The SNA provides not one but three concepts expressing the economic result of the activity of banks. To illustrate this point, the income statement of the Indo-
nesian banks has been translated into an SNA-based sequence of accounts table 3.
5
The first concept offered by the SNA is value added, i.e. the sector’s contribu- tion to the overall creation of wealth in the country GDP. The second is operat-
ing surplus, reflecting the result of the core business. And finally, after taking into account all other transactions, the third concept makes apparent the bottom line,
i.e. the change in net equity.
Table 3 shows that the dramatic 50 billion decline in bank equity over the 15- month period under consideration has two main origins: a sharp decrease in the
volume of the assets mainly write-downs and write-offs of customer loans,
Indonesia’s Banking Crisis: A New Perspective on 50 Billion of Losses 45
TABLE 3 SNA-Based Presentation of the Income Statement—All Banks July 1998 – September 1999
Amount Share of
billion Total Losses
1 Production Output
–8.3 16.4
FISIM
a
–10.3 20.3
FISIM—customer transactions in Rp –12.5
24.7 FISIM—all other transactions
2.2 –4.3
Non-FISIM output 2.0
–3.9
Intermediate consumption plus consumption of fixed capital –1.8
3.7 Value added—net
–10.1 20.1
2 Generation of income
Compensation of employees –0.8
1.6
Operating surplus –11.0
21.7 3
Secondary distribution of income
Taxes on income –0.3
0.5
Savings –11.2
22.2 4
Changes in volume of assets
Losses on assets –38.4
75.8 of which
Losses on customer loans –33.2
65.7
5 Revaluation
Holding losses on foreign currency denominated items –1.0
2.0
Change in net equity –50.6
100.0
a
Financial Intermediation Services Indirectly Measured. Source
: Author’s estimates see appendix.
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amounting to 38 billion, and a negative output of financial intermediation serv- ices for customer transactions i.e. taking deposits and granting loans in domes-
tic currency 12 billion. By comparison, the cost of running the banks themselves—their intermediate consumption, consumption of fixed capital, and
the compensation paid out to their staff—appears modest.
The Negative Output Aberration When each component of the banks’ income statement is reclassified into the
SNA’s sequence of accounts table 3, a massive negative output of financial intermediation services, concentrated in the customer transactions denominated
in rupiah, becomes apparent 12.5 billion over 15 months. For the banking supervisor, this is no surprise: it is just another way to reflect the fact that banks
suffered from deeply negative interest margins. But from the SNA point of view, this is a serious aberration.
6
It is easily conceivable that an inefficient economic entity will generate nega- tive value added if its intermediate consumption is larger than its output. How-
ever, how can output itself be negative? If a good has been produced, a service delivered, how can this physical productive activity be accounted for at less than
zero? The illogicality of negative bank output is confirmed by looking at the bal- ancing items. Financial intermediation services—the output of banks—are a
resource used in other sectors of the economy, as final consumption by house- holds and as intermediate consumption by corporations. Thus if the banks’ out-
put of financial services is negative, as a result, the corresponding final consumption of the households will also be negative, as well as the intermediate
consumption of financial services by the corporate sector. This has a discernible impact on GDP as a whole, since the contribution of the banks to Indonesian GDP
in 1996, the last full year before the crisis, amounted to 4.1.
As mentioned in the previous section, the concept of FISIM relied upon by the SNA splits interest flows into two components: the cost of a commodity funding
and a charge for a service financial intermediation, which includes collection, processing and distribution of the said commodity. The service is billed implicitly
by banks through normally positive interest margins namely, the difference between the higher rate charged to borrowers and the lower rate paid to deposi-
tors, whereas the price of the commodity itself the ‘reference rate’ is the same for both sellers and buyers.
When, as in Indonesia’s crisis, interest margins become deeply negative system-wide for an extended period, it appears that banks are distributing the
commodity that is the basis of their trade at a subsidised price. This subsidy can be characterised as a third component of the interest flows, in addition to the cost
of the commodity itself and that of the service. The subsidy is defined as a cur- rent transfer, and it can also be estimated.
A tentative quantification of the subsidy component incorporated in interest flows was carried out by the author. The key assumption is that the banks’ out-
put of financial intermediation services, as measured through FISIM, remained unaffected by the crisis, except for the impact of changes in the volume of loans
and deposits. This is predicated on the fact that the physical components of the delivery of financial intermediation services maintaining a network of points of
sale, processing transactions, and carrying out related administrative tasks
46 Olivier Frécaut
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remained in place for all but the closed banks. Based on historical GDP data, the normal level of FISIM was estimated and then extrapolated and adjusted for the
crisis period. The subsidy component was determined as the difference between the normal, pre-crisis level of FISIM as adjusted, and the level as measured from
the banks’ financial statements see appendix. On this basis, an enhanced ver- sion of the SNA-based presentation of the banks’ income statement was pre-
pared, in a preliminary attempt to better reflect the economic reality table 4.
With this modification output becomes positive again, by construction, and the subsidy component explaining the negative interest margin is featured as a cur-
rent transfer in the secondary distribution of income account. Table 4 indicates
Indonesia’s Banking Crisis: A New Perspective on 50 Billion of Losses 47
TABLE 4 Enhanced SNA-Based Presentation of the Income Statement—All Banks July 1998 – September 1999
Amount Share of
billion Total Losses
1 Production Output
8.7 –17.2
