1. What do banks do? Measuring traditional and non- traditional bank output Robert Inklaar Groningen Growth and Development Centre, University of Groningen and The Conference Board with Christina Wang (FRB Boston)

2. Why banks?  Importance for monetary policy  Not the topic here  Substantial sector of the economy  5% of GDP in U.S., 4% in EU  Important investor in new technology  7% of private U.S. ICT investment

3. What do banks do: the short answer  Resolve asymmetric information problems of borrowers  Provide transaction services for depositors  Fund management

4. Main argument  Existing output measures of bank output are mostly ad-hoc  GE model of Wang-Basu-Fernald (WBF, 2004) provides a coherent framework  Output measure presented here consistent with model  Choice of measure makes substantial difference

5. Outline WBF-model (1)  Banks provide transaction services and information services  Implicit payment, mostly aspart of interest income & expenses  Other services paid for through fees & commissions  But trading gains/losses should be excluded

6. Outline WBF-model (2)  Risk-adjusted opportunity cost of funds is key concept:  Banks provide funds plus services, so only income in excess of cost of funds is output  Similar for deposits: depositors accept below-market interest rates in return for transaction services => this is an output!

7. Shift towards securitization and away from deposits-funded lending

8. Securitized loans crucial growth factor

9. Real growth: the case for counting  Bank efficiency literature uses CPI-deflated loans and deposits as output indicators  Example: residential mortgages  Change in housing prices relative to average prices  Constant services per dollar or per loan?  Compare car dealers: counting # of cars sold is an improvement over using CPI to deflate sales, even if it’s not perfect

10. Choice between deflation and counts is very relevant

11. Non-traditional activities: what do banks get paid for?  Bank efficiency literature  Credit equivalent of OBS items  Asset equivalent of OBS items  Net non-interest income (CPI-deflated)  Suggestion:  Treat like other industries  Separately deflate different activities

12. How does separate deflation work?  Fund management  Count of the number of trust accounts  Investment banking & insurance  Output price of relevant industry  Securitization  Services similar to on-balance sheet lending  Other activities  Use misc. bank charges deflator from CPI

13. Again: the measure matters a lot

14. Conclusions  Measurement affects the results of industry-level and bank-level analysis  Use a theoretical framework to inform measurement  Framework can be partly implemented at bank level (in U.S.)  Still many improvements possible