New producer price indexes for commercial banking--NAICS 522110--and savings...

In January 2005, in its ongoing effort to expand coverage of the service sector in the Producer Price Index (PPI), the Bureau of Labor Statistics (BLS) introduced new price indexes for Commercial Banking and Savings Institutions-NAICS 522110 and NAICS 522120. These indexes appear in table 5

The primary output of these banking industries is the provision of financial services, including financial intermediation. For these industries, financial intermediation is defined as the assumption of risk that arises from taking money frond depositors and lending it to borrowers.

The services for which indexes are available include:

* Loans

* Deposits

* Trust services

* Other banking services

To measure prices in these industries, PPI has implemented a user-cost methodology. The user cost for a financial service is the difference between the revenue it generates and the sum of its implicit and explicit costs. To measure these costs, interest is allocated between loans and deposits by means of a reference rate. The reference rate is the opportunity cost rate of money, where the risk premium has been eliminated to the greatest extent possible and intermediation services are excluded. For the PPI, the reference rate is the interest rate on risk-free assets held by banks.

In theory, the price of a loan is equal to the asset-holding income rate less a reference rate. The asset-holding income rate is the interest received plus service charges. For deposits, the price is equal to a reference rate less the liability-holding cost rate. The liability-holding cost rate is the interest paid to depositors less service charges.

In practice, the price of loan and deposit services can be expressed as shown below. Both services are priced at the portfolio level.

Loan price =[(earned interest income + fees/average loan balance)- reference rate]* $1,000

Earned interest income includes all interest actually received in a given month for the portfolio of loans being priced. This includes interest earned on both old and new loans. The average loan balance is calculated by averaging the ending daily balances of the loans in the portfolio over the month.

Deposit price = [reference rate-(interest payments - earned fees/average deposit balance)] * $1,000

Interest payments include all interest actually paid to depositors on the funds held in the portfolio in a given month. Earned fees should include all fees, such as those for automatic teller machine withdrawals or insufficient funds, that are collected by the bank. Again, the deposit balance is calculated by taking the average of the ending daily balances of the portfolio.

For trust and all other banking services, the price is equal to the actual fee charged for performing the service. The fee can be a percentage of assets or a flat fee.

For further information on NAICS 522110, contact Melanie McClain at (202) 691-7844. Ms. McClain also can be reached by e-mail: mcclain.melanie@bls.gov.

For further information on NAICS 522120, contact Stephanie Shipley at (202) 691-7714. Ms. Shipley also can be reached by e-mail: shipley.stephanie@bls.gov.