2.2. Guide to the Flow of Funds Accounts, Volume 1

Table F.100 Households and Nonprofit Organizations

The households and nonprofit organizations sector consists of individual households (including farm households) and nonprofit organizations such as charitable organizations, private foundations, schools, churches, labor unions, and hospitals. Nonprofits account for about 6 percent of the sector’s total financial assets, according to recent estimates, but they own a larger share of some of the individual financial instruments held by the sector. (The sector is often referred to as the ‘‘household’’ sector, but nonprofit organizations are included because data for them are not available separately except for the years 1987 through 1996. Supplementary tables F.100.a and L.100.a in the quarterly publications of the flow of funds accounts present the latest available annual data for nonprofits.) At the end of 1997, the sector had total financial assets of more than $27 trillion, about 40 percent of the financial assets of all sectors combined. For most categories of financial assets and liabilities, the values for the household sector are calculated as residuals. That is, amounts held or owed by the other sectors are subtracted from known totals, and the remainders are assumed to be the amounts held or owed by the household sector. For example, the amounts of Treasury securities held by all other sectors, obtained from asset data reported by the companies or institutions themselves, are subtracted from total Treasury securities outstanding, obtained from the Monthly Treasury Statement of Receipts and Outlays of the United States Government, and the balance is assigned to the household sector.

Series calculated in this manner are so identified in the table and carry a reference to the instrument table (for example, table F.209) that lists the sector included in the calculation. For a few series, such as consumer credit, data for the sector are available directly and are not calculated as residuals. When microeconomic data are available (such as the data available from the Federal Reserve Board’s Survey of Consumer Finances), asset and liability totals for the sector are reviewed in light of that data, and the flow of funds series are sometimes adjusted to take into account the additional information. In contrast to the practice in some countries, the household sector statement in the U.S. flow of funds accounts does not include the transactions of unincorporated businesses; those are shown separately in the tables for the nonfarm noncorporate and farm business sectors (tables F.103 and F.104). (The table for the personal sector, F.9, does present such a consolidation of the household sector with unincorporated business.).

Table F.101 Nonfinancial Business

Nonfinancial business in the flow of funds accounts comprises three sectors: nonfarm nonfinancial corporate business, nonfarm noncorporate business, and farm business. Each of these sectors is described in the introduction to its separate table. This table shows the details of gross saving and gross investment for the three sectors combined. Income before taxes is shown (line 1) for information purposes only; it does not enter directly into the calculation of other items that appear in the table. For the two unincorporated sectors (nonfarm noncorporate business and farm business), proprietors’ net investment is calculated as a residual, so neither sector has a discrepancy; therefore, the discrepancy for nonfinancial business equals the discrepancy for the nonfarm nonfinancial corporate business sector.

Table F.102 Nonfarm Nonfinancial Corporate Business

The nonfarm nonfinancial corporate business sector comprises all private domestic corporations except corporate farms, which are part of the farm business sector, and financial institutions, which are shown in other tables; it includes holding companies (through consolidated reporting), S–corporations, and real estate management corporations. The sector is the largest component of the total nonfinancial business sector, alone accounting for roughly half of all net private investment in the U.S. economy; together, entities that make up the sector had well over $3 trillion of credit market debt outstanding at the end of 1997 in the form of bonds, mortgages, commercial paper, and loans from banks and nonblank financial intermediaries.

This table covers only the domestic activities of nonfarm nonfinancial corporations; it does not include the financial transactions of foreign subsidiaries of U.S. corporations. Therefore, earnings from the operations of foreign subsidiaries and foreign branches of U.S. corporations are reflected only in profit elements—either as earnings retained abroad or as dividends received.

In symmetric fashion, the results of the operations of foreign corporations in the U.S. are included in the table, with earnings retained in the U.S. and dividends paid to U.S. stockholders being offset against the items’ respective counterparts for U.S. corporations. Also, in a corollary way, changes in the foreign capital account positions are included in the table, with changes in the financial assets of the sector shown as foreign direct investment abroad and changes in the liabilities of the sector shown as foreign direct investment in the U.S. Information on the nonfarm nonfinancial corporate business sector is obtained from a variety of sources. Data on investment and depreciation, as well as on corporate profits and other elements of cash flow, are taken from the national income and product accounts published in the Survey of Current Business. Information on credit market debt is obtained from securities markets reports, industry trade association releases, commercial bank reports of condition, and finance company surveys. An important source of information for all assets and for non-credit market liabilities, such as trade payables, is the Quarterly Financial Report for Manufacturing, Mining, and Trade Corporations, published by the Bureau of the Census. In addition, the sector’s assets and liabilities are benchmarked to annual data for corporations that appear in the Statistics of Income Corporation Source Book, published by the Internal Revenue Service.

Table F.109 Commercial Banking

The commercial banking sector is made up of four banking groups: U.S.-chartered commercial banks (table F.110), foreign banking offices in the U.S. (table F.111), bank holding companies (table F.112), and banks in U.S.-affiliated areas (table F.113). Each group is described in the introduction to its table. This table is a combined statement for the four groups, whereas the tables for the individual banking sectors are consolidated, with interbank assets netted against interbank liabilities. Credit market funds advanced by the commercial banking sector, shown in line 43, serves as an indicator of the amount of funds supplied by the sector to the domestic nonfi- nancial sectors. Note that credit market funds advanced differs from bank credit, which is shown on line 7, in that it excludes security credit, corporate equities, and mutual fund shares and includes customers’ liability on acceptances.

Table F.110 U.S.-Chartered Commercial Banks

Commercial banks are financial intermediaries that raise funds through demand and time deposits as well as from other sources, such as federal funds purchases and security repurchase agreements, funds from parent companies, and borrowing from other lending institutions (for example, the Federal Home Loan Banks); they use the funds to make loans, primarily to businesses and individuals, and to invest in securities. U.S.-chartered commercial banks are established under the regulations of a U.S. chartering authority—either the U.S. Comptroller of the Currency (for national banks) or the banking authority of one of the fifty states or the District of Columbia (for state-chartered banks). The deposit liabilities of U.S.-chartered commercial banks are components of various monetary aggregates (measures of the U.S. money supply published by the Federal Reserve System). Because of the importance of banks in the U.S. financial system, their activities are closely monitored by federal regulatory agencies. In recent years, the commercial banking industry has undergone significant consolidation as a result of both the gradual removal of prohibitions on interstate banking arrangements and the growing similarity of other financial institutions to commercial banks; at the end of 1998 there were approximately 9,000 U.S.-chartered commercial banks, down from a peak of 14,407 in 1980. Data for U.S.-chartered commercial banks shown in this table are taken directly from quarterly reports of condition submitted to regulatory authorities and published by the Federal Financial Institutions Examinations Council. The sector’s assets and liabilities are reported on a consolidated basis; that is, intrasector deposit and loan balances are netted out. Foreign branches and foreign subsidiaries of U.S.-chartered commercial banks are not included in the consolidation; their assets and liabilities are included in the rest of the world sector. Credit market funds advanced, shown in line 49, is a measure of funds supplied by the sector to domestic nonfinancial sectors. The measure differs from bank credit, which is shown in line 5, in that credit market funds advanced excludes security credit, corporate equities, and mutual fund shares and includes customers’ liability on acceptances.

Table F.111 Foreign Banking Offices in the U.S.

The foreign banking offices sector comprises four groups of banking institutions that are foreign-related or that engage exclusively in international business: (1) branches and agencies of foreign banks that are not incorporated separately from their parents, are located in the U.S., and engage in U.S. banking business (2) Edge Act and agreement corporations, which are U.S. subsidiaries of either domestic or foreign banks and are established by such banks to engage in international business; (3) New York State investment companies, which are banking offices owned by one or more foreign banks and are chartered by the State of New York (included in the sector through 1996:Q2); and (4) American Express Bank, the international banking subsidiary of American Express Corporation. Domestically chartered U.S. banks owned in whole or part by foreign banks are part of the U.S.- chartered commercial banks sector rather than the foreign banking offices sector. Data for the sector are taken from quarterly reports of condition filed by the institutions: Branches and agencies of foreign banks and American Express Bank file form FFIEC 002, Report of Assets and Liabilities of U.S. Branches and Agencies of Foreign Banks; Edge Act and agreement corporations file form FR 2886b, Consolidated Report of Condition and Income for Edge and Agreement Corporations; and New York State investment companies formerly filed form FR 2886a, Quarterly Report of Condition for a New York State Investment Company and Its Domestic Subsidiaries. The Monetary Control Act of 1980 requires that foreign banking offices, along with other depository institutions, hold required reserves equal to a percentage of their deposit liabilities; the reserves must be held in the form of deposits with Federal Reserve Banks or vault cash. Since that requirement took effect, the institutions have also been eligible to borrow at the Federal Reserve discount window.

Table F.112 Bank Holding Companies

Bank holding companies (BHCs) are parent companies of commercial banks. The bank holding company sector in the flow of funds accounts consists of those bank holding companies that submit reports of condition on the Federal Reserve’s Form FR Y-9LP, Parent Company Only Financial Statements for Large Bank Holding Companies. The instructions accompanying the form state that the report is to be filed by ‘‘bank holding companies with total consolidated assets of $150 million or more, or multibank holding companies with debt outstanding to the general public or that are engaged in a nonbank activity (either directly or indirectly) involving financial leverage or engaged in credit extending activities, regardless of size.’’ The major assets of bank holding companies, other than small amounts of loans and securities, are equity and non-equity investments

in their subsidiaries; at the end of 1997, BHCs’ net investment in their bank subsidiaries was just under $414 billion, and their net investment in their nonblank subsidiaries—savings institutions, finance companies, mortgage companies, and security brokers and dealers—was about $90 billion. In this table, interbank liabilities of the sector are shown net of interbank assets. The main source of funding for the sector is the issuance of corporate bonds and commercial paper.

Table F.113 Banks in U.S.-Affiliated Areas

This sector is made up of commercial banks chartered in U.S.-affiliated areas and branches of U.S.-chartered commercial banks operating in these areas. U.S.-affiliated areas with local populations are the U.S. territories of American Samoa, Guam, and the U.S. Virgin Islands; the Commonwealth of the Northern Mariana Islands and the Commonwealth of Puerto Rico; two freely associated states—the Republic of the Marshall Islands and the Federated States of Micronesia; and the Trust Territory of the Pacific Islands (Palau). U.S.- affiliated areas that are uninhabited or that have only a military presence are Baker Island, Howland Island, Jarvis Island, Johnston Atoll, Kingman Reef, Midway Island, Navassa Island, Palmyra, and Wake Atoll. Banks in U.S.-affiliated areas are considered part of the U.S. in balance of payments statistics published by the Bureau of Economic Analysis (BEA), but are considered foreign entities in the U.S. national income and product accounts published by BEA and in financial statistics published by the Federal Reserve Board. Because these banks are treated as foreign entities by the Board, their deposit liabilities are not included in the U.S. monetary aggregates (measures of the national money supply published by the Federal Reserve System), and the institutions are not part of the U.S.-chartered commercial banks sector or the foreign banking offices sector in the flow of funds accounts. Data on the sector come from reports filed with federal regulatory authorities. Commercial banks chartered in the U.S.-affiliated areas submit quarterly reports of condition on the same forms used by domestically chartered banks (FFIEC 031, FFIEC 032, FFIEC 033, or FFIEC 034, depending on the size of the institution and its ownership of foreign offices); branches of U.S. banks located in these areas submit the annual Foreign Branch Report of Condition (FFIEC 030). At the end of 1997, the sector comprised fourteen banks chartered in other areas and twenty-six branches of U.S. banks.

Table F.114 Savings Institutions

Savings institutions are financial intermediaries that raise funds mainly through time and checkable deposits and use the funds to provide loans, principally home mortgages, and to invest in securities. The savings institutions

sector in the flow of funds accounts is made up of savings and loan associations, mutual savings banks, federal savings banks, and Massachusetts cooperative banks. In function, savings institutions are similar to commercial banks, and in recent years the distinction between commercial banks and savings institutions has become blurred as the financial services industry has become more homogeneous. In the past, savings institutions were legally required to engage primarily in home mortgage finance, and even though they now may hold other types of assets, their traditional emphasis continues to be a major difference between savings institutions and commercial banks. Mortgages make up close to 70 percent of the credit market instruments that savings institutions hold. Many savings institutions, particularly savings and loan associations, encountered financial difficulties beginning in the late 1980s. The federal government undertook a largescale bailout of the industry, and many of the institutions disappeared through merger or failure. The industry is now considerably smaller than it had been; the sector’s total financial assets were $1.029 billion at the end of 1997, down from a peak of $1.640 billion at the end of 1988. Information about savings institutions comes from two main sources: Institutions that are regulated by the Federal Deposit Insurance Corporation (FDIC) file quarterly reports of condition similar to those submitted by commercial banks, and institutions regulated by the Office of Thrift Supervision (OTS) submit quarterly Thrift Financial Reports. A total of 564 institutions, including 81 Massachusetts cooperative banks, report to the FDIC; more than 1,200 institutions report to the OTS. The deposit liabilities of the institutions are components of the monetary aggregates (measures of the U.S. money supply published by the Federal Reserve System).

Table F.115 Credit Unions

Credit unions are federally chartered or statechartered savings institutions open to members who share a so-called common bond, such as employment, geographic proximity, or organization membership. (Legislation enacted in 1998 permitted some broadening of this eligibility criterion.) There are about 12,000 credit unions in the U.S., offering primarily consumer-oriented financial services; most are fairly small institutions, although a few are very large and operate in the national financial arena. Credit union deposit liabilities are included in the monetary aggregates (measures of the national money supply published by the Federal Reserve System), and deposits in federal credit unions and federally insured state-chartered credit unions are insured by the National Credit Union Share Insurance Fund (NCUSIF). The credit union industry has a hierarchical structure. Local credit unions belong to thirtynine corporate credit unions. The corporate credit unions accept deposits from and make loans to member credit unions; in turn, they deposit most of their excess funds with U.S.

Central Credit Union, a private institution whose principal function is to provide wholesale financial and payments services to its corporate credit union members and their credit union constituency. In the sector statement for credit unions, intrasector transactions at these various levels are netted out, but the investments of U.S. Central with institutions outside the credit union sector are included in the sector’s total assets. The primary source of data for the sector is the Credit Union National Association (CUNA), a trade association. Data reported to the National Credit Union Administration, a federal agency, are a secondary source of information about the federally and statechartered credit unions insured by the NCUSIF. Federally insured credit unions pay an annual premium into the NCUSIF, which holds only securities issued by or guaranteed by the U.S. government; in the flow of funds accounts the credit unions sector’s total holdings of U.S. government securities include an amount equal to the accumulated contributions of insured credit unions shown on NCUSIF’s balance sheet.

Table F.117 Life Insurance Companies

The life insurance companies sector encompasses all mutual and stock legal reserve life insurance companies in the U.S. These companies write about 98 percent of the life insurance policies in effect in the U.S. (the remainder are written by fraternal societies, savings banks, and the federal government); they also administer individual and group annuities. The companies’ major nonfinancial source of funds is premium receipts; they also receive substantial investment income from their holdings of tangible and financial assets, primarily corporate and government agency bonds and corporate equities. Their major liabilities are reserves set aside for future benefit payments. Information on life insurance companies comes from several sources. One source is data contained in the annual statements filed by the companies with the National Association of Insurance Commissioners (NAIC); the data are tabulated by the A.M. Best Company and by the American Council of Life Insurance (ACLI), a trade association, and are published, respectively, in Best’s Aggregates and Averages, Life and Health and in ACLI’s Life Insurance Fact Book and its quarterly release ‘‘Distribution of Investments of U.S. Life Insurance Companies.’’ Data also come from quarterly estimates provided by A.M. Best from a sample of companies. Finally, the Investment Company Institute (ICI) provides data on the sector’s holdings of mutual fund shares and money market mutual fund shares.

Table F.118 Other Insurance Companies

The ‘‘other insurance companies’’ sector encompasses all companies licensed to write property or casualty insurance policies in the U.S. The firms provide many types of insurance, such as fire, group and other accident and health, homeowners, medical malpractice, workers’ compensation, automobile liability and physical damage, aircraft, reinsurance, burglary and theft, earthquake, credit, mortgage guaranty, and international. The major assets of the companies that make up the sector are fixed-income securities and equities, but they hold several other kinds of assets and have historically been among the larger holders of municipal securities. The companies’ primary liability is amounts payable to policyholders who have filed claims for damages. Their other liabilities include taxes payable and direct investment by foreign parent companies; they also obtain funding from equity issuance. Data on the sector come from annual statements filed by the companies with the National Association of Insurance Commissioners; the statements are then tabulated by A.M. Best Company. Data obtained from the Best Company at the end of 1997 covered 2,450 insurance companies.

Table F.119 Private Pension Funds

The private pension funds sector encompasses all private pension plans that, in accordance with Title I of the Employee Retirement Security Act of 1974 (ERISA), have filed IRS/DOL/PBGC Form 5500 (or Form 5500-C/R for plans with fewer than 100 participants) with the Internal Revenue Service (IRS). It also includes the Federal Employees Retirement System (FERS) Thrift Savings Plan, a supplemental retirement option available to federal employees beginning in 1984. The sector covers both defined benefit plans and defined contribution plans and includes both the retirement funds of nonprofit organizations and the single-employer and multiemployer plans of for-profit firms that are qualified for tax preferences. It does not cover annuities purchased for retirees or other ‘‘insured assets’’ such as guaranteed investment contracts, separate accounts, or other retirement assets managed by insurance companies; the assets of private pension funds do include unallocated insurance company contracts, however. Individual retirement accounts (IRAs) and Keogh accounts are not included in the private pension funds sector. Rather, the assets of such accounts are included with the instruments in whose form the accounts are held, in the households and nonprofit organizations sector. For example, the value of mutual fund shares held by the household sector includes the value of shares held in IRA and Keogh accounts, and the value of household sector deposits includes the value of deposits in IRA and Keogh accounts. Under a defined benefit pension plan, an employee typically receives an annuity upon reaching a specified age.

The size of the annuity in most cases is based on length of service and employment earnings; the annuity may or may not incorporate adjustments for changes in the measured cost of living, and it may be integrated with social security. The employer makes regular contributions to the plan to fund the participant’s future benefits. Private defined benefit plans are frequently noncontributory, that is, participants do not contribute to the plan, and generally there are not individual accounts for participants. The risk of the investment strategy is borne by the employer. Defined benefit plans invest in a variety of tangible and financial assets, but they may not invest more than 10 percent of the fund’s assets in firm (employer) securities.

Under a defined contribution plan, the employer or the employee, or both, contributes to the employee account. The employee bears the investment risk, and the value to the employee at retirement depends on the accumulated contributions, investment earnings, and asset appreciation. There are many types of defined contribution plans, including savings, or thrift, plans; profit-sharing plans; money purchase plans; and employee stock ownership plans (ESOPs). A 401(k) arrangement, one form of defined contribution plan, allows an employee to have a portion of his or her compensation (otherwise payable in cash) contributed to the plan and to defer federal tax on that contribution until the time of withdrawal. In contrast to defined benefit plans, the composition of defined contribution plans is generally dictated by the investment choices of plan participants, and the portfolio is not subject to distribution requirements. As of the end of fiscal year 1994, the private pension funds sector comprised 74,400 defined benefit plans and 615,900 defined contribution plans. At the end of 1997, the sector held $3.6 trillion in assets, with that amount about equally split between defined benefit and defined contribution plans. Corporate equities and mutual fund share holdings account for more than half of the sector’s total financial assets; other assets are government, agency, and corporate bonds.

Data for the defined benefit and defined contribution plans shown separately are published in supplementary tables in the Federal Reserve Board’s quarterly Z.1 statistical release, ‘‘Flow of Funds Accounts of the United States.’’ Data for the private pension funds sector are benchmarked to annual data submitted to the IRS by private pension plan sponsors on IRS/DOL/PBGC Form 5500 (and Form 5500-C/R). The IRS processes the forms and provides computerized files to the Department 564 Guide to the Flow of Funds Accounts, Volume 1 of Labor’s Pension and Welfare Benefits Administration. The Department of Labor (DOL) further edits and checks the computerized files and creates weights to represent the universe of private pension plans with two or more participants. The Flow of Funds Section bases its estimates on the DOL annual data; quarterly figures are estimated using data for the Independent Consultants Cooperative universe as compiled by Bankers Trust Company (now part of Deutsche Bank). The Federal Retirement Thrift Investment Board provides quarterly data on the FERS Thrift Savings Plan. Table F.119 565

Table F.121 Money Market Mutual Funds

Money market mutual funds are investment companies that invest in short-term, liquid assets in order to provide money-market rates of return to investors; they are open-end investment companies that are allowed to issue an unlimited number of shares and are required to redeem all shares at net asset value. Introduced during the 1970s, money market mutual funds may be general funds or may specialize in municipal securities, which provide income exempt from federal taxes; they may also specialize in either institutional or ‘‘retail’’ (individual investor) clientele. All money market mutual funds must comply with Rule 2a-7 of the Investment Company Act of 1940, which seeks to limit the risk of money market mutual funds. The rule places restrictions on the average maturity of a fund’s portfolio (ninety days or less), on the proportion of its securities holdings with less than the highest rating (no more than 5 percent of assets), and on the concentration of the fund’s assets in the securities of any single issuer (no more than 5 percent of assets). Because many money market mutual funds allow their investors to write checks against their accounts, balances in the funds are components of the monetary aggregates (measures of the national money supply published by the Federal Reserve Board); fund balances are not insured by any federal agency, however. Data for the sector in the flow of funds accounts are based on reports made by the funds to the Investment Company Institute.

Table F.122 Mutual Funds

Mutual funds are investment companies that purchase financial assets using funds obtained mainly through the issuance of shares. Many of the funds have specific investment objectives, such as current income or capital appreciation, and many specialize in a certain type of financial security, such as municipal securities, growth stocks, or stocks issued by companies in particular industries or particular areas of the world.

Funds have also tailored their operations to needs of different types of investors, with some offering low initial investment requirements, automatic investment by deduction from deposits, and regular newsletters giving information about current financial conditions; some funds are members of ‘‘families’’ operated by the same management company, allowing shareholders to transfer their investments readily among funds that have different objectives and investment styles. More than 5,000 mutual funds are currently operating in the U.S. They have become an increasingly popular form of investment among individual investors and, in the aggregate, appear to have become a substitute for directly held bonds, equity shares, and deposits.

Mutual funds are also known as open-end investment companies because they are permitted to issue an unlimited number of shares; they are required by law to redeem the shares at net asset value. The net asset value of an individual investor’s share in a mutual fund is determined by the market value of the underlying assets. Shareholders receive returns through pass-throughs of current interest and dividends, distributions of realized capital gains, and accumulation of unrealized capital gains. In the flow of funds accounts, the mutual funds sector covers all open-end investment companies (including unit investment trusts) that report to the Investment Company Institute (ICI) except money market mutual funds and limited-maturity municipal bond funds (which make up the money market mutual funds sector, shown in table F.121) and funding vehicles for variable annuities (which are included in the life insurance companies sector, shown in table F.117). The sector also excludes hedge funds.

Table F.127 Finance Companies

Finance companies are nondepository financial institutions that provide credit to businesses and individuals; about 12 percent of their total financial assets are in residential and commercial real estate loans. Credit extended to businesses covers many types of lending: retail motor vehicle loans; wholesale motor vehicle loans, or floor plan financing; equipment loans and leases; and other business receivables, consisting of loans on commercial accounts receivable, factored commercial accounts, receivable dealer capital, small loans used primarily for business or farm purposes, and wholesale loans for mobile homes, campers, and travel trailers. Credit extended to consumers includes motor vehicle loans, personal cash loans, mobile home loans, and loans to purchase consumer goods such as appliances, apparel, and recreational vehicles. Excluded from the table are securitized loans, which are assets of the issuers of asset-backed securities sector.

Finance companies also own consumer motor vehicles that are leased to consumers; acquisitions of the vehicles are shown as fixed investment in line 2 of table F.127. The leases themselves are not financial assets of the lessors or liabilities of households; lease payments are treated as consumer expenditures by the lessee and as current income to the lessor. (The leases are shown as a memorandum item at the bottom of the table.) Debt used to finance the purchase of the vehicles by finance companies is reported as a liability. Many finance companies have high credit ratings and are able to meet a substantial portion of their funding needs by issuing commercial paper and corporate bonds. Finance companies that are subsidiaries of holding companies obtain equity financing from their domestic or foreign parent companies; some of the subsidiaries are known as captive finance companies and provide credit to buyers of the parent companies’ products. Information on finance companies is obtained from monthly sample surveys of finance companies conducted by the Federal Reserve Board; the surveys are benchmarked to the Federal Reserve Board’s quinquennial survey of finance companies. Data from the surveys are published in the Federal Reserve Board’s monthly G.20 statistical release, ‘‘Finance Companies,’’ and in the Federal Reserve Bulletin.