The Productivity of the Banking Sector: Integrating Financial and Production Approaches to Measuring Financial Service Output

Abstract

Measurement of output for services in general, and for financial services in particular, is a challenge. In the context of the national accounts, there is a significant component of financial services output for which payment is made implicitly through the spread between the asset interest earned and liability interest paid by financial institutions. Although it is reasonably clear that the total value of output of financial institutions includes the net interest income on financial asset and liability products (such as loans and deposits for banks) plus explicit service charges, there are unsettled issues concerning the correct allocation of the net interest component across business (intermediate consumers) versus households, government, and the rest of the world (final consumers). Recent revisions in national accounting rules for banking, together with the developments since the late 1970s in the microeconomic theory of financial firms and of household consumption of financial asset services (Diewert 1974, Barnett 1978, Donovan 1978, Hancock 1985) represent important developments in our understanding of the economics of and measurement possibilities for the banking sector. Central to, and an important contribuLtion of, this last line of literature has been the characterization of the prices of individual service products in terms of the Barnett (1978)-Donovan (1978) user cost of money. These user cost prices are simple functions of items, such as interest rates, that can be measured in financial market transactions. The principal practical economic measurement issues these developments have illuminated are twofold: