3
Capital Account Data: Gaps and Needs

In response to changes in world financial markets, the Bureau of Economic Analysis (BEA) in the U.S. Department of Commerce, the U.S. Department of the Treasury, and the Federal Reserve Bank of New York (FRBNY) have made significant strides over the past several years to improve U.S. capital flow data. At the same time, the Federal Reserve Board has taken steps complementing their efforts. Nonetheless, existing data on U.S. international capital transactions remain of varying quality. For financial transactions that have changed most in form and character and for which adjustments in data collection systems have lagged behind, the quality of data have been adversely affected. The accuracy and coverage of some data can be improved with changes in current methods and procedures at minimal additional cost. For other data, new initiatives and development efforts are required, as well as international coordination.

This chapter examines in detail the adequacy of the capital account data in the U.S. balance of payments and addresses ways to improve them. The types of data are discussed in the same order as they are presented in Chapter 2.

DIRECT INVESTMENT AND RELATED DATA

As discussed in Chapter 2, BEA conducts separate outward and inward surveys on direct investment. Comprehensive benchmark



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Following the Money: U.S. Finance in the World Economy 3 Capital Account Data: Gaps and Needs In response to changes in world financial markets, the Bureau of Economic Analysis (BEA) in the U.S. Department of Commerce, the U.S. Department of the Treasury, and the Federal Reserve Bank of New York (FRBNY) have made significant strides over the past several years to improve U.S. capital flow data. At the same time, the Federal Reserve Board has taken steps complementing their efforts. Nonetheless, existing data on U.S. international capital transactions remain of varying quality. For financial transactions that have changed most in form and character and for which adjustments in data collection systems have lagged behind, the quality of data have been adversely affected. The accuracy and coverage of some data can be improved with changes in current methods and procedures at minimal additional cost. For other data, new initiatives and development efforts are required, as well as international coordination. This chapter examines in detail the adequacy of the capital account data in the U.S. balance of payments and addresses ways to improve them. The types of data are discussed in the same order as they are presented in Chapter 2. DIRECT INVESTMENT AND RELATED DATA As discussed in Chapter 2, BEA conducts separate outward and inward surveys on direct investment. Comprehensive benchmark

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Following the Money: U.S. Finance in the World Economy surveys covering the universe of filers are undertaken every 5 years. In other years, samples of companies are surveyed on a quarterly and an annual basis to update the benchmark surveys. Compilers and users familiar with the direct investment data, including the related statistics on capital expenditure, production, and employment, appear generally satisfied with them (see Appendix B). BEA has addressed a problem frequently raised about these data in the past—the need to update asset values: beginning in 1991, BEA reported the value of direct investment positions using three alternative methods. In addition to the traditional historical-cost basis, two current-price bases were introduced: current cost and market value. Under the current-cost valuation, direct investment stock figures are adjusted to reflect changes in the average price of affiliates' tangible assets. Under the market-value basis, the adjustments reflect changes in estimated market prices of affiliates, based on changes in equity market indices (see Landefeld and Lawson, 1991).1 In addition, under the Foreign Direct Investment and International Financial Data Improvements Act of 1990, BEA has begun linking its direct investment database to the Bureau of the Census's establishment (plant) data to produce detailed industry data on foreign investment in the United States. For example, BEA recently produced detailed data covering the number, employment, payroll, and shipments or sales of the establishments (plants) of U.S. affiliates of foreign companies for 1987 (Bureau of Economic Analysis/Bureau of the Census, 1992). The data show the activities conducted by affiliates in over 800 industries. Foreign-owned establishments (excluding banks) accounted for 1 percent of U.S. business establishments and 4 percent of U.S. nonbank business employment. In manufacturing, the employment share of foreign-owned establishments was 8 percent.2 Although foreign-owned companies accounted for a small share of the overall U.S. economy, they had significant shares of employment in a few industries: hydraulic cement manufacturing, 61 percent; polyester and nylon manufacturing, 60 percent. More than one-fourth of the employment of foreign-owned establishments was in California, New York, 1   These alternative valuation methods are imprecise and cannot be applied to adjust data on individual countries and industries. 2   Data from the 1992 benchmark survey show U.S. nonbank affiliates of foreign firms accounting for 5.1 percent of U.S. nonbank business employment and 11.6 percent of manufacturing employment in 1992 [Bureau of Economic Analysis, 1994b:161).

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Following the Money: U.S. Finance in the World Economy and Texas, but the share of total state employment was largest in Delaware (13 percent) and Hawaii (7 percent). Foreign-owned establishments tended to be in capital-intensive industries, although foreign firms also own financial, insurance, and other business services establishments in the United States. BEA and the Census Bureau have also published expanded information for 1988 through 1991 on the manufacturing establishments of foreign-owned companies, including value added, capital expenditures, and other details (Bureau of Economic Analysis/Bureau of the Census, 1994). Under the same act, BEA is also authorized to give the Bureau of Labor Statistics (BLS) access to its foreign direct investment data so BLS can identify foreign-owned establishments in its database. BLS released data on the number, employment, and payroll of foreign-owned establishments in 1992 (Bureau of Labor Statistics, 1992). Additional BLS data on occupational structure in foreign-owned manufacturing establishments was released in 1993 (Bureau of Labor Statistics, 1993). Despite these expansions in data and analysis, concerns have been expressed about the definition of direct investment and inadequate data in several major areas. DEFINING DIRECT INVESTMENT Investments by foreigners are treated as direct investments if 10 percent or more of the equity in a firm is owned by a single nonresident. In some instances, however, a single nonresident can hold 10 percent of the equity without exercising effective control. For example, Du Pont is treated as a U.S. subsidiary of a foreign firm because of the minority equity interest held by Seagrams (Canada), and some well-known financial institutions are treated as foreign-owned firms because of the minority equity interests held by Japanese institutions. The 10 percent cutoff is an international standard adopted by the International Monetary Fund (IMF) and used by most countries. This dividing line is not intended to represent a controlling interest; it was adopted mainly to separate investments representing an active voice in the management of an enterprise from passive investments, for which the primary objective is capital gain or dividend income. There is a question of whether the arbitrary statistical definition of direct investment (10 percent) causes problems with data collection and analysis. As the percentage of ownership declines, the ability of parent companies to comply with requests for de-

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Following the Money: U.S. Finance in the World Economy tailed information on the operations of their minority-owned affiliates also may decline. In the United States, the capital flow data between a parent and its affiliate (essentially transactions in the debt or equity securities of the affiliate, together with intracompany accounts) are available to the creditor-entity at any level of ownership. The parent also has information on dividends received. At levels below 20 percent of ownership, however, the parent company may have difficulty in obtaining information on earnings and, therefore, reinvested earnings, because under U.S. accounting rules, if the reporting entity owns less than 20 percent of a foreign affiliate, it does not have to maintain detailed information on its investment. Also, the lesser detail available on U.S. minority-owned foreign affiliates reflects the difficulty U.S. parent companies face in obtaining detailed operational information from foreign affiliates over which they do not have majority control. Certain distortions can arise due to the treatment of minority ownerships. For instance, when a foreign investor acquires as much as a 10 percent interest in a U.S. enterprise, BEA begins to include the entire operation of that enterprise as part of the aggregate of the foreign share of U.S. employment, production, exports, imports, etc. BEA also publishes limited data on majority-owned affiliates of foreign firms: that is, affiliates for which foreign direct investors own more than 50 percent. In 1992 majority-owned nonbank affiliates accounted for about four-fifths or more of the gross product, total assets, sales and employment of all nonbank U.S. affiliates (Bureau of Economic Analysis, 1994b). Thus, in the aggregate, the distortion introduced into the data by the inclusion of minority-owned affiliates is modest. There are some industries in which minority-owned affiliates represent an important share of total direct foreign investment. In 1992 minority-owned affiliates accounted for more than one-half of the gross product of all foreign affiliates in three industries: primary ferrous metals, transportation, and communication and public utilities. In the latter two of these industries, however, employment by all foreign affiliates accounted for only 5.1 and 2.2 percent of total employment, respectively (Bureau of Economic Analysis, 1994b). BEA's ability to publish detailed data about minority-owned U.S. affiliates of foreign firms is to some degree restricted by the need to preserve the confidentiality of individual respondents. Publication of separate information about majority- and minority-owned affiliates, to the extent that confidentiality requirements

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Following the Money: U.S. Finance in the World Economy permit, is helpful in better understanding the role of foreign ownership in the U.S. economy. DATA GAPS AND PROBLEMS Income Reported by U.S. Affiliates of Foreign Firms The rates of return on investments earned by foreign direct investors in the United States are markedly lower than those earned by U.S. investors on direct investments abroad. At one time, this gap was commonly ascribed to the undervaluation of U.S. assets abroad, which are older on average than foreigners' assets in the United States. But the difference has persisted, although it is reduced when assets are revalued by BEA under the current-cost and market-value bases. Moreover, the difference is pervasive, showing up in bilateral comparisons as well as in the global data. The difference in rates of return is frequently cited to support the assertion that foreign firms are evading U.S. taxes by manipulating transfer prices to minimize the amounts of income attributable to their U.S. operations. That allegation has spawned proposals to impose higher taxes on those firms. Several explanations have been offered for the difference in rates of return (see Landefeld et al., 1992; KPMG Peat Marwick, 1992; Grubert et al., 1991; Graham and Krugman, 1991). It has been suggested, for example, that many foreign investments in the United States are still relatively new, so that earnings are reduced by start-up costs, and that the United States is a safe place in which to invest, so that earnings on foreign investments in the United States do not have to earn as large a risk premium as U.S. investments in many other countries. The first explanation may apply when a foreign investment in the United States represents construction of a completely new industrial facility. The second hypothesis is called into question by the pervasive character of the difference in rates of return, which holds in cases of both safe and risky foreign locations. Another possibility relates to exchange rates. When the dollar is depreciating, charges billed (including goods imported by affiliates from parent firms) by foreign parent companies to their U.S. affiliates in appreciating currencies can reduce the affiliates' rate of return. BEA recently examined why the rates of return on foreign direct investment in the United States are so low relative to the rates of return on comparable U.S. domestic investment. The study provided interesting insights, but the findings were incon-

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Following the Money: U.S. Finance in the World Economy clusive. BEA observed that the low returns on foreign direct investment in the United States appear to reflect certain long-term factors associated with the operations of multinational companies and the effect of a number of transitional factors that led to a surge of foreign direct investment in the United States in the 1980s. Multinational corporations may accept low returns in the United States in order to take advantage of economies of scale, gain access to a large U.S. market, or secure raw materials. The study also noted that current account surpluses in Japan and several other countries in the 1980s generated excess funds available for investment. Funds were attracted to the United States by average yields on U.S. investments that were higher than those on home-country investments. This spread allowed foreign investors to accept yields below the average yield on U.S. investments. Nonetheless, BEA cautioned, underlying economic conditions and motivations for direct investment vary markedly among countries, and it is difficult to generalize about the factors leading to low returns of foreign direct investment in the United States (Landefeld et al., 1992). Late Reporting Late filings by U.S. affiliates of foreign firms affect data on foreign direct investment in the United States. Late reporting imparts a bias to the direct investment data. The first figures released for any quarter, for example, can show that direct investment flows are falling, or rising less rapidly, because coverage is incomplete. The impression is corrected by subsequent revisions, but it is a source of concern. While knowledgeable users understand the limitations of the preliminary numbers, unsuspecting users can be misled by them. Until recently BEA did not estimate capital flows of late filers in the quarterly surveys, which resulted in large annual revisions for foreign direct investment in the United States and for U.S. direct investment abroad. In June 1992 BEA introduced a methodology that uses matched sample data from filers on changes in direct investment equity positions to estimate equity capital flows for late filers. Nonetheless, direct investment flows can be lumpy, and there may thus be no stable relationship between the figures of firms that report promptly and those that do not. BEA has been regularly monitoring the results of its estimates of equity capital flows for delinquent reporters and will continue to do so

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Following the Money: U.S. Finance in the World Economy and adjust estimating procedures if experience shows adjustment to be desirable. Financing of Multinationals One aspect of the activities of multinationals that is not presently contained in BEA's published data is a presentation of sources and uses of funds. Information about sources and uses was collected for several years during the 1970s in an annual BEA survey, using a simple reporting form, but that survey was eliminated in the late 1970s. Since 1982 BEA has instead conducted regular annual surveys of foreign direct investment in the United States and U.S. direct investment abroad. Data collected in these surveys includes items such as retained earnings, depreciation, capital expenditure, inventories, receivables and other assets. The data are published in balance sheet and income statement formats (see, for example, Bureau of Economic Analysis, 1994c). These data could be used to present information on sources and uses of funds, and it would be useful for BEA to do so. Data on sources and uses of funds of multinational enterprises would shed light on the extent to which they are financed by the local economy, as well as their contributions to the domestic sector. Such information is needed for analyzing the effect of foreign direct investment on the financial sector of the U.S. economy and that of U.S. direct investment abroad in host countries. Real Estate Transactions It is likely that foreign (nonresident) investment in U.S. real estate is not fully captured in the U.S. balance of payments. First, many of these transactions are in the form of limited partnerships.3 Limited partnerships are considered portfolio investment, not direct investment, and should be captured under the Treasury International Capital (TIC) system. Presently, however, they are covered only if they are listed on organized stock exchanges. Thus, large transactions representing the bulk of foreign investment in limited partnerships are covered, but smaller transactions may not be. Second, data on purchases of U.S. residential real estate by nonresidents for their personal use are not collected. Because 3   Non-U.S. citizens are prohibited by law from investing in certain types of limited partnerships (such as oil and gas exploration partnerships).

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Following the Money: U.S. Finance in the World Economy of the large number and the difficulty in identifying and locating potential respondents, it appears that it is impractical to obtain such information as a part of BEA's data collection system on foreign direct investment in the United States. Nor does BEA's present legal authority cover such transactions. Nonresident purchases of residential real estate for personal use are thought to be a relatively small component of foreign investment in the United States as a whole, but are of interest to some states, such as Hawaii. Efforts to date to collect such information at the state level have encountered difficulties in separating resident from nonresident transactions. RECOMMENDATIONS 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. 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) BEA should continue to regularly review its new estimation procedure for late reporting in its direct investment surveys to ensure its reliability and cost-effectiveness. (3-5)

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Following the Money: U.S. Finance in the World Economy TRANSACTIONS IN SECURITIES CURRENT PRACTICES Banks, brokers, and dealers in the United States (and, in principle, other U.S. transactors) make monthly reports on U.S. securities bought and sold by foreigners (nonresidents) and on foreign securities bought and sold by U.S. residents. The transactions are classified geographically by the country of residence of the foreign party, although that party is often a financial intermediary rather than the ultimate owner or issuer. These flow data are reported in the balance of payments. In addition, they are used in conjunction with separate benchmark survey data to estimate holdings of securities, which, in turn, are used to estimate investment income flows. This methodology produces three problems. First, when nonfinancial U.S. residents use brokers and dealers abroad to trade U.S. and foreign securities with foreigners, the transactions may not be recorded in the U.S. balance-of-payments statistics. Second, transactions in U.S. and foreign securities conducted in London and other foreign financial centers are reported as transactions for the countries in which the centers are located, not those in which the ultimate buyers and sellers reside. This has made it difficult to reconcile, for instance, U.S. and Japanese data on Japanese holdings of U.S. securities.4 Third, data on stocks of foreign securities held by U.S. residents are difficult to interpret or use to estimate income flows because they are based on flow data classified geographically by the counterparty (buyer or seller), not by the issuing country. There are fewer problems associated with the flow, stock, and income figures pertaining to transactions in U.S. securities than with the figures pertaining to transactions in foreign securities. Although there is uncertainty about the geographic location of foreign holdings of U.S. securities, there is no doubt about the issuing country of the stocks and bonds involved. As a result, there is good information about the interest rates, dividend payments, and yields when estimating income flows and adjusting 4   Under the TIC system, Japanese sales and purchases of U.S. securities are based on transactions that have taken place within the United States, while Japan's records include its worldwide transactions in U.S. securities. However, this does not necessarily result in a mismeasurement of net global transactions in U.S. Securities.

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Following the Money: U.S. Finance in the World Economy the values of holdings of U.S. securities by foreigners. When dealing with U.S. holdings of foreign securities, by contrast, there is no way to determine which countries' stocks and bonds are being traded. In addition, foreign holdings of U.S. securities are regularly surveyed, most recently in 1989, providing an up-to-date benchmark which can be used to make adjusted estimates for intermediate years. As noted above, until 1994 U.S. holdings of foreign securities had not been surveyed in a half century. The Treasury Department has conducted benchmark surveys of foreign portfolio investment in the United States (inbound surveys) at least once every 5 years. These surveys collect information on foreign holdings of U.S. securities on a security-by-security basis. Approximately 4,000 U.S. firms that issue securities were included in the 1989 survey. The results of these benchmark surveys are intended to serve several purposes. First, they are used to update the cumulative transactions data with respect to both levels of foreign holdings and country of foreign investors. Second, they are used to improve estimates of the resulting income flows linked to the estimated stock of outstanding investment. Third, they are used to analyze foreigners' investment patterns in order to determine if these investments are of policy concern. Unfortunately, according to the Treasury Department, there are typically many errors in the initially submitted responses. In contrast to the regular TIC S forms, of which 80-90 percent are usable as submitted, only about 1 percent of submissions in the inbound survey can be used without extensive follow-up inquiries of the filers. The data eventually produced correspond well with position estimates based on the S form data, but the workload and reporting burden are substantially increased by the need for so much follow-up. To improve data on transactions in foreign securities, the Treasury Department and FRBNY in recent years have undertaken several steps, the most important of which was a new outbound survey. The Treasury Department, in close consultation with BEA, the Federal Reserve Board, FRBNY, the Securities and Exchange Commission, and other government agencies, undertook a 1994 benchmark survey of the magnitude and composition of U.S. holdings of foreign securities. The survey collected detailed information on individual, foreign, long-term securities—both debt and equity—held by U.S. residents. When available, the results should improve estimates of the U.S. international investment position, as well as those of investment incomes associated with U.S. residents' investments in foreign long-term securities. They will also be a check on the accuracy of securities flow data. The

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Following the Money: U.S. Finance in the World Economy outbound survey will focus on three types of institutions: (1) a small number of banks and brokerage firms operating as global custodians; 5 (2) a number of U.S. banks that may be operating as intermediary custodians for U.S. institutional and high-net-worth individual investors; and (3) large U.S. institutional investors active in international securities markets. In addition, the FRBNY is undertaking a broad-based survey of U.S. holdings of short-term foreign securities to complement the outbound survey of long-term securities. The plan is to survey all current respondents to selected TIC forms on their foreign short-term assets. 6 Specifically, respondents will be asked about their foreign assets of both negotiable and nonnegotiable short-term instruments, their foreign currency denominated assets, and short-term assets they hold in custody. Short-term instruments will include commercial paper; short-term marketable notes; bankers and trade acceptances; certificates of deposits; short-term federal, state, and local government paper; and account receivables. The Treasury Department also plans to include U.S. currency flows in the TIC reporting system. This information will improve U.S. international capital flow data, as well as estimates of U.S. monetary aggregates. This work is being carried out jointly by the Treasury Department's data management group, its financial enforcement offices (which are responsible for currency reports), and the Federal Reserve Board (see Chapter 5). The Treasury Department, prompted by BEA's research, completed a small survey of international transactions by U.S. pension funds in 1991. This was followed by a broader survey for 1992-1993 by the Treasury Department and the FRBNY. Both surveys have helped the Treasury Department's efforts to expand the S form reporting panel. The pension fund survey suggested that many transactions had been carried out by offshore money managers and so had not been captured by the reporting system. The 1992-1993 effort also uncovered a large number of nonreporters and generated additional data. The inclusion of transactions undertaken by U.S. pension funds resulted in a 25 percent increase in the gross value of reported securities transactions for the 17 months ending May 1993, a total of about $170 billion. 5   Global custodians are institutions that manage the custody of financial assets for clients; see Chapter 5. 6   The survey will also include a sample of nonreporters who are thought to be actively engaging in these activities.

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Following the Money: U.S. Finance in the World Economy TABLE 3-2 Direct Investment Data Forms, Bureau of Economic Analysis Report and Frequency Who Must Report Coverage BE-11 (all forms) Annually Nonbank U.S. persons having a nonexempt nonbank foreign affiliate. An affiliate is exempt if none of its exemption level items exceeds $15 million, if it is less than 20-percent-owned, directly and/or indirectly, by all U.S. reporters of the affiliate combined, if its U.S. parent is a bank, or if it is a bank U.S. direct investment abroad, including current economic data on the operations of U.S. parent companies and their foreign affiliates BE-11A Annually U.S. reporters meeting requirements for filing form BE-11 (see above) report data for consolidated domestic enterprise Financial and operating data of U.S. reporters, including information on balance sheet items, distribution of sales or gross operating revenues, and U.S. merchandise trade BE-11B Annually U.S. reporters meeting requirements for filing Report BE-11 (see above) report data on majority-owned affiliates Financial and operating data of majority-owned foreign affiliates, including information on balance sheet items, income statement, composition of external finances, distribution of sales or gross operating revenues, and U.S. merchandise trade BE-11C Annually U.S. reporters meeting requirements for filing Report BE-11 (see above) report data on minority-owned affiliates Financial and operating data of minority-owned foreign affiliates, including information on total assets, annual sales or gross operating revenues, net income (loss), U.S. merchandise trade, and employment and employee compensation

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Following the Money: U.S. Finance in the World Economy Report and Frequency Who Must Report Coverage BE-13 Upon acquisition A U.S. business enterprise when a foreign person establishes or acquires directly or indirectly through an existing U.S. affiliate a 10 percent or more voting interest in that enterprise, including an enterprise that results from the direct or indirect acquisition by a foreign person of a business segment or operating unit of an existing U.S. business enterprise that is then organized as a separate legal entity or an existing U.S. affiliate of a foreign person when it acquires a U.S. business enterprise, or a business segment or operating unit of a U.S. business enterprise, that the existing U.S. affiliate merges into its own operations rather than continuing or organizing as a separate legal entity Information related to initial foreign direct investment transaction, including identification and ownership structure of new U.S. affiliate or newly merged portion of a U.S. affiliate, financial and operating data, investment and services provided by state of local governments, and identification of foreign parent and ultimate beneficial owner, and cost of investment BE-14 Upon direct investment A U.S. person—including, but not limited to, an intermediary, a real estate broker, business broker, and a brokerage house—who assists or intervenes in the sale to, or purchase by, a foreign person or a U.S. affiliate of a foreign person, of a 10 percent or more voting interest in a U.S. business enterprise, including real estate or a U.S. person who enters into a joint venture with a foreign person to create a U.S. business enterprise Information related to purchase or sale transactions or related to joint ventures

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Following the Money: U.S. Finance in the World Economy Report and Frequency Who Must Report Coverage BE-15 (long and short forms) Annually Each nonbank U.S. business enterprise that was a U.S. affiliate of a foreign person at the end of its fiscal year, if on a fully consolidated, or, in the case of real estate investments, an aggregated basis, one or more of the following three items for the U.S. affiliate (not the foreign parent's share) exceeded cutoff levels at the end of its fiscal year: total assets, sales or gross operating revenues, excluding sales taxes, or net income after provision for U.S. income taxes. Cutoff levels are as follows: less than $10 million, exempt; between $10 and $20 million, file short form; greater than $20 million, file long form Covers financial and operating data of U.S. affiliate, including information on balance sheet items and schedule of employment, land and other property, plant, and equipment, changes in retained earnings or incorporated U.S. affiliate or in total owner's equity of unincorporated U.S. affiliate, distribution of sales or gross operating revenues, employee compensation, taxes and research and development, and merchandise trade of U.S. affiliate BE-133B and BE-133C Semiannually Each nonbank majority-owned foreign affiliate of a nonbank U.S. parent, if any of the following three items for the affiliate is expected to be outside the range of negative $10 million to positive $10 million in any of the years to be reported: total assets, annual net sales or gross operating revenues, excluding sales taxes, or annual net income (loss) after foreign income taxes Schedule and follow-up schedule of expenditures for property, plant, and equipment of U.S. direct investment abroad BE-507 Upon acquisition or change of industry classification Each foreign affiliate newly established or acquired by a U.S. person and required to be reported on form BE-577, BE-133B, or BE-133C; each U.S. person who becomes a new U.S. reporter by virtue of establishing or acquiring a Industry classifications of U.S. reporter and foreign affiliates

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Following the Money: U.S. Finance in the World Economy Report and Frequency Who Must Report Coverage   foreign affiliate; or existing foreign affiliate or U.S. reporter whose industry classification has changed from that on a previous form   BE-577 Quarterly U.S. persons who hold 10 percent or more of voting stock or equivalent interest in a nonexempt foreign business enterprise. If none of the three items listed below for a foreign business enterprise are outside the range of negative $15 million to positive $15 million, that enterprise is exempt from reporting U.S. reporter's equity in foreign affiliate's, receipts and payments between U.S. reporter and foreign affiliate during quarter, debt and other intercompany balances between foreign affiliate and U.S. reporter, change during the quarter in U.S. reporter's equity in capital stock and/or additional paid-in capital of incorporated foreign affiliate or equity investment in unincorporated foreign affiliate, and U.S. reporter's share in annual income and equity position BE-605 Quarterly Every U.S. business enterprise, except an unincorporated bank, in which a foreign person had a direct and/or indirect ownership interest of 10 percent or more of the voting stock if an incorporated business enterprise or an equivalent interest in an unincorporated business enterprise at any time during the reporting period Foreign parent's direct equity in U.S. affiliate's, direct payments to and receipts from foreign parent by U.S. affiliate, as consolidated, during quarter, intercompany debt balances between U.S. affiliate and foreign parent, change during the quarter in foreign parent's equity in U.S. affiliate, annual income and equity position, direct transactions or accounts between U.S. affiliate and foreign affiliates of the foreign parent

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Following the Money: U.S. Finance in the World Economy Report and Frequency Who Must Report Coverage BE-606B Quarterly Every unincorporated U.S. banking branch or agency in which a foreign person had a direct and/or indirect ownership interest of 10 percent or more at any time during the reporting period. The report is to cover direct transactions and positions between the unincorporated U.S. banking branch or agency (U.S. affiliate) and the foreign parent Changes during quarter in foreign parent's permanent invested capital, certain realized and unrealized gains (losses), net of tax effect, and foreign parent's charges to U.S. affiliate, net of U.S. affiliate's charges to the foreign parent during the quarter BE-10A, BE-10A-Bank, BE-10B, BE-10B-Bank Benchmark U.S. persons who hold 10 percent or more of voting stock or equivalent interest in a foreign business enterprise and foreign affiliates of U.S. direct investors Complete financial and operating data for U.S. persons who are direct investors abroad for each foreign affiliate; data on investment position and transactions between foreign affiliates and U.S. direct investors BE-12 Benchmark U.S. business enterprises (affiliates) in which one foreign person holds 10 percent or more of voting stock or equivalent interest Complete financial and operating data for each U.S. affiliate of foreign direct investors; data on investment position and transactions between U.S. affiliates and foreign direct investors more time to file the forms. They also would like BEA to consolidate forms with other federal ones that collect the same data. As can be seen in Tables 3-1 and 3-2, BEA and the Treasury Department use many forms to collect data on direct and portfolio investment transactions between U.S. residents and foreigners. In addition, other federal agencies that have oversight, supervisory, and regulatory responsibilities for the nation's financial systems require financial institutions to report certain data on their business activities. (There are also state agencies that monitor financial institutions.) Federal banking regulatory agencies

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Following the Money: U.S. Finance in the World Economy include the Federal Reserve Board, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency. These three regulatory authorities also act through the Federal Financial Institutions Examination Council (FFIEC). Other regulatory agencies include the Securities and Exchange Commission, which oversees the nation's securities markets, and the Commodities Futures Trading Commission, which regulates activities in futures exchanges. Table 3-3 shows the reports required by the Federal Reserve Board and the FFIEC; Table 3-4 shows those required by other federal and some state agencies. ASSESSMENT According to respondents to the panel's survey of filers of BEA and Treasury Department reports, it is not uncommon for an internationally active financial institution to file almost all of these forms, and sometimes multiple copies of each, for their various affiliates and subsidiaries. One such institution reported that it files 1,300 statistical and reporting forms annually. Filers, in general, find the statistical and regulatory data reporting burdensome. They also complain about inconsistencies in reporting requirements, duplicative efforts, and the high costs of compliance. Respondents also note that they find little direct benefit to the management of their complex businesses from the required reporting. The panel's survey of BEA, Treasury Department, and FRBNY staff to ascertain their perspectives on the efficiency of the existing data collection system on U.S. international capital transactions yielded similar observations. All recognized there is need to improve the existing system to close data gaps. In particular, BEA staff noted that the U.S. system suffers from gaps in coverage, duplication of effort, increasing respondent burdens, outdated data processing and collection methods, and inadequate or outdated estimation methodologies. BEA staff also noted that improvements in the efficiency of the existing data systems would be possible through access to banking and credit card clearance information; increased use of publicly available financial data; and increased use of regulatory information from agencies such as the Federal Reserve, the Securities and Exchange Commission, and the Commodities Futures Trading Commission (see Appendix B). The panel agrees with the above assessment. It believes that an effective response to the growing reporting burden and diminishing usefulness of some of the reported data requires three steps: (1) to reexamine vigorously the various statistical and regulatory

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Following the Money: U.S. Finance in the World Economy reports; (2) to identify and eliminate duplications and inconsistencies; and (3) to the extent possible, combine similar reports and simplify others. The goal is to redirect the systems to collect data that are of maximum use at minimum cost to both filers and compilers. Toward this end, federal regulatory and statistical agencies will have to work together to streamline existing reporting systems and to eliminate low-priority programs. This is in line with the mandates of the FDIC Improvement Act, which encourages the FFIEC to consider eliminating the numerous differences between regulatory accounting principles (RAP) and the generally accepted accounting principles (GAAP) used in the preparation of corporate financial statements. Streamlining of reporting requirements will not only ease the reporting burden, but will also reduce the need to reconcile different databases. The resulting savings can be used to improve data quality, enforce reporting compliance, and strengthen data analysis efforts. Data filers also report that disparate statistical and regulatory reports have hampered their electronic reporting; it is difficult to develop in-house automated data recording, management, and reporting systems to meet different reporting requirements. Coordinated efforts by federal regulatory and statistical agencies to develop consistent approaches to their data collection methods could greatly help the nation to move toward an electronic data collection system (see Chapter 5). Since the 1987 stock market crash, federal regulatory agencies have worked together more closely on their supervisory responsibilities. Further coordination of these agencies with their statistical counterparts on data reporting will strengthen the effectiveness of both the regulatory and the data reporting systems, essential for monitoring the financial conditions of U.S. economy. 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 the disparate regulatory and statistical reporting forms is needed to ensure that only relevant data useful for public policy making are collected and that irrelevant data are not. Such a review is critical to enhance the cost-effectiveness of the existing data collection systems 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 is likely to engender filers' cooperation and compliance, yielding more accurate and timely data.

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Following the Money: U.S. Finance in the World Economy TABLE 3-3 Forms on Activities of Financial Institutions, Federal Reserve Board, and Federal Financial Institutions Examination Council Report Frequency Coverage FC-1 Weekly Foreign currency report of banks in the United States FC-2 Weekly Consolidated foreign currency report on foreign branches and subsidiaries of U.S. banks FC-3 Monthly Assets, liabilities, and positions in specified foreign currencies of firms in the United States FC-4 Quarterly Consolidated report of assets, liabilities, and positions in specified currencies of foreign branches and subsidiaries of firms in the United States FFIEC 004 Annually Indebtedness FFIEC 009 Quarterly Country exposure report of banks in the United States FFIEC 019 Quarterly Country exposure report of foreign branches and subsidiaries of U.S. banks FFIEC 030 Annually Foreign branch report of condition FFIEC 031 Quarterly Consolidated Reports of Condition and Income (Call Report) FFIEC 032 Quarterly Consolidated Reports of Condition and Income (Call Report) FFIEC 033 Quarterly Consolidated Reports of Condition and Income (Call Report) FFIEC 034 Quarterly Consolidated Reports of Condition and Income (Call Report) FFIEC 035 Monthly Foreign currency report (domestic and foreign) FR 2006 Monthly Bankers' acceptances created by the bank FR 2042 Monthly Various time deposit instruments outstanding FR 2050 Weekly Selected deposits in foreign branches held by U.S. addresses FR 2069 Weekly Assets and liabilities for large U.S. branches and agencies of foreign banks FR 2077 Weekly Liabilities to/and custody holdings for U.S. addresses (foreign branches) FR 2415 Weekly Daily outstanding balances of selected borrowings FR 2416 Weekly Statement of condition for management's domestic offices and subsidiaries detailing assets, liabilities, and certain supplementary data FR 2502 Monthly Foreign branches assets and liabilities FR 2502S Quarterly Foreign branches assets and liabilities FR 2573 Monthly Total dollar of debits to demand and savings deposits

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Following the Money: U.S. Finance in the World Economy Report Frequency Coverage FR 2900 Weekly Daily outstanding balances of demand, time and savings accounts, daily outstanding balances of cash items and balances on deposit with other banks. Used for computing management's reserve requirements FR 2950 Weekly Certain Eurocurrency transactions done with foreign entities FR Y6 Annually Bank holding companies FR Y6A Quarterly Selected data for nonbank subsidiaries of bank holding companies FR Y7 Annually Annual report of foreign banking organizations FR Y8 Semiannually Report of bank holding company's intracompany transfers and balances FR Y9C Quarterly Consolidated financial statements for bank holding companies FR Y9LP Quarterly Parent company only financial statements FR Y11AS Annually Combined financial statements of nonbank subsidiaries of bank holding companies, by type of nonbank subsidiary FR Y11Q Quarterly Combined financial statements of nonbank subsidiaries of bank holding companies FR Y20 Quarterly Financial statements for a bank holding company subsidiary engaged in ineligible securities underwriting and dealing FR Y111 Annually Selected financial data for nonbank subsidiaries of bank holding companies RECOMMENDATIONS 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 Treasury Department and FRBNY and filers should be held for these purposes. (3-18)

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Following the Money: U.S. Finance in the World Economy TABLE 3-4 Other Reports Required of Financial Institutions Agency and Report Frequency Federal Deposit Insurance Corporation FDIC Assessment Semiannually FDIC Survey—Summary of deposits by domestic branch Annually FDIC Examination Every 5 years Federal Financial Institutions Examination Council Federal Reserve Board and New York State Bank Examination Annually Directors' examination Annually Trust examination Annually Abandoned property examination Every 5 years Securities and Exchange Commission Form 10-Q financial report Quarterly Form 10-K financial report Annually State and other agencies Section 121 Report Monthly Legal Lending Limit Quarterly New York State Report of Abandoned Property Annually Housing and Urban Development Survey Quarterly National Securities Clearing Corporation (NSCC) Survey Quarterly English Companies Act Annually The Treasury Department and the Federal Reserve Bank of New York should conduct an active educational campaign for data filers covering the purposes and uses 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 the 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) The panel recommends consideration of streamlining of reporting in four areas: The FFIEC 035 monthly foreign-currency report (see Table 3-3) contains substantial information on foreign-currency exposures. The additional requirement for financial institutions to file the weekly foreign-currency reports (FC-1, FC-2, FC-3, and FC-4) (see Table 3-3) for domestic offices and foreign offices seems unneces-

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Following the Money: U.S. Finance in the World Economy sary. The Federal Reserve Board and the Treasury Department should examine the two sets of forms to determine if the more detailed monthly FFIEC reports are sufficient to meet their needs for information on foreign-currency exposure. Through the quarterly Call Report (FFIEC 031, 032, 033, and 034) (see Table 3-3), the Federal Reserve Board, the FDIC, and the Office of the Comptroller of the Currency collect detailed information on the financial conditions of all banking institutions in the United States. In view of the volume of data gathered in the Call Report, the Treasury Department, in collaboration with the Bureau of Economic Analysis, should thoroughly review the usefulness of the TIC B forms, which collect monthly, quarterly, and semiannual information on banks' assets and liabilities with foreigners (see Table 3-1). If duplications exist or certain reported TIC data are no longer useful and meaningful, the TIC forms should be simplified. In view of the incomplete coverage under the TIC C form on nonbank commercial claims and liabilities with unaffiliated foreign firms, such as trade credit and accounts receivable and payable (see CQ-2 in Table 3-1), the Treasury Department and BEA should consider integrating Treasury's CQ-2 form with BEA's direct investment forms (see Table 3-2). In addition to direct investors, BEA should require firms that generate significant commercial credit and liabilities through trade to file the integrated form. Major U.S. and foreign exporters and importers located in the United States should be targeted. In addition, harmonizing the definitions of accounts payable and receivable used in balance-of-payments reporting and those used by firms in financial accounting under generally accepted accounting principles would help improve coverage. Under such principles, cash items are not included in accounts receivable or payable; they are, however, included in balance-of-payments reporting. The panel attaches great importance to BEA's 5-year censuses of outward and inward direct investments because they yield basic information on the economic effects of these enterprises. However, the panel notes that the list of questions and the degree of detail have multiplied over the years and is concerned that the reporting burden may outweigh the benefits. Accordingly, the panel recommends that BEA, in consultation with data users, review the need for each of the major sections of the censuses and the breakdowns, taking into account the extent to which the data developed are of good quality and used. (3-21)