Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Dodd–Frank Wall Street Reform and Consumer Protection Act wikipedia , lookup
Financial crisis of 2007–2008 wikipedia , lookup
Currency intervention wikipedia , lookup
Systemic risk wikipedia , lookup
Patriot Act, Title III, Subtitle A wikipedia , lookup
Fractional-reserve banking wikipedia , lookup
Systemically important financial institution wikipedia , lookup
Financial Crisis Inquiry Commission wikipedia , lookup
Improving Consistency in Measuring Financial Services in the National Accounts John Fernald* Federal Reserve Bank of San Francisco * All views expressed are my own and do not necessarily reflect the views of anyone else associated with the Federal Reserve System. 1 Financial crisis highlights key questions for which we need reliable measurement • How important is finance for economic growth? • How does “financial innovation” and the rise of the shadow banking system affect the economy? • How risky are different parts of the financial system? 2 Finance matters to the economy primarily as an intermediate input into other activities Credit intermediation, securities, investments, and related activities as share of GDP Percent Source: BEA Input-Output Tables 3 Financial crisis highlights key questions for which we need reliable measurement • How important is finance for economic growth? • How does “financial innovation” and the rise of the shadow banking system affect the economy? • How risky are different parts of the financial system? 4 Shadow banking system has overtaken the traditional banking system (but fallen off sharply recently) Source: Pozsar, Adrian, Ashcraft, and Boesky (2010). Shadow banking liabilities include items like total repo liabilities, net securities loaned, total liabilities of ABS issuers, and shares of money market mutual funds. 5 Financial crisis highlights key questions for which we need reliable measurement • How important is finance for economic growth? • How does “financial innovation” and the rise of the shadow banking system affect the economy? • How risky are different parts of the financial system? 6 One inconsistency: Treatment of risk across types of financial service providers • Financial services are complex and intangible, so measurement is challenging • Compensation for many services is implicit (through interest margins), not through explicit fees • Are risk premia part of the (nominal) compensation for services? • For banks, the BEA says yes, for non-banks (and the shadow banking system) the BEA says no • A preferable, practical fix for the inconsistency: Apply a risk-based “user-cost” approach to measuring nominal bank output • Consistent with theory and across providers • Conceptually similar to what BEA already does • Improved consistency in measuring bank output automatically improves consistency of non-financial statistics 7 Risk-based user cost on a bank loan • Bank lends $1 million at 10 percent • BEA’s imputation of nominal bank services: (rL –rRef )Loan + fees = (10%- rRef )($1 million) • What reference rate? Want the opportunity cost of the funds. • BEA uses something close to a risk-free rate, e.g., Treasury rates • If Treasury rate is 2 percent, then imputed service value is 8 percent ($80,000) • But the bank could have invested in a junk bond, or the stock market, or gold. Those are all foregone opportunities as well! 8 BEA approach measures nominal output of borrowing firms differently depending on financing choices • Consider a commercial real estate firm with a $1 million building that yields $100,000 in leasing revenue (with no labor) • Suppose it borrows from the bank at 10 percent interest • Implicitly buys $80,000 in intermediate financial services • So the firm’s “value added” – the implicit rental cost on the $1 million building—is $20,000 • Alternatively, it could borrow from the bond market • Pay fees of, say, $20,000 to an investment bank and rating agency, pay 8 percent interest on the loan • Firm is recorded as buying $20,000 in intermediate financial services, and value added is $80,000 • The firm might be indifferent, and economics might be identical…but measurement is not 9 Common-sense answer is to treat risk the same across financing choices • Wang-Basu-Fernald (2004) model a bank as if it were a bond market and a rating agency • The correct opportunity cost of the bank’s funds is what the fixed-income market would charge on a similar loan • (rL –rRef )Loan + fees = (10%- 8% )($1 million) =$20,000 • If the bank offers additional services beyond a rating agency, the riskadjusted user cost measure automatically captures that 10 Adjusting for the risk of bank loans is possible (Basu-Inklaar-Wang, 2009) 11 Risk premium (for term and default risk) varies over time (Basu-Inklaar-Wang, 2009) 12 Payoffs to better measurement of financial output • Measuring value added of banking system properly allows more accurate assessment of its economic contribution • Especially important now, when high risk premia artificially inflate BEA measure of bank value added (all else equal) • Future risk premia will fall as asset markets stabilize, and current method will make it appear that the banking system is declining in importance • Distinguish bank’s “value creation” from riskiness of its existing portfolio • Allows market participants to better assess the risk of investing in banks • Will help regulators to evaluate the health of the banking system more accurately 13 Conclusion • Key questions are hard to answer because of inconsistencies in the national accounting for financial services • Need accounting based on economic function, not type of institution • A key principle of financial reform: Regulate based on economic function in order to minimize regulatory arbitrage • Improving nominal consistency is both preferable and practical • Measuring real value of bank services is also difficult, and raises conceptual issues • Being explicit about the services that banks actually perform helps resolve the difficulties and leads to better measurement of real output as well 14