Risk Bearing, Implicit Financial Services and Specialization in the Financial Industry

31 Pages Posted: 17 Feb 2009 Last revised: 5 Mar 2009

See all articles by J. Christina Wang

J. Christina Wang

Federal Reserve Bank of Boston

Susanto Basu

Boston College, College of Arts and Sciences, Department of Economics; National Bureau of Economic Research (NBER)

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Date Written: December 2008

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

Suggested Citation

Wang, J. Christina and Basu, Susanto, Risk Bearing, Implicit Financial Services and Specialization in the Financial Industry (December 2008). NBER Working Paper No. w14614, Available at SSRN: https://ssrn.com/abstract=1344680

J. Christina Wang (Contact Author)

Federal Reserve Bank of Boston ( email )

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Boston, MA 02210
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Susanto Basu

Boston College, College of Arts and Sciences, Department of Economics ( email )

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Chestnut Hill, MA 02467-3806
United States
617-552-2308 (Fax)

National Bureau of Economic Research (NBER) ( email )

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