The analysis of Households’ wealth with and beyond national accounts WPFS, 13 October 2008, OECD,...

The analysis of Households’ wealth with and beyond national accounts

WPFS, 13 October 2008, OECD, Paris

Denis Marionnet, Banque de France

The analysis of households' wealth with and beyond national accounts, OECD,WPFS 13 October 2008 2

Introduction (1/3)The most common use of national accounts to analyse HHs’ wealth

consists in combining: data from financial accounts:

outstanding amounts financial transactions revaluation flows (when available)

and/or data from total wealth accounts: land housing

These data allows analysing: the evolution in time of the structure of total portfolio or financial

portfolio (stocks), financial transactions and arbitrages between financial instruments, growth rates of different assets, indices on outstandings,… international comparisons,…

With various tables and graphs


Introduction (2/) Examples taken from the Banque de France Bulletin Digest No 148, April

2006:

http://www.banque-france.fr/gb/publications/telechar/bulletin/148etud1.pdf


Introduction (2/2) Examples taken from the ECB Monthly Bulletin, November 2007

http://www.ecb.int/pub/pdf/other/pp75-87_mb200711en.pdf


OverviewBrief presentation of 4 papers that propose ways to

supplement the traditional analysis of HHs’ wealth:

1. Enhancing the analysis by combining micro data from Wealth Surveys with national accounts “The composition of household wealth between 1997 and 2003”, P. Girardot and

D. Marionnet, Quarterly Selection of Articles of the Banque de France, n°12, Summer 2008

2. Enhancing the analysis by making financial intermediation transparent “La destination finale de l’épargne des ménages”, A. Rincon, Bulletin de la Banque

de France, n°167, November 2007 “The final financial investment of French households”, D. Marionnet, Irving Fisher

Committee Bulletin, n°25, Bank for International Settlements, March 2007

3. Enhancing the analysis by taking into account implicit social security and pension wealth in HHs’ assets “Implicit social security and pension wealth in households’ assets in the US and

France”, D. Durant and M. Reinsdorf, paper presented at the International Association for Research in Income and Wealth, August 2008


1. National accounts data combined with Wealth SurveysThe idea was to combine in the same article : National financial and non-financial accounts data

drawn up by INSEE and the Banque de France With a particular look at valuation effects on both real estate

and financial assets Households’ Wealth Surveys data conducted by

French NSI, INSEE, in 1998 and 2004, adjusted against these macroeconomic data This Survey looks at the changes in the distribution of household wealth

(real-estate, financial and professional) and the holding rates of the various assets. It also includes very detailed information on the factors underlying households’ investment behaviour: family and professional biographies, inheritance and donations, income and financial position, motives for holding/ not holding a certain type of asset.

The article: “The composition of household wealth between 1997 and 2003”, P. Girardot and D. Marionnet, Quarterly Selection of Articles of the Banque de France, n°12, Summer 2008 (http://www.banque-france.fr/gb/publications/telechar/bulletin/qsa/qsa12etud_6.pdf)


1. National accounts data combined with Wealth SurveysMethodological aspects:

In order to bring the scope of the financial accounts in line with that of the INSEE Wealth Survey, some assets hardly held by households were not included in the analysis.

In addition, for comparison purposes, financial assets were grouped together at the macroeconomic level in a different manner than in the usual presentation of financial accounts.

Because the survey data tend to underestimate outstanding amounts relative to national accounting data, the results presented in this article are based on the amounts adjusted against wealth outstanding amounts in the national accounts .


1. National accounts data combined with Wealth Surveys Between 1997 and 2003, gross

household wealth increased rapidly (average annual increase of 8.6% compared to 4.1% for their gross disposable income)

Mainly as a result of a boom in real-estate prices

Real estate accounted for 58% of households’ private wealth (excl. professional wealth) in 1997, compared with 66% in 2003.

Contributions to the increase of total wealth: rise in real estate assets : 78%

of which increase in the value of housing and land : 61%

of which increase in investment flows: 17%

increase in households’ financial assets: 22% of which cumulated annual investment

flows: 21%) of which increase in the value of

financial assets: 1%


1. National accounts data combined with Wealth Surveys Illustration


1. National accounts data combined with Wealth SurveysWealth inequalities increased between 1997 and 2003:The Gini index (concentration indicator calculated on the basis of private wealth) rose from 0.614 in 1997

to 0.629 in 2003. Thus, the private assets

held by the 10% least wealthy households amounted to less than EUR 2,110 in 2003, compared with EUR 1,930 in 1997, whereas those held by the 10% wealthiest households stood at over EUR 450,060 in 2003, as against EUR 296,400 in 1997.

Homeowners posted a very significant rise in their gross private wealth, while on average households holding only financial assets have benefited less.


1. National accounts data combined with Wealth Surveys

Illustration: detailed tables presenting HHs’ total, real estate or financial wealth broken down according to households’ characteristics


1. National accounts data combined with Wealth Surveys %


1. National accounts data combined with Wealth Surveys Five types of more or less diversified financial portfolios drawn up using a hierarchical ascending classification method:


1. National accounts data combined with Wealth Surveys This typology can be linked to the structure of private wealth by decile as

households are more likely to diversify their portfolio when their personal environment is favourable: stable family situation, high income, no risk of unemployment.


1. National accounts data combined with Wealth Surveys

Risky financial assets: higher holding rates in 2003 than in 1997 HHs’ financial savings increasingly channelled into risky investments: the share of their

risky assets rose from 14.0% in 1997 to 19.2% in 2003, after having peaked at 23.8% in 2000.

In a context characterised by large fluctuations in financial market prices, it is useful to define the characteristics of holders of risky financial assets and to attempt to explain their behaviour using an “all other things being equal” analysis.

The qualitative model used measures the impact of each household characteristic (age, socio-occupational category, type of household, whether the parents were holders of risky assets, income, etc.) on the probability of holding a risky financial asset. What is measured is the gap between the probability of holding a risky financial asset in the reference

situation and in the situation under review. The reference situation is that of households between 40 and 49, in an intermediate-grade occupation in the public sector, with two children and in the 5th decile of private wealth and disposable income.

Main findings: The head of the typical household holding risky assets has a high income and

considerable wealth. His parents also held risky assets; he has no children. Similar considerations seem to prevail among managers: in 2003, they hold risky

assets slightly more often than the other social categories. In general, households’ investment behaviour is carried over from one generation to

the next. Overall, households’ wealth, level of income and degree of information on financial

investments are key determinants of their propensity to hold risky assets.


2. Making financial intermediation transparent As the proportion of intermediated instruments in HHs’ financial

wealth increases in many countries, the interest in X-raying their financial investment gets increasingly relevant.

Using a method that makes financial intermediation transparent is one way of doing so, making possible to complement the use of financial accounts for the analysis of HHs’ financial wealth. Indeed, SNA93 and ESA95 nomenclatures do not always provide sufficient detail for a complete analysis of HHs’ wealth and the risks they bear.

This method was first used by M. Boutillier et al. in “Placements des ménages en Europe : le rôle des intermédiaires financiers se transforme en profondeur”, Economie et Statistiques, n°354, pp. 85-102, 2002.


2. Making financial intermediation transparent This approach consists in “looking through” financial institutions (FI) and re-

allocating to households the “final” assets that FI hold on other sectors: deposits, debt securities, quoted shares, unquoted equity,

Available, if possible, with different breakdowns in order to enhance the analysis: less or equal to 1 year / over 1 year maturity, national currency / foreign currencies, resident counterparties / non-resident counterparties, securities issued by general government / issued by other sectors, etc,…

For the re-allocation process, the structure of investment of each FI is applied to households’ assets held with FI.

As FI also invest part of their assets with other FI, this method has to be applied several times so as to completely eliminate intermediated investments from the structure applied to HHs intermediated assets.

Indeed, life insurance corporations invest in mutual fund shares and mutual funds are allowed to invest into other mutual fund shares. Therefore, after one round of ‘re-allocation’, mutual fund shares remain in HHs’ assets. Thus, the remaining amount of investment in MFS should be replaced by the structure of their investment, giving again a residual amount invested in MFS,...

This can be solved by matrix stepwise calculations: please refer to the articles


2.1 Making transparent financial assets held with all FI in 2006 In this case, 4 ‘final’ instruments:

deposits (including loans and currency), debt securities, quoted shares, unquoted equity (AF512+AF513),

Available with the following breakdowns: national currency / foreign currencies, resident counterparties / non-resident counterparties, General Government financing / private sector financing,

For the year 2006 Financial intermediaries made transparent:

Credit institutions and investment corporations (~ banks) Money market mutual funds Non-money market mutual funds Insurance Corporations

The article: “La destination finale de l’épargne des ménages”, A. Rincon, Bulletin de la Banque de France, n°167, November 2007 (http://www.banque-france.fr/fr/publications/telechar/bulletin/etu167_2.pdf)


2.1 Making transparent financial assets held with all FI in 2006 The initial structure of HHs’ financial investment (1)

At end 2006, 87% of HHs’ financial assets were placed with financial intermediaries and 13% were directly invested in final assets


2.1 Making transparent financial assets held with all FI in 2006 Financial intermediaries’ structure of investment (1)

Each FI has its own structure of investment:


2.1 Making transparent financial assets held with all FI in 2006 The final destination of HHs’ savings

A different view of HHs’ financial investment :

The transparency making process modifies significantly the structure of investment by instrument of HHs’ financial wealth



Financial intermediation contributes to international diversification of HHs’ financial investment:



HHs’ financial investment after transparency making process largely finances General Government, French or Euro area:


2.2 Making transparent financial assets held with all non-banking FI during 1994-2005 In this case, 5 ‘final’ instruments:

deposits (including loans and currency), debt securities, quoted shares, unquoted equity (AF512+AF513), and additional real-estate related financial instruments.

Available with the following breakdowns: less or equal to 1 year / over 1 year maturity, national currency / foreign currencies, resident counterparties / non-resident counterparties.

Over the period 1994-2005

The article: “The final financial investment of French households”, D. Marionnet, Irving Fisher Committee Bulletin, n°25, Bank for International Settlements, March 2007 (http://www.bis.org/ifc/publ/ifcb25o.pdf)


2.2 Making transparent financial assets held with all non-banking FI during 1994-2005

Deposits, loans and currency: predominant but declining (from 45% to 35%)

Life insurance: the most rapid and constant growth (from 19.9% to 34.4%)

Unquoted equity: significant increase (from 12.3% to 19.6%)

Mutual fund shares: significant decrease in MMFs’ shares (5.7% to 1%), slighter decrease of other MFs’ shares (from 11.1% to 8.7%)

Quoted shares: some fluctuations around 4%

Debt securities: sharp decrease in direct holding (from 6.4% to 1.5%)Source: Banque de France (quarterly f inancial accounts)

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Life insurance (F611)

Mutual fund shares (F52)

Unquoted equity (F512+F513)

Quoted shares (F511)

Debt securities (F3)

Deposits, loans and currency (F2+F4)

Initial structure of HHs' financial investments



Deposits, loans and currency: still predominant despite a decline (from 49% to 38%)

Debt securities: fluctuations around 30%

Unquoted equity: increasing though in spite of some fluctuations due to market valuation

Quoted shares: fluctuations due to stock market prices evolution

Additional real-estate related assets: residual

Source: Banque de France (quarterly f inancial accounts and IFs database)

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Deposits, loans and currency (F2+F4) Debt securities (F3)Quoted shares (F511) Unquoted equity (F512+F513)Real-estate related f inancial instruments

HHs' financial investments in ‘final’ instruments

Compared to direct holding, debt securities is the ‘final’ instrument which increases the most, followed by quoted shares while unquoted equity and deposits present a limited increase.


Debt securities Quoted shares

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Direct holding Via Mutual fund shares Via Life insurance

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Direct holding Via Mutual fund shares Via Life insurance


At Dec05, 78% of HHs’ final investment in debt securities are made via life insurance, 17% via mutual funds and 5% directly.

Direct and intermediated HHs’ holdings of

Quoted shares, as a ‘final’ instrument, are held in a fairly even manner over the period.

At Dec05, 42% are held via ICs, 30% directly and 28% via IFs.

(in % of all final holdings of the instrument) (in % of all final holdings of the instrument)

Unquoted equities are in average held directly at more than 85% over the decade


Chart 8: Share of risky assets in HHs' financial and non financial wealth

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in total w ealth


Risky assets predominant (77%) when housing assets are included.

The trend towards more risk exposure has been reinforced by the rapid rise in housing prices since 2000.

Chart 7: Share of risky assets in HHs' financial wealth

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After transparency

risky assets = assets highly sensitive to price fluctuations

French HHs tend to increasingly hold risky assets: clear upward trend (in spite of sensitivity to stock market fluctuations).



Liquidity = ability to sell relatively rapidly the underlying instruments to obtain cash. HHs’ financial asset is less liquid than that of IFs and life ICs.

Indeed, life ICs invest in marketable securities whereas HHs’ assets in life insurance may not be considered as liquid products (tax-exemption on realised capital-gains occurs after 8 years).

A different picture would appear if MFIs were made transparent as they hold an important share of non-liquid assets (loans mainly) on their asset side.

Chart 10: Share of liquid assets in households' financial wealth

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French financial accounts do not distinguish euro-denominated assets from foreign currency denominated assets for the instruments ‘other mutual fund shares’ and ‘life insurance contracts’. => currency risk exposure can only be calculated after transparency.

The share of assets denominated in foreign currencies after transparency lies a little bit above 5% before the euro changeover and around 4.5% after. => the euro changeover permitted geographical diversification while reducing the need to bear currency risk.

French HHs bear a low and relatively stable foreign currency risk.

Chart 11: Share of HHs' financial assets invested in foreign currencies

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Before transparency, the share of HHs’ wealth invested in assets involving NR counterparts is quite low reflecting the fact that HHs primarily transact with resident intermediaries and do not easily invest directly with RoW counterparts.

After transparency, geographical diversification comes from financial intermediaries and is increasing. The share of HHs’ wealth involving NR issuers or counterparts started to rise in 1998, climbing from 11.5% up to 21.9% in Dec. 2005.

This increase has been made possible by the euro, which allows geographical diversification without currency risk (ICs are constrained by regulatory rules in their capacity to incur such a risk).

Chart 12: Share of HHs' financial assets invested with NR counterparts

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3. Enlarging households’ wealth for pensions (1/5)

Data available for pension entitlements and related flows for 2005

data in bold are calculated from published data, others are estimates of the authors

DC plans & ife insurance

DB plans & book reserves

civil servants plan

social security

totalsocial security from Prost

contributors 2 635 1 586 2 459 16 638 19 097 22 058

beneficiaries 2 635 ? 1 961 11 939 13 900 11 994

1 Pension entitlement (opening BS) 70 87 950 6 565 7 672 5 980

2 actual contributions 4 4 24 136 167 139

3 taxes and govt transfers 11 11 13

4 imputed contributions incl. actualisation 1 6 34 319 360 281

5 pensions paid 2 2 33 160 197 153

6 Pension entitlement (closing BS) 74 94 975 6 872 8 015 6 260

6 = 1+2+3+4-5

discount rate = 2%

contributors of column 3 and 4 add up to the total, but not the one for columne 1 and 2 as these plans are supplementaries

Households’ pension wealth in social security and ICPF in the supplementary tables of the revised SNA: a test exercise for France


3. Enlarging households wealth for pensions (2/5)

Private pensions, data sources and estimation methodsoutstanding amounts as at en 2006, in euro million

nature sources type status in fin. accounts reserves contributions pensions

life insurance and other DC plansinsurance contracts with fiscal provisions

defined contribution (art 82 CGI) FFSA dc 2 734 190 160defined contribution (art 83 CGI) FFSA dc 20 933 1 899 1 224individual workers (Madelin) FFSA dc 11 154 1 705 188farm worker FFSA dc 2 214 205 37

specialised insurance corporationsInstitution de prévoyance estimates 4 000 ? 17Institutions de retraite supplémentaire estimates 19 600 ? 83Mutual insurance estimates 15 000 ? 63

individual pension plansPERP FFSA dc 2 350 852 0other individual plans FFSA dc 29 041 3 520 893

specialised financial corporationPERCO AFG dc mutual funds shares 761 432 0

DB plans and book reservesdefined benefit (art 39 CGI) FFSA db 30 993 2 797 1 812retirement benefit FFSA db 11 901 1 275 696companies net liabilities Mercer ? not yet recorded 25 674 ? ?

pension in employer sector (risk born by the

employer)

classification in the present study

life insurance reserves




pension in life insurance

life insurance

pension in pension funds

Insurance corporations (mainly) and PERCO (marginally) are in charge of private pension plans in France



Table A.3: Balance Sheet for US Households with Actuarial Measures of Pension and Social Security Wealth (Ratios to Net Disposable Household Income; Unincorporated Businesses Consolidated)

2006 2007 Real estate and tangible assets of unincorporated businesses 2.99 2.92 Deposits and money market shares 0.77 0.80 Bonds and mortgages, including held in mutual funds, plus miscellaneous 0.77 0.83 Equities (directly held+held in mutual funds) 0.92 0.84 Life insurance, annuities and defined contribution pension and retirement plans 0.74 0.74 Actuarial value of defined benefit pension plans 0.85 NA Actuarial value of benefits payable by the Pension Benefit Guarantee Corp 0.007 0.007 Actuarial value of future social security benefits net of future taxes 1.71 1.71 Home mortgage debt 1.08 1.09 Other liabilities 0.72 0.75 Assets of social security trust fund 0.20 0.20 Social security trust fund+taxes less benefits for future participants if positive 0.20 0.28 Financial net worth with actuarial values of pension wealth 2.24 NA

Compilation of actuarial value of pension funds in the US



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A renewed view on international comparison of households assets (in% of corrected disposable income – social security by Prost)

United states France

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social securitydefined benefit plans and boo k reserveslife insurance and other defined contribution plansequities including held in mutual fundsbonds and bills, including held in mutual fundsdeposits (incl. held in mutual funds) and MMFhousingother net assets o.w. mortgage debtloans from credit institutions


3. Enlarging households wealth for pensions (5/5)The risk on social security may be measured by the

discounted future financing gapsAssets and “value at risk” (in grey) for HHs in France (as a % of gross disposable income)

The article: “Implicit social security and pension wealth in households” assets in the US and France”, D. Durant and M. Reinsdorf, paper presented at the International Association for Research in Income and Wealth, August 2008 (http://www.iariw.org/papers/2008/durant.pdf)

The analysis of Households’ wealth with and beyond national accounts WPFS, 13 October 2008, OECD,...

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