The Phrase “Financial Intermediary” In National Accounts

A lot of times heterodox economists and bloggers complain about the usage of the phrase “financial intermediary” when talking about banks. Such as this one from 2016. The reason given is: “because loans make deposits”. In my opinion, this is counter-productive. While it’s true loans make deposits, it is irrelevant to whether banks should be termed financial intermediaries or not. In fact, that is standard usage. The System of National Accounts 2008, on para 4.101 says:

Financial corporations can be divided into three broad classes namely, financial intermediaries, financial auxiliaries and other financial corporations. Financial intermediaries are institutional units that incur liabilities on their own account for the purpose of acquiring financial assets by engaging in financial transactions on the market. They include insurance corporations and pension funds. Financial auxiliaries are institutional units principally engaged in serving financial markets, but do not take ownership of the financial assets and liabilities they handle. Other financial corporations are institutional units providing financial services, where most of their assets or liabilities are not available on open financial markets.

[italics and boldening in original]

Further 4.106 says:

In general, the following financial intermediaries are classified in this subsector:

a. Commercial banks, “universal” banks, “all-purpose” banks;

b. Savings banks (including trustee savings banks and savings and loan associations);

c. Post office giro institutions, post banks, giro banks;

d. Rural credit banks, agricultural credit banks;

e. cooperative credit banks, credit unions; and

f. Specialized banks or other financial corporations if they take deposits or issue close substitutes for deposits.

Heterodox economists use national accounts and flow of funds more often than orthodox economists who build their theory around a production function, so it is surprising that they vehemently oppose the usage of the phrase “intermediary” for banks. More importantly, the debate is not just semantics but also about “aggregate demand”. The ones who dislike the phrase “intermediary” seem to think that non-bank lending doesn’t have effects on aggregate demand. Funnily, while asserting others use the “loanble funds model”, they are themselves making such errors in their mental model.

Perhaps the term “financial intermediary” is used in the national accounts because it is centred around the production process. At the same time – of course – attention is equally given to finance. So there is nothing really to gain by trying to ban the usage of the phrase “intermediary” for banks.

Aside: IE users should upgrade their browser to IE11. 

Microsoft is going to stop support for old IE browsers. From now on, it will support the latest version only, unlike earlier when it was supporting several versions simultaeneously. So using old browsers will expose you to security risks. Websites’ codes are also browser dependent, so it is possible that my site won’t work with old IE soon. So please upgrade to IE11.

Or do something geeky. Pick up Chrome Canary or the Firefox Nightly build. But IE11 is not bad. It’s superfast.

Happy New Year!

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