
and the George Washington University, among others.
Philippe de Rougemont is an economist on secondment from the
Banque de France to the Directorate General Economics of the European Central Bank with specialisation in sectoral accounts, conjunctural analysis (notably inventory movements) and corporate behaviour.
Previously, he was seconded to Eurostat (fiscal accounts) and the International Monetary Fund, and before that to the Directorate General
Statistics of the ECB. He started his career at the Banque de France in
the Business Survey Department, and was then in the Flow-of-Funds
Unit.
John Duca is Associate Director of Research at the Federal Reserve Bank
of Dallas, where he supervises and conducts research in macroeconomics and finance. Earlier, he was Economist at the Federal Reserve
Board from 1986 to 1991 and was a part-time Lecturer at the University
of Maryland. He currently teaches Money and Banking as an Adjunct
Professor at Southern Methodist University. He received a PhD in Economics from Princeton and has published articles on macroeconomics,
money, credit, housing and financial crises.
Janez Fabijan is Vice Governor–Deputy Governor of the Bank of
Slovenia. He was educated as Economist and Advisor in Accounting and
holds a master’s degree in Informatics–Decision Support Systems. He

has a career in central banking in Slovenia, running projects in areas
such as implementing ERP systems, payment system reform, and reform
of the statistical reporting system for financial institutions. His main
research areas include financial accounts, monetary policy transmission,
decision support systems for supervisory functions, and banking risk
management.
Alexandr Hobza is an economist in the Directorate General for Economic and Financial Affairs of the European Commission. Prior to
joining the European Commission, he worked as a Research Fellow
at the Centre for European Policy Studies in Brussels. He received
his PhD from the University of Economics in Prague and he has a
master’s degree in Quantitative Economics from the Universit´e Libre
de Bruxelles. His research interests are macroeconomic imbalances,


Notes on the Contributors xix

international financial flows, impact and political economy of structural
reforms, and coordination of economic policies in the EU.
Shuji Kobayakawa is Associate Director-General of the Monetary Affairs
Department, which plans and formulates monetary policy at the Bank of
Japan. After having worked for the OECD as Economist covering structural policy analysis and country analysis, he became a Chief Editor of
the Bank of Japan’s Financial System Report. He then headed the Bank’s
Statistics Division. He has a DPhil in Economics from the University of
Oxford.
John Muellbauer is Senior Research Fellow of Nuffield College, Professor of Economics and Senior Fellow of the Institute for New Economic
Thinking at the Oxford Martin School, Oxford University. He is a fellow of the British Academy, of the Econometric Society and of the
European Economic Association and a CEPR Research Fellow. Before
coming to Nuffield College in 1981, he was Professor of Economics
at Birkbeck College, London, and Lecturer at Warwick University. He
obtained his doctorate from the University of California. Recent work

includes interactions between finance and the real economy focused
on the household sector, inflation forecasting and exchange rate passthrough, mortgage arrears and possessions in the UK, the role of housing
in the financial crisis, drivers of US house prices, and the implications
of the long-term shift in US credit market architecture.
Ryoichi Okuma is an economist at the Research and Statistics Department of the Bank of Japan. After having engaged in the compilation and
improvement of Japan’s flow-of-funds accounts in the Statistics Division, he is now responsible for the assessment and projection of the
Japanese economy in the Research Division.
Nuno Ribeiro has been working in the Economic Research Department of the Banco de Portugal on capital markets, financial system and
financial stability issues for the last 18 years. He has been involved in
international organisations’ working groups and task forces, as well as
in policy discussions, concerning a variety of aspects of the financial sector. He has been the Head of the Financial Stability Division since 2003.
He graduated in Economics from the Faculty of Economics of Universidade Nova de Lisboa and completed academic requirements for a PhD
in the same faculty.
Virgilijus Rutkauskas first worked in insurance and consultancy companies, before joining the Financial Stability Division at the Bank of

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xx Notes on the Contributors

Lithuania in late 2007. His main areas of interest are the interaction
between economy and finance, assessment and analysis of the financial
sector, households, corporates and other economic agents, estimation of
credit and deposit dynamics and their interest rates, and measurement
of economic power.
Nuno Silva is an economist at the Economic Research Department of
Banco de Portugal since 2009, working in the Monetary Policy Division.
Previously, he worked in the Financial Stability Division, where he was
involved in stress test exercises on the Portuguese banking system and
credit risk monitoring. He has a Licenciatura in Economics from Universidade Nova de Lisboa and a MSc in Operational Research and Finance

from the University of Southampton. His research focuses on the
application of contingent claim analysis to systemic risk measurement.
Christophe Van Nieuwenhuyze is an economist at the Research
Department of the National Bank of Belgium since 2002. At the NBB,
he started his career as a member of the Business Cycle and Forecasting
Unit, with a deep interest in the quantitative modelling of short-term
GDP growth. Since 2010 he has been active in the Financial Accounts
Team, where his research interests cover the domain of the flow of funds
and balance of payments, with particular attention to assessing financial positions, international financial integration, European Monetary
Union and macroprudential policy.


1

Introduction and Overview∗
Bernhard Winkler, Ad van Riet and Peter Bull

1.1 Introduction
Flow-of-funds accounts are a component of the national accounts
system reporting the financial transactions and balance sheets of the
economy, classified by sectors and financial instruments. As described
by Winkler (2010), the financial accounts track funds as they move from
sectors, such as households, that serve as sources of funds (net lenders),
through intermediaries (financial corporations) or financial markets to
sectors that use the funds to acquire physical and financial assets (nonfinancial corporations, government, rest of the world). These flows,
together with valuation changes, result in changes to sectoral (net) asset
positions and the composition of the corresponding balance sheets.
The financial crisis has driven home the importance of financial flows
and balance sheets for an understanding of real–financial linkages, and
it has spurred a renewed academic and policy interest in flow-of-funds

analysis. During the crisis, policy-makers could rely neither on received
wisdom and assumptions on liquid and efficient markets underlying the
functioning of the financial system, nor on standard macroeconomic
workhorse models to give ready answers on the origins, transmission
channels and policy implications of the financial crisis. In such circumstances flow-of-funds data could be seen, at least, to provide a promising
framework to articulate relevant questions to be asked when confronting
new challenges for monetary policy and financial stability, such as
related to debt and asset market dynamics, leverage cycles, financial
∗ c The authors on behalf of the European Central Bank (ECB). This chapter should

not be reported as representing the views of the ECB. The views expressed are
those of the authors and do not necessarily reflect those of the ECB.
1


2 Winkler et al.

intermediation chains and feedback loops between the financial system
and the real economy (see ECB, 2012).
The financial crisis has, hence, underlined the relevance of flow-offunds analysis from a policy perspective, for example for an understanding of factors behind the building up of macrofinancial imbalances and
the accumulation of balance sheet vulnerabilities (see ECB, 2011). In this
respect, the flow of funds provides a nexus between the ‘flow’ dynamics of money, credit and other financial intermediation flows and the
implications for ‘stock’ dynamics in terms of sectoral balance sheets
and the evolution of assets and liabilities. On this basis one can, for
example, construct early warning indicators for financial boom-bust
cycles. In particular, private and public sector debt indicators based
on financial accounts data have become an important element in the
enhanced surveillance of macroeconomic imbalances (in both the EU
and the G20 context). Moreover, flow-of-funds approaches can be used
for macroprudential risk analysis.

Central banks have traditionally taken a close interest in the working
of the financial system and have for a long time invested in compiling
financial accounts, most notably at the US Federal Reserve, but also at
the Bank of Japan and at many European national central banks. For a
comprehensive compilation of key academic papers and applications see
Dawson (ed.) (1996). The set of studies included in De Bonis and Pozzolo
(eds) (2012) is also highly recommended. Flow-of-funds analysis for the
euro area is a relatively recent endeavour. For the European Central Bank
it offers a natural platform for cross-checking and ‘bridging’ analysis
under the economic and monetary ‘pillars’, that are a key feature of its
monetary policy strategy (see Winkler, 2010).
The remainder of this introduction and overview summarises the contributions to the workshop proceedings collected in the present volume,
sub-divided into three thematic parts, each covering a specific field of
interest.

1.2 Part I: Flow of funds and macrofinancial
analysis
As pointed out by Winkler (2010), the flow-of-funds accounts, by themselves, are not informative about the underlying drivers of financial processes, nor can they be used to forecast the implications of flow-of-funds
developments for economic dynamics and vice versa. To this end, empirical tools for flow-of-funds analysis have to be developed. The most commonly adopted modelling approach for flow-of-funds analysis involves


Introduction and Overview 3

the use of empirical macroeconomic portfolio balance models in the
spirit of James Tobin (1969). Several contributions in Part I, entitled
‘Flow of Funds and Macrofinancial Analysis’, also identify a continued
need to develop modelling tools based on the flow-of-funds framework.
This is highlighted in particular in the contribution by John Duca (Federal Reserve Bank of Dallas and Southern Methodist University) and John
Muellbauer (Nuffield College and Institute for New Economic Thinking
at the Oxford Martin School). They explicitly go back to the portfolio

balance view of Tobin and his Yale colleagues, in which portfolio choice
across a wider range of assets matters for saving behaviour and real–
financial linkages. The authors illustrate the relevance of flow-of-funds
balance sheet variables for household behaviour by examining the crucial role of credit market liberalization for consumption outcomes in
the case of the United States. For this purpose, they augment a life-cycle
consumption function with credit constraints and disaggregated wealth
effects that can vary over time depending on financial innovations. A
key element in this respect is the introduction of shifts in credit availability, both in unsecured household credit and in mortgage credit, and
the consequent induced behavioural shifts. They then introduce this
consumption function into a larger system which endogenises key portfolio choices made by households, such as changes in mortgage debt,
mortgage refinancing, housing equity withdrawal or the acquisition of
residential housing. The authors conclude with a plea to strategically
integrate flow-of-funds accounts into tractable macroeconometric models that better incorporate real and financial sector linkages and are
useful for assessing financial stability.
Richard Barwell (Bank of England at the time of writing) and Oliver
Burrows (Bank of England) construct a flow-of-funds framework for the
United Kingdom to analyse financial flows, balance sheets and asset
prices and the building up of financial fragilities during the ‘Great Moderation’. Their analysis of the DotCom bubble around the turn of the
millennium and of the great credit expansion shows that there were
many linkages between the balance sheet developments that led to
financial instability. The rapid expansion of household debt during the
credit and housing boom found its counterpart in increasingly stretched
bank balance sheets. The non-financial corporate sector realised balance sheet growth considerably in excess of income growth by rapid
borrowing from banks. The rise in corporate debt was used to finance
acquisitions of commercial property and to increase the return on
equity. The UK banking sector became highly exposed to the value of
the assets and income streams of households and corporates, while also


4 Winkler et al.

expanding its non-UK activities. The authors conclude that the flow
of funds offers a useful framework to spot the build-up of financial
fragilities in an economy.
Shuji Kobayakawa and Ryoichi Okuma (both Bank of Japan) start
from the observation that the financial systems in Japan and the euro
area have much in common, both being bank-based, in contrast to
the United States, where banking assets are much smaller as a ratio
to GDP. An important difference is, however, that Japanese depository corporations raise funds primarily through deposits by households (through retail funding),while their counterparts in the euro area
depend largely on deposits from each other (through wholesale funding). The authors also analyse the network of lending and borrowing
relationships between different sectors using the detailed flow-of-funds
accounts for Japan. This shows that the funds raised by the general government have increased with each sector contributing. Loans
from depository corporations to private non-financial corporations and
households are the principal channels of funding for the private sector. The authors conclude with an overview of the further development
and enhancement of the flow-of-funds accounts for Japan, also stressing
their importance for assessing the stability of the financial system.
Janez Fabijan (Banka Slovenije) calls for developing a comprehensive
and consistent statistical information system of quarterly financial and
broader sectoral accounts in each euro-area country. He refers to Slovenia’s experience with building up such a coherent statistical information
and decision support system for policy purposes. Given the natural role
of the financial sector as an intermediator of funds, granular data for
this core sector are of vital importance. The availability of such more
granular data in Slovenia allowed a closer analysis of bank deleveraging
after 2008. The core of the concept used in Slovenia is a matrix reporting
system for financial intermediaries, which also forces them to redesign
their information systems for stronger risk management in the future.

1.3 Part II: Flow of funds and macroeconomic
imbalances in Europe
The second part of this volume, entitled ‘Flow of funds and macroeconomic imbalances in Europe’, brings together work on sectoral balance

sheets and rebalancing in the wake of the crisis for the euro area as well
as individual European Union (EU) economies.
Philippe De Rougemont and Bernhard Winkler (both European Central Bank) offer an overview of ECB analysis on selected features of
the financial crisis in the euro area, in part drawing on ECB (2011).