Producer Price Index Manual: Theory and Practice ... - METAC

Producer Price Index Manual
would be necessary to adjust nominal interest rates
and service fees for changes in price movements,
and again might be important in countries experiencing
relatively high rates of inflation.
⎡
⎣( ) ⎤
⎦ , the output would be expressed in terms of the numbers
of accounts, and the user cost prices above
where L represents the amount on a liability account
to the creating or issuing financial institution
(such as a deposit), producing a relative of the form
t
t t t t
tt , 1 p ⎡ ( ρi − ri + hi ) + s ⎤
− i
i
Ri = = ⎢ ⎥ .
t−1 t−1 t−1 t−1 t−1
pi ⎢
⎣( ρi − ri + hi ) + si
⎥
⎦
10.213 The holding gain h is interpreted in the liability
case to be an increase (decrease) in the size
of liability through time, possibly because of a feature
of the contract forming the liability.
10.214 In principle, the reference rate should be
some risk-free rate. However, the selection of an
actual rate is more complicated. For example,
should only short-term government securities be
used, or should the rate represent a weighted average
of government security rates, where the rates
reflect the holdings of such securities by banks An
additional question concerns the time period to be
used. As indicated, the computation of interest rates
is based on historical data. If one were to use current
period market rates for the reference rate then
t
t t t t
p ⎡ ( ri + hi −ρ
i)
+ s ⎤
i
i
= = ⎢ ⎥.
one may find that the differences between the reference
rate and the computed interest rate is volatile.
−1 −1 −1 −1 −1
pi ⎢
⎣( ri + hi −ρ
i ) + si
⎥
⎦
One solution would be to compute the reference
rate, as the other interest rates; the reference rate
would be the interest income from government securities
divided by the balance sheet entry for such
securities.
10.215 For both asset and liability products, it also
may be useful to collect indicators of activity, such
as number of accounts, number of automated teller
machines, or indicators of the average utilization of
specific service dimensions on each account, such
as transaction processing, statement generation, assessment
of creditworthiness via loan applications,
and applications for letters of credit, as applicable
to the type of account. Variations in these other indicators
of service would indicate variations in the
quality or nature of service across accounts and institutions,
to the extent that these variations are correlated
with the explicit and implicit service charges
on accounts to adjust service fees and interest rates
to enable adjustments for quality of services.
10.216 In fact, one could consider the account as
the primary unit of output for a financial institution;
10.208 The computation of h does not include the
value of any “write down” arising from a reassessment
of the credit risk of the borrower. Unlike a
holding gain or loss generated as a result of exposure
to exchange risk, accumulated write downs appear
on the institution’s balance sheet as a liability
counter-entry to the contract value of the loan asset,
rather than a direct “mark (down) to market” of the
value of the compromised asset. The write down increases
the liability recorded against booked loan
assets and is shown as an “other change in the volume
of assets” rather than a revaluation of holding
gain loss.
10.209 Using the above, the price relative for an
individual financial product that is an asset A to the
issuing or creating financial institution (such as a
loan) is to have the following form:
R
tt , −1
i t t t t t
Thus, the price relative for services attaching to an
asset account represents the relative change in the
total service charge rate.
10.210 The computation of the various interest
rates is done by dividing income data by corresponding
balance sheet items. For example, the interest
rate received on loans would be computed as
interest received on loan divided by the amount of
outstanding loans on the balance sheet. Instead of
using the balance sheet entry at a point in time, one
could use an average over two time periods—this
would be an estimate of opening and closing values
and allow for some loans to be paid off while new
loans are made.
10.211 All of the other components of the user
cost price would be computed in a similar manner.
10.212 For liability products, the price of financial
services again comprises an implicit and explicit
component, as
p = ρ − r + h + s
t t t t t
i i i i i
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