| Working
Paper 03-6
by J. Christina Wang
This paper constructs a new measure of output for Bank
Holding Companies (BHCs) over the period 1986 to 1999.
This flow measure of bank value added follows from a
unified model of bank operation that integrates theories
of production, financial intermediation, and asset pricing.
The primary contribution of the model is to demonstrate
how one should account for risk when measuring the value
added of bank services. One key implication is that
the risk-related return on the funds banks borrow and
lend should be excluded from the nominal value of the
services banks produce, since the model recognizes that
these funds are simply a particular kind of intermediate
input. The new output measure is thus conceptually different
from the existing ones even in terms of the nominal
value. This paper focuses on deriving the nominal value
of bank services according to the new measure, since
no adequate data are available for compiling more accurate
price indices for the services. Comparisons show that
the new measure differs noticeably from the two existing
ones. First, it is about 25% smaller than the measure
stipulated in System of National Accounts 1993, and
it is two orders of magnitude smaller than the measure
used in virtually all the empirical studies of individual
banking organizations. Second, the new measure exhibits
quite different time series properties––in
particular, it is more cyclical. This new model-based
measure of bank output carries significant implications
for the measurement of banking output in the National
Income Accounts, providing the theoretical basis for
a new approach that is consistent with basic principles.
This paper can be regarded as a first attempt to resolve
the host of data limitations on the implementation of
the new measure. Better data and more accurate price
indices for bank services will be needed before the
new measure can become practical for National Income
Accounting.
JEL classification codes: G21, D24, O47
Keywords: bank holding company, service output, risk
premium, value added
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