U.S. International Capital Flows Data: Promises and Pitfalls

1. U.S. International Capital Flows Data: Promises and Pitfalls Frank Warnock Darden Business School, University of Virginia IIIS, Trinity College Dublin The Globalization and Monetary Policy Institute, Dallas Fed National Bureau of Economic Research http://faculty.darden.virginia.edu/warnockf/ NABE Professional Development Seminar April 15, 2009

2. Roadmap Useful Starting Points: FAQs and Articles on TIC Crucial: Understand How the Data Are Collected Three Tangents Foreign governments’ activity in U.S. securities Necessary (and known) data adjustments Monthly positions estimates (More possible in Q&A…What would you like to discuss?)

3. Aside: Terminology and Focus of the Talk Terminology Assets: US holdings of (or transactions in) foreign stuff Liabilities: Foreigners’ holdings of (or transactions in) US stuff Focus of the Talk I’ll focus primarily on TIC positions and flows in long-term securities—bonds and equities.) Not so much on derivatives and short-term instruments.

4. My Philosophy (at least on TIC) U.S. international capital flows data can be very informative… …but only if you understand what questions they can and cannot be asked.

5. Two Places You Must Look (1) Articles on the Data:http://www.treas.gov/tic/articles.shtml U.S. Cross-Border Derivatives Data: A User's Guide. Detailed information on the uses and interpretation of the TIC derivatives data. (Federal Reserve Bulletin, May 2007) Understanding U.S. Cross-Border Securities Data. Recommended reading for all users of the various TIC data related to cross-border securities. (Federal Reserve Bulletin, 2006) -- The previous article (Federal Reserve Bulletin, 2004) was Recent Developments in Cross-Border Investment in Securities. The appendix compares U.S. and foreign measurement of holdings of U.S. securities. -- The first in this series of articles (Federal Reserve Bulletin, 2001) was The U.S. System for Measuring Cross-Border Investment in Securities. The appendix discusses how to use the monthly transactions data and the annual survey data to construct ongoing estimates of cross-border holdings of securities.

6. Two Places You Must Look (2) FAQs on the Data:http://www.treas.gov/tic/faq1.shtml Divided into 4 main areas General questions on the TIC system Questions on country classification in TIC data Questions on foreign holdings of U.S. Treasury Securities and Foreign Official holdings Questions on other types of securities in the TIC data If you need to understand the TIC data and don’t go to the articles and FAQs, you are setting yourself up for failure.

7. Crucial: Understand How the Data Are Collected (i) Positions (collected on a custodial basis) Annual security-by-security surveys of custodians. Vastly improves the ability to cross-check and spot errors. Liabilities: Surveys can see the first foreign address. Total amounts should be accurate, but country attribution of foreign holders is subject to a third-country custodial center bias. Assets: Surveys get the security ID, so the country attribution is quite good. A chance total amounts are understated, though.

8. Crucial: Understand How the Data Are Collected (ii) Flows (collected on a transactions basis)* Monthly reports, data reported in aggregate (ie not security-by-security) For flows, both liabilities and assets subject to a financial center bias, which can be severe or non-existent. Aggregate data collection limits cross-checking, editing, error spotting. * Note that short-term securities are collected on a custodial basis.

9. Crucial: Understand How the Data Are Collected (iii) Based on how the data are collected, we know that The amounts and, especially, the country attribution in the monthly flows data should be used cautiously. For liabilities positions, the amounts are likely very accurate, but country attribution can be off. For asset positions, country attribution great and amounts should be fine (but perhaps a bit of undercounting).

10. Three Tangents Foreign governments’ activity in U.S. securities Necessary (and known) data adjustments Monthly positions estimates (More possible in Q&A…What would you like to discuss?)

11. Tangent 1: Foreign governments’ activity in U.S. securities (i) Memo table in the weekly H.4.1 release shows aggregate (ie no country detail) amounts of Treasuries and agencies held by FRBNY on behalf of foreign governments. Timely, very accurate, but partial (some govts might avoid the FRBNY). Reported on a custodial basis, not transactions-based like long-term TIC flows. Monthly aggregate foreign official flows reported in TIC data. Data reporters asked to identify total flows and then the portion that is ‘foreign official’ (see forms for exact definition). Annual liabilities surveys. Again, aggregate with no ‘foreign official’ country detail.

12. Tangent 1: Foreign governments’ activity in U.S. securities (ii) While ‘foreign official’ country detail is not available (because it is considered confidential), can triangulate with other data sources to come up with reasonable estimates.

13. Tangent 2: Necessary (and known) data adjustments ABS (http://www.treas.gov/tic/absprin.shtml) Estimated unrecorded principal repayments to foreigners on domestic corporate and agency asset-backed securities Will overestimate US inflows if ignore these. Stock Swaps (http://www.treas.gov/tic/swapstk.html) Estimated portfolio acquisitions of U.S. (or foreign) stocks through stock swaps At times these can be large; at other times less important. Unfortunately, both of these adjustments are available only in the aggregate (US v. ROW), not at the country level.

14. Tangent 3: Monthly positions estimates (i) Positions data are annual but of reasonably high quality. Flows data are monthly but less accurate. Can the two be combined to provide (i) more reasonable flows data and (ii) more frequent positions estimates? Sure. See The U.S. System for Measuring Cross-Border Investment in Securities and The Performance of International Equity Portfolios for early estimates. More important: Estimates are being refined and maintained; see Monthly Estimates of U.S. Cross-Border Securities Positions (paper and data files).

15. Tangent 3: Monthly positions estimates (ii) The creation of monthly positions estimates has taught us a lot about international flows and positions. For striking pictures, see Figures 8 and 9 in Understanding U.S. Cross-Border Securities Data.

16. Bottom line U.S. data on international capital flows and international positions are rich and informative. That said, if you are going to use them, it is imperative that you take some time to learn about what they can and cannot address. Much of that can come from a basic understanding of how the data are collected.

17. Discussion: What questions/issues would you like to address using the TIC data?