Banking's risky business

[CHIMO]

Remember the dog days of 2008? Of course, you do. That was the period when the banks were being bailed out willy-nilly by the taxpayer and global capitalism appeared to be on the brink of collapse. During the final three months of 2008, the world economy was shrinking at an annual rate of 6% and international trade was collapsing at an annual rate of 25%. The shares of the world's leading banks dropped by around 50% during those three months.

To be a banker during that winter was to be a social pariah. Not since the Great Depression of the 1930s had the public held the financial sector in such low esteem. Yet that was not the picture of the banks painted by government data. The national accounts published by the Office for National Statistics showed that the financial sector was making its biggest contribution since the mid-1980s to the UK economy; between the third and fourth quarters there was a record increase in the value of the services provided by the banks.

Confused? Clearly, there's something not quite right about a state of affairs where banks are both contributing massively to the economy while at the same time being rescued from collapse. Fortunately, an answer to this conundrum was provided given today in a paper by Andrew Haldane, the Bank of England's director of financial stability. It also has much wider ramifications, which we'll get to later.

Haldane's paper, given at a London School of Economics' conference on the future of finance argues that the answer to the puzzle lies in the way the ONS measures the value of financial services. Although this has a name that only a number-cruncher could come up with – Financial Intermediation Services Indirectly Measured (FISIM) – it is actually quite a simple concept. Banks charge interest on the loans they make and they pay interest on the deposits they take in. FISIM is calculated by subtracting the interest rate on deposits from the interest rate on loans and multiplying by the number of outstanding bank balances.

http://www.guardian.co.uk/commentisfree/2010/jul/14/banking-risky-business-economy