Risk Bearing, Implicit Financial Services and Specialization in the Financial Industry / J. Christina Wang, Susanto Basu.

By:

Wang, J. Christina

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Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w14614.Publication details: Cambridge, Mass. National Bureau of Economic Research 2008.Description: 1 online resource: illustrations (black and white)Subject(s):

E01 - Measurement and Data on National Income and Product Accounts and Wealth • Environmental Accounts
E44 - Financial Markets and the Macroeconomy
G21 - Banks • Depository Institutions • Micro Finance Institutions • Mortgages
G32 - Financing Policy • Financial Risk and Risk Management • Capital and Ownership Structure • Value of Firms • Goodwill

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Abstract: This paper makes three points regarding the proper measurement of the output of financial intermediaries. Two of them concern the measurement of nominal financial output, especially banking output. First, we show that, to impute the nominal value of implicitly priced financial output, it is necessary to adjust each reference rate of interest (also called "the user cost of funds") for the risk inherent in that corresponding financial transaction. Otherwise, nominal financial output will be overstated, and the bias can be large (about 25 percent). Second, we argue that, according to finance theory, the required risk correction can be implemented practically at the level of industries (e.g., the banking sector as a whole). The third point concerns the construction of a financial services price index, and thus applies to the measurement of real output. We argue that the reference rates or the related rate spreads, which are used to impute the nominal output of financial institutions, are not the right implicit price deflators for deriving the real output of financial institutions

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Previous	nber w14611 The Effects of Capacity on Sales Under Alternative Vertical Contracts /	nber w14612 Deciphering the Liquidity and Credit Crunch 2007-08 /	nber w14613 A Theory of Firm Scope /	nber w14614 Risk Bearing, Implicit Financial Services and Specialization in the Financial Industry /	nber w14615 The Value of Risk: Measuring the Service Output of U.S. Commercial Banks /	nber w14616 A General-Equilibrium Asset-Pricing Approach to the Measurement of Nominal and Real Bank Output /	nber w14617 Unemployment Dynamics in the OECD /	Next

December 2008.

This paper makes three points regarding the proper measurement of the output of financial intermediaries. Two of them concern the measurement of nominal financial output, especially banking output. First, we show that, to impute the nominal value of implicitly priced financial output, it is necessary to adjust each reference rate of interest (also called "the user cost of funds") for the risk inherent in that corresponding financial transaction. Otherwise, nominal financial output will be overstated, and the bias can be large (about 25 percent). Second, we argue that, according to finance theory, the required risk correction can be implemented practically at the level of industries (e.g., the banking sector as a whole). The third point concerns the construction of a financial services price index, and thus applies to the measurement of real output. We argue that the reference rates or the related rate spreads, which are used to impute the nominal output of financial institutions, are not the right implicit price deflators for deriving the real output of financial institutions