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Understanding business credit measures: a joint study by the Bank of Canada and Statistics Canada

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The Bank of Canada (the Bank) and Statistics Canada both produce aggregate measures of borrowing, or credit, for sectors of the Canadian economy. The Statistics Canada measures are part of the National Balance Sheet Accounts (NBSA), which cover the entire economy and directly align with the internationally recognized national accounting principles detailed in the United Nations System of National Accounts. They are available by sector as currently defined in the Canadian System of Macroeconomic Accounts. The NBSA are created using a balance sheet approach, which involves presenting the assets and liabilities for all instruments and sectors of the economy.  In other words, for each instrument all holders of financial assets must have corresponding counterparties who hold the financial liabilities, and as such, the sum of these are equal in the aggregate. To determine the amount of loans and other credit extended to businesses published by Statistics Canada that are comparable to the Bank’s business credit series, one can begin by looking directly at the liability side of the NBSA for the non-financial private corporations sector. However, because the Bank’s definition of business credit also includes unincorporated businesses, but the NBSA records these liabilities in the household sector, those amounts must also be included to align with the Bank’s definition.

The Bank’s data are presented based on the issuer of credit, i.e., the holder of the financial assets, and do not display liabilities. The Bank calculates its business credit aggregates using the asset side of the balance sheets of chartered banks and non-bank financial institutions including asset-backed securities, loans extended to individuals and others for businesses purposes. In addition, banker’s acceptances are taken from the liability side of the balance sheets of chartered banks and commercial paper data from third-party sources (i.e., Dominion Bond Rating Service). Long-term debt and equity securities are taken from other sources. Given this approach and the information available, the creditor side can be equated to the debtor side of non-financial corporations and unincorporated businesses. However, the Bank’s aggregates have more limited coverage than Statistics Canada’s on both the lending sector and instrument dimensions (i.e., the Bank does not include all assets and liabilities for all sectors). For example, Bank estimates exclude government and government agencies lending to businesses. Data availability is the main factor for this asset-based perspective.

Both measures are constructed primarily from records of Canadian financial institutions and provide thorough coverage of lending by those institutions. They show a similar picture of the indebtedness of Canadian non-financial businesses, currently and in the past. However, the use of differing classification systems, methodologies and definitions result in some reconcilable differences in the aggregate measures. Therefore, the Bank and Statistics Canada conducted a joint study to understand and identify key differences between their respective measures of business credit, including non-mortgage business loans, non-residential mortgages and commercial paper. Long-term debt and equity securities were excluded from this exercise, but a reconciliation study covering these items will be made available at a later date. A reconciliation between estimates of household credit has already been undertaken and the results can be viewed in Understanding household credit measures: a joint study by the Bank of Canada and Statistics Canada.

The magnitude of the variance between the Bank’s and Statistic Canada’s main business credit aggregates is shown in Table 1. The differences at the component level (non-residential mortgages, non-mortgage loans and short-term paper) are examined in subsequent sections. It should be noted that the classifications used in this document refer to those employed by the Bank, as Statistics Canada does not explicitly publish non-mortgage business loans, non-residential mortgages or commercial paper on the asset side of the balance sheet.

While a comparison of the two measures of business credit results in a consistent picture of the extent of borrowing by businesses, differences exist between the measures. Both organizations make certain assumptions based on limited information regarding specific debt components. Moreover, it is important to note that some assumptions made by each organization are specific to the particular component being measured.

The Bank uses data reported on, or calculated as, an average-over-the-period basis (the average value of the stock of an asset over the period), whereas Statistics Canada uses data reported on an end-of-period basis (the value of the stock of an asset on the final day of the period). This results in timing differences between estimates derived from each source, especially when large movements in value occur throughout the period or near the end. For non-residential mortgages and non-mortgage loans, this adjustment is not directly measurable, but would generally be immaterial. As such, any differences due to timing are included in the overall remaining difference for these instruments.

Mortgage liabilities of the business sector

Table 2 reconciles differences in measures of non-residential mortgage liabilities; please note, the terminology used reflects the Bank’s definition. The table starts with Statistics Canada’s value for the total mortgage liabilities of private non-financial corporations. From there, explainable differences between the Bank’s and Statistics Canada’s values are calculated, including differences due to classification and coverage, which are explained following the table. This leads to a Statistics Canada approximated value according to Bank of Canada definitions.

Classification differences

In the NBSA, non-residential mortgage liabilities are allocated to the various borrowing sectors. For example, an unincorporated business in the household sector may hold a non-residential mortgage on a business property. Similarly, residential mortgage liabilities are allocated to various sectors of the economy to reflect the fact that residential mortgage liabilities are found in sectors other than the household sector. For example, non-financial corporations may own residential apartments or residential care facilities and hold the corresponding mortgage loans for these properties.

Generally, financial institutions will make a distinction between their mortgage assets based on the intended use of the mortgaged property, i.e., for residential or non-residential purposes. For example, if a residential care facility requires a mortgage, a financial lender will record this as a residential mortgage. The NBSA emphasizes the debtor-creditor relationship; that is, if the debtor is a corporation, then the liability will be classified as a residential mortgage in the corporate sector. The Bank’s credit statistics classify mortgages to sectors based on the intended use of property; therefore, the Bank includes all non-residential mortgages in business credit and all residential mortgages in household credit.

Coverage differences

Given the NBSA’s integrated coverage of all sectors of the economy, non-residential mortgage assets for some sectors are recorded in the NBSA, but are not included in the Bank’s mortgage statistics. These sectors are investment funds, federal and provincial government business enterprises, households, non-financial private corporations (i.e., intra-sectoral lending), governments and non-residents. The Bank excludes the corresponding mortgage liabilities of non-financial businesses involving these lending sectors because they are outside the scope of the Bank’s credit aggregates.

Non-mortgage business loans

Table 4 reconciles differences in measures of non-mortgage loans and begins with Statistics Canada’s value for non-mortgage loan liabilities of private non-financial corporations. From there, explainable differences between the Bank’s and Statistics Canada’s values are calculated, including differences due to classification, coverage and methodological approach, which are explained following the table. This leads to a Statistics Canada approximated value according to Bank of Canada definitions.

Classification differences

The Bank’s estimates of business non-mortgage loans include both incorporated and unincorporated entities, whereas in the NBSA, unincorporated businesses are included in the household sector and incorporated businesses are included in the corporate sector. Consequently, to align with the Bank’s estimate, it is necessary to include from the NBSA non-mortgage loans of private non-financial corporations and the portion of non-mortgage loans in the household sector belonging to unincorporated businesses. Additionally, amounts not explicitly classified elsewhere are included in the private non-financial corporations sector.

Coverage differences

The Bank’s credit aggregates do not cover certain loans from some sectors that are included in the NBSA. Examples include some loans from credit unions, government business enterprises and other private financial institutions where the Bank has partial coverage. Additionally, the Bank excludes some lending sectors entirely, as they are not within the scope of its definition of credit. Finally, the Bank includes non-trade receivables in its measure of business non-mortgage loans, while the NBSA excludes this category. The Bank also includes all leasing in business credit, while the NBSA includes a portion of automobile leasing as a liability of households.

Methodological differences

The Bank uses data reported worldwide in Canadian currency as well as transactions to Canadian residents in foreign currency as an approximation for Canadian activity, while Statistics Canada uses data booked in Canada in domestic and foreign currency to capture activity in Canada. This adjustment reflects Canadian currency booked outside of Canada that is included in the Bank’s values.

Short-term paper

Table 6 reconciles differences in measures of short-term paper; however, the terminology used reflects the NBSA’s definition, which includes bankers’ acceptances and commercial paper, two series that the Bank publishes separately under 1) business loans, and; 2) debt securities, respectively. This table starts with Statistics Canada’s value for Canadian short-term paper liabilities of private non-financial corporations. From there, explainable differences between the Bank’s and Statistics Canada’s values are calculated, including differences due to classification and timing, which are explained following the table. This leads to a Statistics Canada approximated value according to Bank of Canada definitions. In this case, given that both organizations use the same data sources, both estimates can be fully harmonized and any remaining difference is effectively nil.

Classification differences

Statistics Canada uses information from its integrated business register to assign debt-issuing entities to the appropriate institutional sector, whereas the Bank classifies entities differently in some cases. These differences in sector definitions cause discrepancies between each organization’s estimates.

Timing differences

The Bank uses data reported on, or calculated as, an average-over-the-period basis (the average value of the stock of an asset over the period), whereas Statistics Canada uses data reported on an end-of-period basis (the value of the stock of an asset on the final day of the period). This results in differences between estimates derived from each source, especially when large movements in value occur throughout the period or near the end. Although this is labelled as a timing difference, any data issues between reconciling at the end of the period compared with the average will inherently be included in this calculation.