The Treatment of Interest and Financial Intermediaries in the National Accounts: The Old “Bundle” Versus the New “Unbundle” Approach

Abstract

As is widely recognized both in the literature and by the practitioners, the treatment of financial intermediaries has been one of the most controversial issues in national accounting. This has been so largely because no one up to now has been able to define the output of banks and other financial intermediaries. In the present paper, a theory of services in general and of financial services in particular is used to demonstrate that financial intermediaries produce at least six commodity type services. Furthermore, it is argued that in order to solve the banking imputation problem it is necessary to separate the theory of interest rates from the theory of financial services and examine the interdependence between them. The gross interest rate must be unbundled because it contains three distinct components. These are, first, the pure interest rate, which reflects payment for a factor‐type service; second, payments for six commodity‐type services, which reflect the output of financial intermediaries; and, third, payments for unilateral transfers. The new unbundled approach is contrasted to the old bundle approach used and/or advocated by standard economic theory, the SNA, Sunga and the Ruggleses. Furthermore, it is recommended that payments for the pure interest rate be considered as part of income of the paying enterprise or sector while payments for financial services by enterprises to other enterprises should be considered as intermediate purchases.

Efficiency and Productivity Growth in Indian Banking

“…Again, the cost criterion followed in the production approach does not adequately serve to distinguish financial inputs from financial outputs, because obtaining any financial input incurs some labour and capital costs. According to Mamalakis (1987), these measures of output in banking have serious conceptual and measurement problems. 2 The user cost approach first applied by Hancock (1985) determines whether a financial product is an input or an output on the basis of its net contribution to bank revenue.…”

“…Deposits and other liabilities are treated as inputs to the intermediation process because they provide the raw material for investible funds. Mamalakis (1987) makes some distinction between funds intermediation and deposit services of a bank, whereas the asset approach considers only the former. Another criticism of this approach is that its grouping of inputs and outputs is arbitrary, as the choices made by some researchers are disputed by others, and the approach admits no mechanisms for resolving such debates.…”

“…Mamalakis (1987) attempted to solve the banking imputation problem, first, by developing and using a theory of financial services. The gross interest rate was unbundled into the pure interest rate, charges for financial services and other (unilateral transfer) charges.…”

Financial Intermediation Services Indirectly Measured: Estimates for France and the U.K. Based on the Approach Adopted in the 1993 Sna

“…A paper by Mamalakis (1987) which builds on the work mentioned above, provides a possible bridge between the financial economics and national accounting approaches. He suggests that progress can be made in solving some of the problems surrounding FISIM by unbundling interest flows into three components.…”