IDEAS home Printed from https://ideas.repec.org/p/fip/fedbpp/06-3.html
   My bibliography  Save this paper

Risk bearing, implicit financial services, and specialization in the financial industry

Author

Listed:
  • Susanto Basu
  • J. Christina Wang

Abstract

What is the output of financial institutions? And how can we measure their nominal and, more importantly, real value, especially since many financial services are provided without explicit charges? This paper summarizes the theoretical result that, to correctly impute the nominal value of implicit financial service output, the ?user cost of money? framework needs to be extended to take account of the systematic risk in financial instruments. This extension is easy to implement in principle: One can continue using the current imputation procedure, and the only change needed is to adjust the reference rates of interest for risk. ; The paper clarifies why the risk-related income is not part of the output?or equivalently, why risk bearing is not a service?of financial institutions. The paper next argues that, to measure real output, one must first explicitly specify and define the economic services produced by financial firms, a step that is absent from the ?user cost of money? theory. Once it is established that only financial services, and not instruments, should be counted as the value added of financial firms, it follows that the quantity of services provided by these institutions is not necessarily in fixed proportion to the volume of instruments. The corollary is that the implicit price of financial services bears no definitive relationship with any reference rate. Instead, price deflators for financial services should be constructed using methods similar to those used for other services.

Suggested Citation

  • Susanto Basu & J. Christina Wang, 2005. "Risk bearing, implicit financial services, and specialization in the financial industry," Public Policy Discussion Paper 06-3, Federal Reserve Bank of Boston.
  • Handle: RePEc:fip:fedbpp:06-3
    as

    Download full text from publisher

    File URL: http://www.bostonfed.org/economic/ppdp/2006/ppdp063.htm
    Download Restriction: no

    File URL: http://www.bostonfed.org/economic/ppdp/2006/ppdp063.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Diewert, W E, 1974. "Intertemporal Consumer Theory and the Demand for Durables," Econometrica, Econometric Society, vol. 42(3), pages 497-516, May.
    2. Berger, Allen N. & Humphrey, David B., 1997. "Efficiency of financial institutions: International survey and directions for future research," European Journal of Operational Research, Elsevier, vol. 98(2), pages 175-212, April.
    3. Barnett, William A., 1980. "Economic monetary aggregates an application of index number and aggregation theory," Journal of Econometrics, Elsevier, vol. 14(1), pages 11-48, September.
    4. Barnett, William A & Kirova, Milka & Pasupathy, Meenakshi, 1995. "Estimating Policy-Invariant Deep Parameters in the Financial Sector When Risk and Growth Matter," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 1402-1429, November.
    5. Fama, Eugene F., 1984. "The information in the term structure," Journal of Financial Economics, Elsevier, vol. 13(4), pages 509-528, December.
    6. Hancock, Diana, 1985. "The Financial Firm: Production with Monetary and Nonmonetary Goods," Journal of Political Economy, University of Chicago Press, vol. 93(5), pages 859-880, October.
    7. Lawrence J. Radecki, 1999. "Banks' payments-driven revenues," Staff Reports 62, Federal Reserve Bank of New York.
    8. Lawrence J. Radecki, 1999. "Banks' payments-driven revenues," Economic Policy Review, Federal Reserve Bank of New York, vol. 5(Jul), pages 53-70.
    9. Fama, Eugene F. & French, Kenneth R., 1989. "Business conditions and expected returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 25(1), pages 23-49, November.
    10. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    11. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
    12. Dennis J Fixler & Marshall B Reinsdorf & Shaunda Villones, 2010. "Measuring the services of commercial banks in the NIPA," IFC Bulletins chapters, in: Bank for International Settlements (ed.), The IFC's contribution to the 57th ISI Session, Durban, August 2009, volume 33, pages 346-349, Bank for International Settlements.
    13. Donal J. Donovan, 1978. "Modeling the Demand for Liquid Assets: An Application to Canada (Etablissement d'un modèle de demande d'actifs liquides: application au Canada) (Construcción de un modelo de demanda de activos líqu," IMF Staff Papers, Palgrave Macmillan, vol. 25(4), pages 676-704, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. repec:dgr:rugggd:gd-117 is not listed on IDEAS
    2. Bertrand Groslambert & Raphaël Chiappini & Olivier Bruno, 2015. "Bank Output Calculation in the Case of France: What Do New Methods Tell About the Financial Intermediation Services in the Aftermath of the Crisis?," GREDEG Working Papers 2015-32, Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), Université Côte d'Azur, France.
    3. Robert Inklaar & J. Christina Wang, 2013. "Real Output of Bank Services: What Counts is What Banks Do, Not What They Own," Economica, London School of Economics and Political Science, vol. 80(317), pages 96-117, January.
    4. Susanto Basu & Robert Inklaar & J. Christina Wang, 2011. "The Value Of Risk: Measuring The Service Output Of U.S. Commercial Banks," Economic Inquiry, Western Economic Association International, vol. 49(1), pages 226-245, January.
    5. Chaffai, Mohamed & Dietsch, Michel, 2015. "Modelling and measuring business risk and the resiliency of retail banks," Journal of Financial Stability, Elsevier, vol. 16(C), pages 173-182.
    6. Inklaar, R. & Colangelo, A., 2010. "Banking sector output measurement in the euro area – a modified approach," GGDC Research Memorandum GD-117, Groningen Growth and Development Centre, University of Groningen.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. J. Christina Wang & Susanto Basu & John G. Fernald, 2009. "A General-Equilibrium Asset-Pricing Approach to the Measurement of Nominal and Real Bank Output," NBER Chapters, in: Price Index Concepts and Measurement, pages 273-320, National Bureau of Economic Research, Inc.
    2. Barnett, William A. & Chauvet, Marcelle, 2011. "How better monetary statistics could have signaled the financial crisis," Journal of Econometrics, Elsevier, vol. 161(1), pages 6-23, March.
    3. Fixler, Dennis & Zieschang, Kim, 2019. "Producing liquidity," Journal of Financial Stability, Elsevier, vol. 42(C), pages 115-135.
    4. Barnett, William A. & Su, Liting, 2020. "Financial Firm Production Of Inside Monetary And Credit Card Services: An Aggregation Theoretic Approach," Macroeconomic Dynamics, Cambridge University Press, vol. 24(1), pages 130-160, January.
    5. William Barnett & Meenakshi Pasupathy, 2003. "Regularity of the Generalized Quadratic Production Model: A Counterexample," Econometric Reviews, Taylor & Francis Journals, vol. 22(2), pages 135-154.
    6. Kimberly D. Zieschang, 2016. "FISIM Accounting," CEPA Working Papers Series WP012016, School of Economics, University of Queensland, Australia.
    7. Robert Inklaar & J. Christina Wang, 2013. "Real Output of Bank Services: What Counts is What Banks Do, Not What They Own," Economica, London School of Economics and Political Science, vol. 80(317), pages 96-117, January.
    8. Li, Xiafei & Luo, Di, 2019. "Financial constraints, stock liquidity, and stock returns," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 63(C).
    9. William Barnett & Liting Su, 2017. "Financial Firm Production Of Inside Monetary And Credit Card Services: An Aggregation Theoretic Approach1," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 201707, University of Kansas, Department of Economics, revised Oct 2017.
    10. Henkel, Sam James & Martin, J. Spencer & Nardari, Federico, 2011. "Time-varying short-horizon predictability," Journal of Financial Economics, Elsevier, vol. 99(3), pages 560-580, March.
    11. Lekkos, Ilias & Milas, Costas, 2004. "Time-varying excess returns on UK government bonds: A non-linear approach," Journal of Banking & Finance, Elsevier, vol. 28(1), pages 45-62, January.
    12. Bakshi, Gurdip & Panayotov, George & Skoulakis, Georgios, 2011. "Improving the predictability of real economic activity and asset returns with forward variances inferred from option portfolios," Journal of Financial Economics, Elsevier, vol. 100(3), pages 475-495, June.
    13. Cochrane, John H., 2005. "Financial Markets and the Real Economy," Foundations and Trends(R) in Finance, now publishers, vol. 1(1), pages 1-101, July.
    14. William A. Barnett & Milka Kirova & Meenakshi Pasupathy, 1996. "Technology Modeling: Curvature is not Sufficient for Regularity," Econometrics 9602002, University Library of Munich, Germany, revised 24 Jun 1999.
    15. William Barnett & Barry E. Jones & Milka Kirova & Travis D. Nesmith & Meenakshi Pasupathy1, 2004. "The Nonlinear Skeletons in the Closet," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 200403, University of Kansas, Department of Economics, revised May 2004.
    16. Alex Ilek & Tanya Suchoy & Nir Klein, 2006. "Estimating the premium implicit in the yields of Treasury Bills," Israel Economic Review, Bank of Israel, vol. 4(2), pages 53-83.
    17. John H. Cochrane, 1999. "New facts in finance," Economic Perspectives, Federal Reserve Bank of Chicago, vol. 23(Q III), pages 36-58.
    18. Athanasoglou, Panayiotis P. & Georgiou, Evangelia A. & Staikouras, Christos C., 2009. "Assessing output and productivity growth in the banking industry," The Quarterly Review of Economics and Finance, Elsevier, vol. 49(4), pages 1317-1340, November.
    19. H Fukuyama & W L Weber, 2009. "Estimating indirect allocative inefficiency and productivity change," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 60(11), pages 1594-1608, November.
    20. Moritz Wagner & John Byong-Tek Lee & Dimitris Margaritis, 2018. "Mutual Fund Flows and Seasonalities in Stock Returns," Working Papers in Economics 18/17, University of Canterbury, Department of Economics and Finance.

    More about this item

    Keywords

    Financial services industry;

    JEL classification:

    • E01 - Macroeconomics and Monetary Economics - - General - - - Measurement and Data on National Income and Product Accounts and Wealth; Environmental Accounts
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fedbpp:06-3. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: https://edirc.repec.org/data/frbbous.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Spozio (email available below). General contact details of provider: https://edirc.repec.org/data/frbbous.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.