The Flow of Funds Accounts are a crucial data source on credit market positions in the U.S. economy. In particular, they combine regulatory data from various sources to produce a consistent set of flow and stock tables in major credit market instruments by sector. There is also a detailed breakdown of the financial sector by type of institution. This is exactly the kind of data needed to understand how financial innovation changes the amount of borrowing and lending in the economy and reshapes the financial industry. The events of the last five years have underscored the importance of positions data to guide economic analysis.
As do most available data sets on credit market positions, the Flow of Funds accounts report accounting measures such as book value or fair value. In contrast, most economic analysis views asset positions as random payment streams that are valued by state prices. The latter view is particularly useful to assess the sensitivity of a position to changes in market conditions. For example, one may ask what happens to the value of a position when monetary policy lowers the short end of the yield curve. The answer follows from discounting the payment stream with (hypothetical) state prices that reflect the steeper yield curve. More generally, once positions are viewed as payment streams, the risk in a position can often be parsimoniously represented by exposures to a small number of risk factors. Exposures are then comparable across positions and can readily be aggregated to create measures of risk for the entire portfolio held by an economic agent, such as a financial institution or a household.
Viewing positions as payment streams typically requires more information than book value or fair value. In particular, to construct the payment stream associated with a given instrument such as a coupon bond or installment loan, one would like to know
• the maturity or next repricing date of the instrument
• the promised interest rate, that is, the coupon rate for a bond or the loan rate
• call or prepayment provisions, if applicable
• the credit rating of the issuer