Summary

Over the past two decades, one of the most significant developments affecting the U.S. economy has been the enormous growth in international capital transactions—an increase that has far surpassed the increase in trade (goods and services) flows. This growth has resulted from liberalization and deregulation of world financial markets and technological innovations in telecommunications, as well as from revolutionary changes in the form and character of international financial transactions.

No longer are financial instruments confined to bank loans and deposits, stocks and bonds, and other traditional forms. Numerous financial products have emerged to meet new needs and preferences of individuals and institutions. At the same time, operations of major financial institutions increasingly have extended beyond national borders and are now carried out on a worldwide basis. Such changes in capital mobility, product innovation, and industry structure have transformed world financial markets and hastened the internationalization of the U.S. financial system.

In this new economic environment, public and private decision makers need relevant, accurate, and timely information on international capital transactions to analyze financial developments in the U.S. economy and to formulate policies arising from them. For example: How does capital mobility affect the functioning of U.S. monetary and fiscal policies? What is the effect on exchange



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Following the Money: U.S. Finance in the World Economy Summary Over the past two decades, one of the most significant developments affecting the U.S. economy has been the enormous growth in international capital transactions—an increase that has far surpassed the increase in trade (goods and services) flows. This growth has resulted from liberalization and deregulation of world financial markets and technological innovations in telecommunications, as well as from revolutionary changes in the form and character of international financial transactions. No longer are financial instruments confined to bank loans and deposits, stocks and bonds, and other traditional forms. Numerous financial products have emerged to meet new needs and preferences of individuals and institutions. At the same time, operations of major financial institutions increasingly have extended beyond national borders and are now carried out on a worldwide basis. Such changes in capital mobility, product innovation, and industry structure have transformed world financial markets and hastened the internationalization of the U.S. financial system. In this new economic environment, public and private decision makers need relevant, accurate, and timely information on international capital transactions to analyze financial developments in the U.S. economy and to formulate policies arising from them. For example: How does capital mobility affect the functioning of U.S. monetary and fiscal policies? What is the effect on exchange

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Following the Money: U.S. Finance in the World Economy rates? What is the impact of the increased volume and complexity of financial transactions on the safety and soundness of the U.S. financial system? What is the extent of foreign ownership of U.S. industries, real estate, and other assets? How are the U.S. current account imbalances financed and how are they linked to the nation's savings and investment patterns? Is the external financing sustainable? At a time when reliable data on U.S. international capital transactions have become more important, the developments in international financial markets have made it a more formidable task to collect such data. Although the United States produces as much detailed data on its capital flows as any country in the world, the explosion in such transactions since the early 1980s has outpaced improvements in the statistical systems that monitor them. The existing system for reporting U.S. capital transactions was originally designed some 50 years ago; it collects data primarily from large domestic financial intermediaries and other corporations, missing many new participants and new modes of transactions. There are both data gaps and major obstacles to tracking the many kinds of increasingly complex transactions that now occur. With a recognition of these difficulties, as well as the budgetary constraints faced by statistical agencies in the public sector, the Panel on International Capital Transactions of the National Research Council convened in April 1992 to examine the new global financial environment, assess public and private needs for data on U.S. international capital transactions, review the adequacy of existing data, and explore alternative methods of data collection. The panel's goal has been to help ensure that the data collected are accurate, timely, relevant, cost-effective, and useful. FINDINGS Increased international capital mobility not only has led to growing linkages of world financial markets, but also has allowed the macroeconomic policies and market conditions of one country to significantly affect those of others. As world financial markets have become more closely linked, U.S. domestic financial conditions have increasingly become subject to external shocks and market pressures from other countries, and the liquidity and solvency of participants in one market have come at times to affect those in other markets. Meanwhile, the securitization of transactions and growth in derivative financial instruments have added new dimensions to the traditional process of intermediation, making

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Following the Money: U.S. Finance in the World Economy international financial flows more complex and more difficult to characterize. These developments have complicated the formulation of U.S. monetary and fiscal policies and made it increasingly difficult to assess the stability and soundness of the U.S. financial system. The unprecedented changes in world financial markets have also reduced the effectiveness of the traditional data collection methods and the adequacy of the data. The conceptual framework under which the existing data on U.S. international capital transactions are collected is that of the balance of payments, which defines international economic transactions as those between residents of the United States and nonresidents (foreigners), those outside U.S. boundaries. Under this framework, data are collected on economic exchanges that cross national borders between the United States and the rest of the world. These data provide vital information on the external sector of the economy and how it affects economic activity within the United States. International transactions, defined in this way, are a component of the national accounts (which include the national income and product accounts, the flow-of-funds accounts, and the balance sheets of the U.S. economy). However, as U.S. financial activities have become global in nature, cross-border financial exchanges increasingly represent capital transfers among worldwide offices and branches of U.S. financial institutions, not transactions between U.S. firms and foreign firms. There is also a growing presence of foreign-owned firms in U.S. domestic markets and of U.S.-owned firms in markets abroad. These developments have complicated identification of resident versus nonresident transactions. More important, internationalization of U.S. financial transactions has given rise to policy concerns about the liquidity, solvency, and stability of the U.S. financial system insofar as it is affected by foreign markets. These are issues that the balance-of-payments framework was not designed to treat. There is need to supplement the existing balance-of-payments data with other information on the international financial activities of U.S. and foreign institutions. Existing international transactions data are also marred by measurement and collection problems and significant gaps. For example, the rise in nonbank market participants (in particular, institutional investors like pension funds, mutual funds, insurance companies, and other professional money managers), the surge in international financial flows and their diversification across currencies, the increase in offshore financial activities, and the burgeoning of international trading in derivative financial instruments

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Following the Money: U.S. Finance in the World Economy (such as options, swaps, forwards, and futures on interest rates, foreign currencies, stocks, bonds, and commodities) have outstripped the coverage of the U.S. data system. The increased ability of domestic institutions to deal directly with their foreign counterparts through computer and telecommunications networks has put many of these transactions beyond the reach of the existing reporting system. Wide fluctuations in exchange rates and asset prices have also compounded the difficulty of determining the value of U.S. holdings of foreign assets and liabilities. Existing U.S. international transactions data need both to be improved and to be supplemented with other information. Yet efforts intended to yield comprehensive information on the warp and woof of the full fabric of U.S. international capital transactions would be prohibitively costly both for the statistical agencies and for those who would have to supply the raw data. Thus, key recommendations in this report focus on streamlining existing statistical and regulatory reporting and using alternative financial databases to enhance the cost-effectiveness of the existing data collection system. PUBLIC POLICY ISSUES ARISING FROM GLOBALIZATION Increasingly, U.S. monetary and fiscal policy must take account of international financial developments. U.S. interest rates are influenced not just by the monetary policy decisions of the U.S. Federal Reserve system and domestic economic events. Official decisions made by monetary authorities abroad, as well as developments in international securities and foreign exchange markets, increasingly have an impact on U.S. interest rates. Meanwhile, it has become more difficult for the Federal Reserve to use monetary aggregates to monitor the relative tightness or slack in the U.S. monetary condition partly because substantial amounts of U.S. currency are held in Latin America, Asia, the Middle East, Africa, Europe, and, more recently, in the states of the former Soviet Union. There is now no accurate recording of international shipments of U.S. currency. On issues of fiscal policy, the ability of institutional investors to move large pools of savings overseas in search of higher returns increases the uncertainty that tax and other measures will have their intended effects. Efforts to use tax incentives (such as, for example, more generous individual retirement account provisions) to boost domestic savings and generate increased capital for do-

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Following the Money: U.S. Finance in the World Economy mestic investment may be seriously diluted by movement of funds abroad. Similarly, the stability of the U.S. financial system cannot be adequately assessed solely on the basis of the activities of domestic U.S. financial institutions when growing linkages of world financial markets have rendered financial institutions of virtually every country sensitive to shocks and market pressures elsewhere. The 1987 stock market crash, for example, demonstrated how financial shocks can reverberate across international markets. The role of foreign producers in U.S. markets cannot be determined just by considering imports and exports of goods and services that cross U.S. borders. It must be assessed in conjunction with foreign investment activities that build production and marketing bases in the United States. Also, nonresidents' acquisitions of U.S. assets can be financed through domestic or foreign sources: whether such investments result in an infusion of foreign capital into the U.S. economy cannot be determined without information on foreign investors' sources of funds. Likewise, the competitiveness of U.S. firms and the influence of U.S. investments abroad on the U.S. economy and the economies of the host countries have to be assessed in a similarly broad context. As the U.S. economy becomes increasingly internationalized, there is a blurring of the traditional distinction between domestic and international economic activities. To address economic policy issues that transcend national geographical boundaries, there is need for data that adequately reflect the globalized financial activities of the U.S. economy. SIGNIFICANT DATA GAPS The altered conditions of world financial markets have implications for U.S. efforts to monitor its international capital transactions. Official statistics on the net U.S. international investment position show that at the end of 1991 the value of U.S. assets held by nonresidents was $368 billion more than the value of foreign assets held by U.S. residents. Statistics such as these have led to extensive media characterization of the United States as the largest debtor nation in the world. One cannot be certain that this characterization is correct, however, because there are serious deficiencies in these numbers (see Kester, 1992). More important, the existing data system tends to collect more complete data on foreign capital flowing into the United States than on U.S. capital flowing out of the country. Another major con-

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Following the Money: U.S. Finance in the World Economy cern relates to the valuation and coverage of U.S. holdings of foreign securities. Although the Treasury Department has undertaken regular, periodic surveys to measure nonresidents' holdings of U.S. securities since the mid-1970s, there had not been a comprehensive survey of U.S. residents' holdings of foreign securities since World War II until one was undertaken in 1994. In addition, despite the recorded ''net indebtedness," official data show that earnings (interest and profits) of U.S. residents on their investments abroad continue to exceed those received by foreigners on their U.S. investments; the excess reached $21 billion in 1990, although it had dropped to $4 billion by 1993. Furthermore, persistently large errors and omissions in the U.S. international transaction accounts in the late 1970s and the 1980s have undermined confidence in the accuracy of the measurement of the net U.S. international investment position and affected the interpretation of such data. The foreign acquisition of Rockefeller Center in New York City and of the Seattle Mariners baseball team attracted a lot of attention. So did the auto plants that foreign firms have established in this country. Yet the extent of foreign (nonresident) ownership of U.S. business and, particularly, real estate is unclear. Nonresidents' purchases of U.S. real estate (including residential real estate) for commercial purposes are now covered in the survey of foreign direct investment done by the Bureau of Economic Analysis (BEA). However, because of the difficulties of identifying smaller transactions and of distinguishing between residential real estate purchased for commercial purposes and that purchased for personal use, survey coverage is undoubtedly incomplete. BEA's legal authority for conducting the direct investment survey does not extend to real estate held exclusively for personal use. Purchases by limited partnerships are considered portfolio investment and are covered in Treasury Department surveys rather than in the BEA direct investment survey. Obtaining complete coverage is difficult. There is also limited information about the sources and uses of funds of foreign investors in the United States. Some foreign firms issue commercial paper—short-term, unsecured promissory notes, issued mostly by corporations—in the United States to secure funds for their operations both here and abroad. Yet the coverage of such activities and other financing mechanisms used in this country by nonresidents is extremely limited. Similarly, there is incomplete information on the sources and uses of funds

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Following the Money: U.S. Finance in the World Economy by U.S. firms abroad. The existing data on foreign direct investment in this country can give a misleading impression of the extent of foreign ownership in the U.S. economy. If a foreign investor owns as much as a 10 percent interest in a U.S. enterprise, the entire enterprise will be classified as a U.S. affiliate of a foreign company. The explosive growth in innovative derivative instruments has transformed world financial markets since the 1980s. One key feature of these instruments is that they allow borrowers and investors to hedge against the risks of fluctuating interest and exchange rates and of equity and commodity prices. Commercial and investment banks, along with large securities firms and other corporations, have become dominant players in these financial derivatives markets, which are largely international in nature. The risk exposures of U.S. participants in these volatile markets are a concern of the Federal Reserve and other federal regulatory bodies that oversee the U.S. financial system, but official data on transactions in financial derivatives are scanty. Partly as a result of the surge in derivatives transactions, the capital flow data in the U.S. international transaction accounts no longer serve as adequate indicators of international sources of exchange market and interest rate pressures. One reason is that the balance-of-payments framework does not register the full dimension of derivatives activities. To assess potential exchange market pressures in this globalized market, one needs to know whether U.S. liabilities to and claims on foreigners are denominated in dollars or foreign currencies. When a foreigner borrows dollars in the United States and invests them in this country, there is no additional net dollar exposure, and the U.S. international investment position will not show a net change. However, when a foreigner invests foreign funds in the United States but fully hedges the investment in the derivatives market (for example, through a currency swap), the U.S. international investment position will show a net increase in U.S. obligations to foreigners, and it will not indicate that the foreign claimant has taken no dollar risk. Nor can one readily determine whether the counterparty (buyer or seller) to the currency swap is a U.S. resident. Derivatives transactions, therefore, can have significant implications for foreign, and even domestic, assessments about possible future fluctuations in the value of the dollar and, consequently, for reactions to domestic macroeconomic policies.

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Following the Money: U.S. Finance in the World Economy SHORTCOMINGS OF THE EXISTING DATA SYSTEM Information on U.S. international capital flows is reported on a quarterly basis in the U.S. balance-of-payments accounts, along with data on U.S. merchandise trade, international services transactions, investment incomes and payments, and unilateral transfers. Private capital flows include direct and portfolio investment (banking, securities, and other commercial and financial transactions). The Bureau of Economic Analysis of the U.S. Department of Commerce is responsible for compiling direct investment data, as well as data on international services, investment income, transfers and official government international capital transactions. The U.S. Department of the Treasury, using the Federal Reserve banks as agents, collects information on portfolio transactions under the Treasury International Capital (TIC) data system. Despite improvements in recent years, there are many shortcomings to the current TIC collection methods. The system relies heavily on manually collecting information from large financial intermediaries located in the United States. The emphasis has been on traditional banking business, largely in the form of loans and deposits. The system does not adequately capture the numerous transactions that bypass traditional financial intermediaries and channels, particularly those involving securities and new derivative financial products and those undertaken by nonbank participants in foreign financial centers. One indication of the errors and gaps in the data on U.S. international capital transactions is the statistical discrepancy (representing net errors and omissions) in the U.S. balance-of-payments accounts. The discrepancy grew significantly during the 1980s, reaching $53 billion in 1989. It also increased as a percentage of exports of goods and services and investment incomes. Another indication is found by comparing TIC data on U.S. nonbanks' foreign claims and liabilities with data compiled by the Bank for International Settlements (BIS) on foreign banks' liabilities and claims on U.S. nonbanks. From 1986 to 1989, the TIC flow data averaged $20-25 billion less per year than data from the BIS. If, as is generally thought, banking data are more complete than data filed by nonbanks, the TIC data almost certainly have understated U.S. nonbanks' claims and liabilities. The Treasury Department conducted a small survey of international transactions by U.S. pension funds in 1991. It indicated that a large part of U.S. pension fund transactions in foreign securities had been carried out by offshore (nonresident) money man-

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Following the Money: U.S. Finance in the World Economy agers and that there had been significant underreporting of these transactions in the TIC data. The inclusion of these respondents resulted in an increase of nearly $170 billion in reported gross trading activities for the 17 months ending in May 1993. As a result of a 3-year effort to incorporate information from foreign central banks and the BIS, BEA recently published dramatic upward revisions in its estimates of U.S. nonbank financial claims on foreigners. These claims were estimated at $254.5 billion in 1993; without the incorporation of these new data sources, the estimate would have been only $42.6 billion. In 1992 and 1993 the statistical discrepancy in the balance-of-payments accounts dropped to between 2 and 3 percent of exports of goods and services and investment income, reflecting in part the introduction of these improved data sources. Timely and accurate reporting of portfolio transactions by data filers has been hampered by both the growing complexity of financial business and a lack of clear, consistent, and uniform guidance from the Treasury Department to data filers. Financial institutions now engage in myriad complex transactions that may span several countries and occur around the clock. To report information on their multifaceted international transactions, data filers generally have to expend considerable effort to examine financial accounts from offices in different countries and in different currencies. Moreover, the data required may not be readily available in their accounting records because of differences in definitions and concepts between accounting principles and statistical reporting instructions. In addition to filing statistical reports on international transactions, many filers have to submit other financial reports to federal regulatory agencies: the total number of forms filed by an internationally active financial institution can be as many as 1,300 a year. Many TIC filers do not fully understand the purposes of the TIC forms, and filers concede that the quality of some of the data they provide is poor. Under these circumstances, it may not be surprising that all but 1 percent of the responses to the Treasury Department's comprehensive survey of foreign holdings of U.S. securities for 1989 required extensive follow-up inquiries. The panel underscores that, as the international financial environment evolves, the existing data on U.S. international capital transactions will become more deficient if the data collection system continues to lag behind global financial developments. Major steps must be taken now. The United States is not alone in facing problems of collecting

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Following the Money: U.S. Finance in the World Economy and integrating data on international capital transactions. Other countries are confronted with similar problems and are working to improve their data. As indicated in the 1993 Balance of Payments Statistics Yearbook of the International Monetary Fund, the statistical discrepancy in the global capital account averaged nearly $120 billion a year during 1989-1992: that is, recorded capital inflows exceeded outflows by that amount on the average every year during that period. (In principle, global outflows should equal global inflows.) Given the internationalization of capital transactions, there will be a growing recognition that the present reporting systems of individual national governments cannot perform as well working alone as they can working together. The panel's recommendations urge that the United States and other countries exchange statistical information and collaborate closely with international organizations to develop common standards for such data collection. RECOMMENDATIONS The panel recommends several major steps to improve the usefulness of the existing data and the cost-effectiveness of their collection. The success of each step, in turn, will depend on the concerted efforts, not only of the federal statistical agencies currently responsible for the collection of the data, but also of financial regulatory bodies, the accounting profession, myriad financial institutions, and public and private data users. International coordination will also be vital to these efforts. The panel's most important recommendations are included in this summary. They are listed in terms of their relative importance, with the most important ones listed first in each of five sections: closing data gaps, streamlining reporting requirements, improving coverage of financial derivatives, using alternative data sources and methods, and expanding international data exchange and coordination. The number in parentheses at the end of each recommendation refers to the chapter in which the recommendation is discussed. CLOSING DATA GAPS Among existing data on U.S. international capital transactions, direct investment data are generally adequate in coverage but require constant and careful attention; improvements are most needed in portfolio investment data.

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Following the Money: U.S. Finance in the World Economy To better assess the debtor/creditor position of the United States in the world economy, the outbound benchmark survey by the Treasury Department of U.S. holdings of foreign securities should be conducted not only in 1994 but also periodically thereafter—at least once every 5 years—to avoid cumulative errors. It can and should be carried out more frequently if a system is developed for collecting data from global custodians and the system is shown to be cost-effective. (3-7) The Treasury Department and the Federal Reserve Bank of New York should expand the TIC forms to improve the coverage of short-term securities, such as commercial paper. (3-8) To improve estimates of U.S. monetary aggregates, the Treasury Department, working with the Federal Reserve, should develop ways to monitor shipments of U.S. currency abroad. (3-9) For its inbound benchmark survey on foreign holdings of U.S. securities, the Treasury Department should improve the number of usable initial filings by continued educational efforts and other means to obtain the cooperation of filers. (3-10) Substitution by the Bureau of Economic Analysis of data from the Bank for International Settlements for data from U.S. sources has produced major improvements in coverage of the international claims and liabilities of U.S. nonbank firms and of investment income flows. BEA should continue its process of working with the BIS, the Federal Reserve, and the statistical authorities of other countries to seek further improvements in BEA's coverage of international transactions through additional use of data collected by international organizations and foreign central banks. (3-13) If resources permit, BEA should either resume collection of more complete data on sources and uses of funds of multinational corporations, covering both outward and inward direct investment, or extract comparable information from the existing data. The results should be analyzed and published to inform the public about this essential operational aspect of multinational corporations. (3-1) The Treasury Department should continue its efforts to collect more complete data on nonresidents' holdings of U.S. real estate in the form of limited partnerships. (3-2) BEA should devote additional resources to analyzing the immense volume of data it collects on direct investment and examining the economic effects of the growth of multinational enterprises on domestic production, employment, and transfer of technology.

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Following the Money: U.S. Finance in the World Economy BEA is in the best position to exploit the detailed information it gathers regularly on the activities of these enterprises. (3-3) BEA should undertake further reviews, by industry, on the rates of return of foreign direct investment in the United States, with particular attention to any data or reporting problems that may contribute to measured differences between rates of return on U.S. investment abroad and foreign investment in the United States. (3-4) STREAMLINING REPORTING REQUIREMENTS Because the structure of financial markets and the nature of financial instruments have changed dramatically over the past decade and will continue to evolve, a vigorous review of all regulatory and statistical reporting forms is urgently needed to ensure that only relevant data useful for public policy making are collected. Such a review is critical to enhance the cost-effectiveness of the existing data collection systems if they are to cover adequately the burgeoning volume of financial transactions in various forms and levels of complexity. Coordinated efforts by regulatory and statistical agencies to streamline reporting requirements, in consultation with filers, are likely to engender cooperation and compliance from them, yielding more accurate and timely data. The Treasury Department and the Federal Reserve Bank of New York should mount a vigorous publicity campaign to bring the existence of the reporting requirements to the attention of all parties active in the international trading of securities, including pension funds, mutual funds, insurance companies, and individuals or businesses that serve as money managers and investment advisers. Special attention should be directed to institutional investors that deal directly in foreign markets. (3-6) In response to the growing complexity of transactions and organizational structures of financial institutions, the Treasury Department and the Federal Reserve Bank of New York (FRBNY) should work together with data filers to streamline TIC reporting requirements (including level of details, frequency of reports, and exemption levels), clarify reporting instructions and guidelines, and determine how particular transactions should be reported. A major objective should be to eliminate unnecessary details, explore the feasibility of obtaining certain data on a quarterly instead of monthly basis (for example, data on country details), and simplify reporting forms. Periodic meetings between staff of the

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Following the Money: U.S. Finance in the World Economy Treasury Department and the FRBNY and filers should be held for these purposes. (3-18) The Treasury Department and the Federal Reserve Bank of New York should conduct an active educational campaign for data filers covering the purpose and use of the required data. This would be especially helpful to foreign-owned financial intermediaries operating in the United States. (3-19) The Treasury Department and Federal Reserve Bank of New York should formalize their consultation processes with filers. A manual of instructions and administrative guidance should be distributed to filers. The manual could be in the form of diskettes or a loose-leaf binder, in which updated instructions would replace old ones. (3-20) IMPROVING COVERAGE OF FINANCIAL DERIVATIVES An interagency group led by the Federal Reserve and including the Federal Reserve Bank of New York, the Treasury Department, the Bureau of Economic Analysis, the Securities and Exchange Commission, the Commodity Futures Trading Commission, and other financial regulatory bodies, should be established to undertake several tasks. Specifically, the interagency group should identify the major participants in financial derivatives markets, the intermediaries involved, and the various forms of transactions. It should also examine the coverage, quality, and consistency of the limited data on financial derivatives currently collected by the Federal Financial Institutions Examination Council, the Commodity Futures Trading Commission, the Securities and Exchange Commission, and private institutions and determine ways to expand coverage, eliminate duplication, standardize definitions, and, whenever appropriate, integrate the data. The group should work closely with market participants, industry groups, and the accounting profession to ensure harmonization of accounting, regulatory, and statistical reporting practices, especially for classifying derivatives transactions and recognizing their market values, income flows, and gains and losses. It is important that the group secure the cooperation of filers and that filers have an appreciation of the purpose and significance of the transactions they are required to report. Because many of the fastest growing derivatives transactions are international in nature, consideration should be given to collecting data on such activities from large financial institutions and multinational corporations, and to classifying the data by major financial instruments and in key currencies. Over

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Following the Money: U.S. Finance in the World Economy the long-term, harmonization of international reporting standards for derivatives is desirable. (4-1) USING ALTERNATIVE DATA SOURCES AND METHODS In view of the global nature of transactions and their rapid expansion, improvements in the medium term in coverage and accuracy of data (in particular, those on portfolio transactions that bypass traditional financial intermediaries and those that are conducted directly through computer and telecommunications networks), without entailing substantial increases in resources, lie in drawing on information from existing custodians of financial assets, as well as large payment, clearance, and settlement systems. Over the long-term, as rising numbers of multinational corporations and financial institutions commit large sums to developing in-house international information and communications systems to meet their operational needs, the possibility of collecting balance-of-payments data electronically will increase. The potential use of EDIFACT (Electronic Data Interchange for Administration, Commerce, and Trade) for balance-of-payments reporting has recently been analyzed by a task force of the Statistical Office of the European Community (EUROSTAT). Global custodians are institutions that manage the custody of financial assets in multiple markets for clients who are largely institutional investors. Their main role is that of master record-keeper and reporter. Clients are provided monthly or quarterly reports detailing information on assets held, including value and transaction date. Information on the nationality of the clients is also available. Data from global custodians should be developed to improve information, particularly on U.S. holdings of foreign securities. The Treasury Department targeted global custodians as its main source of data in its 1994 outbound portfolio investment survey of U.S. holdings of foreign securities because of this potential for improved coverage. The potential for using global custodians as a new source of data appears promising. In addition to information on securities holdings, the Treasury Department and the Federal Reserve Bank of New York should actively explore the feasibility of gathering flow data on securities transactions from global custodians and assess its cost-effectiveness. (5-1)

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Following the Money: U.S. Finance in the World Economy Payment, clearance, and settlement organizations are institutions that process financial transactions. In the United States, Fedwire and the Clearing House Interbank Payments Systems (CHIPS) are the two large-value payment and clearance networks. Fedwire is the Federal Reserve's wire transfer network. CHIPS is a private electronic payment system owned and operated by the New York Clearing House Association. The two systems together process enormous quantities of electronic payments each day. On the basis of the information currently available on Fedwire and CHIPS, it appears that it would be possible to secure statistical data on U.S. international capital transactions from the two systems. The Treasury Department and the Bureau of Economic Analysis should conduct a rigorous study to explore such feasibility by undertaking an in-depth analysis of a sample of transactions that pass through Fedwire and CHIPS. They should also determine whether cost savings would result from using data from Fedwire and CHIPS. If data for analysis cannot be released by CHIPS or Fedwire to outsiders due to privacy concerns, the Treasury Department and BEA could request the staffs of Fedwire and CHIPS to devise ways of providing the data without violating individuals' privacy. (5-2) A EUROSTAT statistical task force is currently working to develop EDIFACT electronic messages for the collection of balance-of-payments data. Three factors have provided impetus for this initiative. First, the use of EDIFACT is spreading in Europe, and merchandise exporters and importers and the banking community are showing interest in pilot projects both nationally and internationally. Second, the compilers anticipate that paper recording of individual transactions may cease as customs barriers are removed within the unified Europe and as firms become increasingly automated. Third, savings will accrue to both customers and firms when they no longer have to file reports to their national statistical compilers. An important aspect of this electronic approach is the development of standardized information codes and statistical systems for information extraction. Compilers of national statistics will need to be involved in the development of the coding systems, which should be designed to minimize retrieval costs. With regard to extraction systems, a crucial issue is the determination of how and when to aggregate information. This will affect costs because of the huge volume of information available.

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Following the Money: U.S. Finance in the World Economy In the United States, the Federal Reserve, the Treasury Department, and the Bureau of Economic Analysis should allocate resources to study the systems architecture of information technology adopted by financial institutions and multinational corporations and to investigate ways to facilitate the development of these automated data collection systems to prepare for the emerging electronic global trading environment. (5-3) EXPANDING INTERNATIONAL DATA EXCHANGE AND COORDINATION Because of the internationalization of financial markets, data compilers can no longer rely largely on domestic data sources. Greater coordination and cooperation among countries are needed to exchange data and thereby improve data coverage. BEA has recently increased its utilization of data obtained by the BIS from central banks, and it also uses data obtained directly from authorities in other countries. Data exchanges and the use of the databases of international organizations require that the data of different countries be comparable in coverage, definitions, and concepts. Despite recent efforts of various countries to bring about greater convergence, significant conceptual differences and data inconsistencies among countries remain. This circumstance points to the need for careful and systematic comparisons of bilateral data, as well as for comparisons between national data and information contained in international databases, before substituting or making adjustments to national databases. This process is inevitably labor intensive and time consuming. One approach would be to focus on the countries of greatest quantitative importance and data that offer the most possibilities for improvement. Another promising approach is for U.S. statistical officials to consult closely with statistical experts in countries with which the United States is engaged in data exchanges. The aim would be to enhance understanding of how the bilateral statistical systems, definitions, and concepts can be modified to make the systems more consistent. (5-4) An essential step toward harmonizing data on international transactions of various countries is to encourage national compilers to adhere to standards currently being developed by international organizations, such as the International Monetary Fund, the Bank for International Settlements, the United Nations, the Organization of Economic Cooperation and Development, and other

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Following the Money: U.S. Finance in the World Economy international securities and financial groups. In addition, different international organizations need to establish guidelines showing how their different databases can be reconciled. (5-5) CONCLUDING OBSERVATION For fiscal 1992, BEA's budget for the collection of all U.S. international transactions was about $12 million. The Treasury Department does not have a separate budget for its role in the TIC data system, and the costs to the Federal Reserve banks of collecting the TIC data for the Treasury Department are borne from their own budgets. According to the Federal Reserve Bank of New York, Federal Reserve banks expended about $2 million for this purpose in 1992. In view of the importance of capital flows in the increasingly internationalized U.S. economy, the panel believes that higher priority should be accorded to the collection of accurate, timely, and comprehensive data on such activities, particularly on U.S. holdings of foreign securities and U.S. nonbank financial transactions. This report contains a number of recommendations for cost-effective approaches to obtaining needed statistical information. In particular, data can be improved and costs contained through sharing of information among national statistical authorities and international data-gathering institutions and through effective use of the data becoming available from the sophisticated electronic recording systems being adopted for international transactions clearing. Capitalizing on these opportunities requires immediate investment of the resources necessary to bring about change. The panel is conscious of the many competing demands on federal resources and of the need to restrain federal spending. We stress, however, that the current opportunities for longer run efficiencies through actions taken now and the urgency of better information about international capital transactions argue for immediate investment of the resources needed to bring about change. The funds required are minuscule relative either to the size of the federal budget or to the importance of a better understanding of international financial flows, but adequate funding is crucial to the ability of U.S. statistical agencies to accomplish the work that is needed. The challenge facing data compilers is how to improve the data collection systems to reflect today's needs and to do so in an environment of the growing number and diversity of institutional and private players engaging in international capital transactions,

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Following the Money: U.S. Finance in the World Economy the changing roles of intermediaries and financial instruments, and the complexity of modern financial transactions. Only when this challenge is met will U.S. analysts, business people, and policy makers be in a position to adequately understand the impact of international financial activity on the U.S. economy and the role of U.S. financial activity in the world economy.