Introduction
The Federal Reserve Board has begun an ambitious and long-term effort to upgrade the Financial Accounts of the United States to provide a significantly more detailed and timely picture of financial intermediation in the United States. The goal for this project, which is called the Enhanced Financial Accounts (EFAs), is to make the Financial Accounts more useful and more usable for researchers, analysts and others interested in understanding key financial relationships in the U.S. economy. This effort is in keeping with our longstanding practice of introducing regular improvements to the Accounts. What sets the EFA project apart from our typical improvements is that we intend to make larger-scale, more-fundamental changes, such as the inclusion of available higher-frequency information and more-disaggregated data, even if such data are not comprehensively available or easily incorporated into the existing structure of the Accounts. For example, we may make more use of memo items and supplementary tables that may be linked or attached to, but not fully integrated with, the traditional Financial Accounts. At the same time, the project will result in a variety of new detail and enhancements to the traditional Financial Accounts along the lines of the improvements that we have regularly incorporated over the years. We also plan to enhance the usability of the Financial Accounts by improving the way the data are reported and made available to the public, and by providing additional documentation and analysis. To accomplish the ambitious goals of the EFA project over the coming years, we will be actively soliciting feedback and suggestions from the users of the Financial Accounts.

Overview of the Financial Accounts
The Financial Accounts of the United States (formerly called the Flow of Funds Accounts) are U.S. national accounts published quarterly by the Federal Reserve Board. The Financial Accounts provide information on macro-financial flows and aggregate balance sheets for major sectors of the economy, including households, financial institutions, nonfinancial businesses, governments, and the international sector. The Financial Accounts also make up the financial component of the Integrated Macroeconomic Accounts, which are published jointly with the Bureau of Economic Analysis and which relate production, income, and saving from the National Income and Product Accounts to changes in net worth and financial transactions across the major economic sectors of the U.S. economy.¹

The key organizing principle of the Financial Accounts is that the sum of the various sources of funds must equal the sum of the various uses of funds, both within and across the major economic sectors. This basic framework has proven valuable for understanding the economic relationships underlying the major sectors of the economy, as well as for monitoring the effects of macro-financial developments.

Limitations of the Financial Accounts
Researchers and analysts have turned to the Financial Accounts repeatedly to investigate the causes and consequences of the recent financial crisis, and to create and analyze indicators of financial stability.² While the Financial Accounts have always been at the forefront of national financial accounting design and practice, and have been continually improved and developed over time, they were not originally designed to be a comprehensive source of data for all of the complex financial relationships and transactions whose importance to the macro-economy were made clear during the financial crisis.

In particular, to better understand these relationships and analyze a broader range of developments, researchers and analysts need more detailed and disaggregated information about which economic sectors or subsectors are borrowing from which other sectors, using what type of financial instruments, over what time frame, using what type of collateral (if any), and at what pricing. We also need more detailed information on "off-balance sheet" activities such as the use of financial derivatives to transfer market risk, credit risk, interest-rate risk, and exchange-rate risk. As useful as they are, the Financial Accounts fall short of this ideal.³

Overview of the EFA Project
To address the need for more detailed information, we are embarking on an ambitious multi-year project to dramatically enhance the Financial Accounts and move closer to the ideal. Our goal is to expand the detail, dimensionality, and scope of the Financial Accounts by providing data wherever possible at higher frequencies, at more disaggregated levels, and for market values as well as book values. We also hope to include at least basic information on risk exposures through financial derivatives. In some cases the additional detail will be integrated into the core of the Financial Accounts--so that sources of funds match uses of funds, sector by sector. In other cases, new detail will be supplemental and presented as "memo items" or in "satellite" accounts. But in general, the goal is to array substantial amounts of new information around the traditional core of the Financial Accounts. At the same time, we plan to enhance the usability of the Financial Accounts by improving the way the data are reported and made available to the public, and by providing additional documentation and analysis.

Types of Enhancements to the Financial Accounts
At this early stage, we envision several types of enhancements to the Financial Accounts. The first is to provide additional detail on financial instruments wherever possible. This could include, for example, breaking apart current instrument categories such as "corporate and foreign bonds" into new sub-categories such as foreign bonds, domestic unstructured bonds, and asset-backed securities (including mortgage-backed securities). For some sectors, perhaps including banks, mutual funds, insurance companies, and state and local pension funds, we could also provide detail on the maturities and credit-risk ratings of fixed-income securities.

A second type of enhancement is to include information on holdings and activities that are currently not well described in the Accounts. Examples include securities lending activities and the investment of their cash collateral pools, the holdings and transactions of hedge funds and other private funds, and the holdings and transactions of nonprofit organizations.⁴

A third type of enhancement is to provide supplementary data at higher frequencies and lower levels of aggregation than in the current publication. Some data may be available at monthly, weekly, or even higher frequencies, while other information may be available by state, firm, or other level of disaggregation. These enhancements would be supplemental in the sense that they would not necessarily be integrated into the process of equating sources and uses of funds, which would continue to be done at a quarterly, aggregate level. Nonetheless, these supplemental data series, where available, could help analysts and researchers drill down into finer levels of detail.

A fourth type of enhancement is to provide information on the use of financial derivatives to trade various kinds of financial risks. Analysts and policy makers would have benefitted from detailed information on the use of derivatives such as interest-rate swaps and credit-default swaps to shift (and concentrate) financial risk before the recent financial crisis, and such data would be just as beneficial now. We are investigating various data sources that could be used to significantly enhance our understanding of risk transfer throughout the financial system.

A fifth type of enhancement is to improve the dissemination of data from the Financial Accounts and our communication about the construction of the data and interpretation of the results. This aspect would include the development of new tools for making data available to the public, as well as more analysis about the economic interpretation of the data from Board staff. This communication has already begun, by using the FEDS Notes series to provide additional discussion and analysis of changes to the Financial Accounts, beyond what is already included in the "Release Highlights" of each publication and the online Financial Accounts Guide.⁵

Next Steps
Federal Reserve Board staff have begun to design and plan many of the enhancements described in this note. Some of the proposed projects are relatively straightforward. For example, recently available regulatory data on the holdings of money-market mutual funds are comprehensive, detailed, well defined, and publicly available. To be sure, a full integration of these detailed data into the Financial Accounts will take time and a significant investment in information technology infrastructure. Nonetheless, the economic and accounting issues are well-defined and well-understood.

In contrast, projects related to new sectors, such as hedge funds, or new instruments, such as derivatives, will be more complicated. Indeed, the concepts, data, and procedures to implement these aspects of Enhanced Financial Accounts have not yet been developed. To bring the project to its full potential will likely take several years, and will rely on collaboration with other governmental agencies and input from users of the Financial Accounts. In particular, a key part of the process will be engagement with researchers, analysts, and others to identify current gaps and weaknesses and to propose new approaches for measuring and accounting for economic and financial activity. We hope and expect that the ultimate payoff will be an even more useful tool for measuring, understanding, and monitoring the structure, interconnections, and potential systemic imbalances characterizing the modern U.S. financial system.

 

 

References
Begenau, Juliane; Piazzesi, Monika; and Schneider, Martin. "Remapping the Flow of Funds," forthcoming in National Bureau of Economic Research, Risk Topography: Systemic Risk and Macro Modeling, Markus K. Brunnermeier and Arvind Krishnamurthy, editors, University of Chicago Press.

Bhatia, Ashok Vir, and Bayoumi, Tamim. 2012. "Leverage? What Leverage? A Deep Dive into the U.S. Flow of Funds in Search of Clues to the Global Crisis." International Monetary Fund Working Paper WP/12/162.

Eichner, Matthew; Kohn, Donald; and Palumbo, Michael. "Financial Statistics for the United States and the Crisis: What Did They Get Right, What Did They Miss, and How Should They Change?" forthcoming in National Bureau of Economic Research, Measuring Wealth and Financial Intermediation and Their Links to the Real Economy, Charles Hulten and Marshall Reinsdorf, editors, University of Chicago Press.

Gallin, Joshua. "Shadow Banking and the Funding of the Nonfinancial Sector" forthcoming in National Bureau of Economic Research, Measuring Wealth and Financial Intermediation and Their Links to the Real Economy, Charles Hulten and Marshall Reinsdorf, editors, University of Chicago Press.

Gorton, Gary, and Metrick, Andrew. 2012. "Securitized Banking and the Run on Repo". Journal of Financial Economics, June 2012, v. 104, iss. 3, pp. 425-51.

Greenwood, Robin, and Sharfstein, David. 2013. "The Growth of Finance". Journal of Economic Perspectives, Spring 2013, v. 27, iss. 2, pp. 2-28.

Krishnamurthy, Arvind; Nagel, Stephan; and Orlov, Dmitry. "Sizing Up Repo". Journal of Finance, forthcoming.

Krishnamurthy, Arvind and Nagel, Stephan. 2013. "Interpreting Repo Statistics in the Flow of Funds Accounts". NBER Working Paper No. 19389, August 2013.

Nakamura, Leonard. 2013. What You Don't Know Can Hurt You: Keeping Track of Risks in the Financial System." Federal Reserve Bank of Philadelphia. Business Review, First Quarter, 2013.

 

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1. The Financial Accounts publication, which includes the Integrated Macroeconomic Accounts, can be found at http://www.federalreserve.gov/releases/z1/Current/. The Financial Accounts Guide, which describes the data sources and methods used to construct the statistics, can be found at http://www.federalreserve.gov/apps/fof/. The Integrated Macroeconomic Accounts are based on international guidelines as defined in the System of National Accounts, 2008 , which was jointly produced by the United Nations, the European Commission, the Organization for Economic Co-operation and Development, the International Monetary Fund and the World Bank Group. Return to text

2. For example, see Bhatia and Bayoumi (2012), Eichner, Kohn, and Palumbo (forthcoming), Gallin (forthcoming), Gorton and Metrick (2012), Greenwood and Sharfstein (2013), Krishnamurthy, Nagel and Orlov (forthcoming), and Nakamura (2013). Return to text

3. A number of researchers have pointed out limitations of the Financial Accounts for financial-stability purposes and how they might be improved, including Begenau, Piazzesi and Schneider (forthcoming), Eichner, Kohn, and Palumbo (forthcoming), Gallin (forthcoming), and Krishnamurthy and Nagel (2013). Some enhancements have already been implemented--for example, see the recent FEDS Note Repurchase Agreements in the Financial Accounts of the United States, 2014. Return to text

4. Domestic hedge funds, unregistered funds, and nonprofit organizations are currently included in the household sector by default, because the household sector is constructed residually after accounting for all the other sectors. Return to text

5. FEDS Notes can be found at http://www.federalreserve.gov/econresdata/notes/feds-notes/default.html. In addition to the current Note, recent FEDS Notes related to the Financial Accounts include The Federal Debt-Limit Standoff of 2013 in the Financial Accounts of the United States, and Repurchase Agreements in the Financial Accounts of the United States. Additional FEDS Notes describing improvements to the Financial Accounts are forthcoming. Return to text