The Treatment Of Interest And Financial Intermediaries In The National Accounts: The Old “Bundle” Versus The New “Unbundle” Approach

As is widely recognized both in the literature and by the practitioners, the treatment of financial intermediaries has been one of the most controversial issues in national accounting. This has been so largely because no one up to now has been able to define the output of banks and other financial intermediaries. In the present paper, a theory of services in general and of financial services in particular is used to demonstrate that financial intermediaries produce at least six commodity type services. Furthermore, it is argued that in order to solve the banking imputation problem it is necessary to separate the theory of interest rates from the theory of financial services and examine the interdependence between them. The gross interest rate must be unbundled because it contains three distinct components. These are, first, the pure interest rate, which reflects payment for a factor‐type service; second, payments for six commodity‐type services, which reflect the output of financial intermediaries; and, third, payments for unilateral transfers. The new unbundled approach is contrasted to the old bundle approach used and/or advocated by standard economic theory, the SNA, Sunga and the Ruggleses. Furthermore, it is recommended that payments for the pure interest rate be considered as part of income of the paying enterprise or sector while payments for financial services by enterprises to other enterprises should be considered as intermediate purchases.