Banking Output & Price Indicators from Quarterly Reporting Data

Banque centrale du Luxembourg Working Paper No. 27

28 Pages Posted: 2 Mar 2007 Last revised: 23 Jul 2020

See all articles by Paolo Guarda

Paolo Guarda

Banque Centrale du Luxembourg

Abdelaziz Rouabah

Banque Centrale du Luxembourg

Date Written: June 6, 2007

Abstract

The measurement of banking output (and therefore productivity) has long been controversial. This article applies the user cost approach in Fixler and Zieschang (1999) to quarterly reporting data from Luxembourg's banking sector. This requires associating the flows in the profit-and-loss account to different assets and liabilities in the balance sheet. The user cost of each asset/liability is then calculated as the difference between the rate at which it generates revenues/costs and a "reference rate" representing the opportunity cost of funds. A negative user cost then identifies an asset or liability as an output and a positive user cost identifies it as an input in the production process. In theory, this datadriven approach is capable of combining elements of both the two traditional approaches to measuring banking output (the production and intermediation approaches) since these classify inputs and outputs on an a priori basis. In practice, our results suggest that neither of these conventional approaches is wholly consistent with the data for Luxembourg. We then use multilateral Törnqvist indices to aggregate outputs and inputs separately and show that the resulting series are robust to alternative measures of the reference rate. The difference between the output and input index provides a measure of Total Factor Productivity (TFP) and an implicit price index is also derived. Results suggest that productivity growth in Luxembourg's banking sector has been high since the mid-1990s, displaying volatile but persistent dynamics and moving pro-cyclically. Productivity varies widely across banks but larger banks (in terms of total assets) tend to be more productive.

Keywords: banks, total factor productivity, Törnqvist index

JEL Classification: G21, D24, C34

Suggested Citation

Guarda, Paolo and Rouabah, Abdelaziz, Banking Output & Price Indicators from Quarterly Reporting Data (June 6, 2007). Banque centrale du Luxembourg Working Paper No. 27, Available at SSRN: https://ssrn.com/abstract=966293 or http://dx.doi.org/10.2139/ssrn.966293

Paolo Guarda (Contact Author)

Banque Centrale du Luxembourg ( email )

2, boulevard Royal
Luxembourg, L-2983
Luxembourg

Abdelaziz Rouabah

Banque Centrale du Luxembourg ( email )

2, boulevard Royal
Luxembourg, L-2983
Luxembourg

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