Download Identifying financial services

In the first part of our presentation, Philippe
outlined changes in activities of financial
corporations and presented a working
definition
 Next question: what are the services
rendered by financial corporations?
 Have they changed as well? And how can
they be measured?
 But first: some terminology

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Terminology: Production process of
financial unit
Output = Services
Inputs
Activities
•Labour
•Liquidity provision service
•Monitoring service
•Financial information service
•…
•Other services
•Non-financial goods/services
•Non-financial capital services
Financial capital
•Risk management
•Liquidity transformation
•…
•Other activities
Output-Support =
Financial Instruments
•Deposits
•Loans
•Securities
•…
•Other instruments
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Identifying financial services (1)


Finance literature on ‘theory of financial
intermediation’
Monitoring services
– Financial corporation assumes costly monitoring of
borrowers on behalf of depositors
– Financial corporation assumes costly monitoring of
depositors on behalf of borrowers

Convenience services
– Bookkeeping
– Safeguarding
– Transfer of funds etc.
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Identifying financial services (2)

Liquidity provision services
– Depositors: capacity to finance unforeseen
expenditure due to withdrawal possibility
– Borrowers: credit lines

Risk assumption services
– Without financial corporations, individual
economic agents would bear the full risk of
financial operations
– Financial corporations assume (parts of) risks of
financial operations
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Identifying financial services (3):
Examples of risks
Financial
instrument
Type of risk
Loan
Default of borrower
Securitized
mortgage
Deposit
Portfolio
management on
behalf of client
Bonds issued by
financial
corporation
Risk borne by
Financial
corporation
Default of borrower
Financial
corporations that
are holders of loanbased securities
Withdrawal by
Financial
depositor
corporation
Misjudge markets
Client
Misjudge markets
Financial
corporation
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Identifying financial services (4)

Financial information services
– As a separate product (e.g. credit rating agency)
– Embedded in portfolio management activities

Underwriting services
– consulting on issuance of security
– securitizaton services

Inventory, trading and market making services
– Supply of ‘immediacy’
– Market makers bring together buyers and sellers
– Remuneration: bid-ask spread
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Measuring financial services
Explicitly priced: value of service = value of
commission, fee etc.
 Implicitly priced: more difficult

– Example: depositor buys risk assumption
services from financial corporation by
accepting interest that is lower than the one
paid by the ultimate borrower of his funds

No one-to-one correspondence between
type of payment and type of service
– Example: underwriting services by investment
bank: fixed fee combined with margin on price
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of security
Implicitly priced services: an economic
rationale for measurement (1)
Assume for a moment there are no financial
corporations and only loans
 Loans are granted by non-financial units at
rate rL
 Alternative financial investment at
minimum risk at rate rr
 Total risk (rL-rr)yL
 Risk is borne by (non-financial) lenders

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Deposit / loan market without financial corporations
Interest paid
Financing
Non-financial
units with
demand for
funds
Financial
Markets
Non-financial units
with surplus
of funds
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Implicitly priced services: an economic
rationale for measurement (3)





Now let there be a bank that accepts deposits yD at
rate rD and lends them all out at rate rL
Total risk associated with lending is still (rL-rr)yL
But the non-financial unit now only accepts a risk
of (rD -rr) yD
The differential risk (rL-rr)yL - (rD -rr) yD is borne
by financial institution
This corresponds to Eurostat FISIM = (rr-rD) yD +
(rL-rr)yL
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Deposit / loan market with financial corporations
Interest paid
Financing
Non-financial
units with
demand for
funds
Financial
Markets
Loan (YL)
Deposit (YD)
rL
Interest rate
for loans
Non-financial units
with surplus
of funds
Financial
corporations
Assets
rD
Interest rate
for deposits
Liabilities
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So what?


A different rationale has been provided for a welldefined (FISIM) procedure. Is it worth the
trouble?
Yes, because:
– equality in outcome with FISIM only holds for the
simple deposit-loan case but the logic of measuring
implicitly priced financial services extends directly
to a more general case with other assets involved
– it emphasises the fact that both sides of the balance
sheet are important for the production of a financial
service ==> link back to definition
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Beyond the deposit/loan case


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Structural shift away from deposit/loan business:
different sources of funding and forms of investment
Parts of the literature associate (intermediation)
services exclusively with deposits and loans.
Transactions with other financial instruments are
considered merely financial market transactions
Following the economic rationale adopted here, this
reasoning would not hold: implicitly priced financial
services are also identifiable with securities
– But we allow for a broader range of sources of
funds of financial corporations
– And we allow for a broader range of investment
possibilities for financial corporations
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Beyond the deposit/loan case (II)

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Just as they create markets for deposits, financial
units create markets for securities issued by
financial corporations.
A residual computation similar to the simple
deposit/loan case can be envisaged but under the
inclusion of other financial assets and liabilities.
A number of questions remain to be further
discussed by the taskforce, however.
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Should all securities be included?

Discussion point in the Task Force: investment in
shares
– Can be seen as one instrument by which e.g. risk
assumption or liquidity provision services are provided
– What about shares held to achieve short-term trading
gains?
– Shares are not interest-bearing and the most important
element of return is price changes
– But price changes are holding gains/losses in the SNA
and do not constitute compensation for services
– Distinction between ‘expected’ and ‘pure’ holding gains
as proposed by Moulton and Fixler
– Any discussion about holding gains has to consider
holding losses
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What about financial derivatives?

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Taskforce opinion: they cannot be a priori
excluded as carrier of financial services
But they constitute off-balance sheet items in
commercial accounting
A large part of derivatives is traded within the
financial sector
This reduces their importance from a macroeconomic viewpoint unless these intra-sectoral
links are international
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Other points

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Can we identify the units that buy financial
services?
Yes, in the case of deposits and loans
Things get much more complicated when other
securities are involved
Volumes and prices - much work left
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Issues for discussion

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
Is the list of financial services comprehensive?
Are important services missing?
Beyond the deposit/loan case - a good idea?
Is the task force on the right track? Further
issues that should be tackled? Others that
should not be treated?
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