What is Financial Intermediation Services Indirectly Measured (FISIM)?

Financial intermediation services indirectly measured, or FISIM, refers to the value of the services provided by financial intermediaries, such as banks and other financial institutions, in facilitating transactions between borrowers and lenders. 

FISIM is typically calculated as the difference between the interest rates paid by borrowers and the interest rates received by lenders, minus the costs incurred by the financial intermediaries in providing these services.

FISIM is an important concept in national accounts and macroeconomic analysis, as it helps to capture the economic value of the services provided by the financial sector. It is typically included in the measurement of gross domestic product (GDP) and other macroeconomic indicators, as it reflects the contribution of the financial sector to economic activity.

There are several ways in which financial intermediaries provide value to the economy through their intermediation services. These include:

  1. Information gathering and processing: Financial intermediaries gather and process information about potential borrowers and lenders, which helps to reduce the costs and risks associated with financial transactions. This information gathering and processing function is particularly important in cases where borrowers and lenders have limited information about each other, or where the financial transactions are complex.
  2. Risk management: Financial intermediaries help to manage the risks associated with financial transactions by pooling together funds from multiple lenders and spreading the risk across a large number of borrowers. This helps to reduce the risk of default for individual lenders, and makes it easier for borrowers to access the funds they need.
  3. Matching: Financial intermediaries help to match borrowers and lenders based on their respective needs and preferences. This can involve matching borrowers with lenders who have complementary risk profiles, or matching borrowers with lenders who have specific preferences in terms of the type of collateral or other terms of the loan.
  4. Liquidity transformation: Financial intermediaries help to transform illiquid assets, such as loans or mortgages, into more liquid instruments, such as securities, which can be more easily traded in financial markets. This helps to increase the liquidity of financial markets and make it easier for investors to buy and sell assets.
  5. Payment services: Financial intermediaries provide payment services, such as check clearing and electronic funds transfer, which help to facilitate financial transactions and reduce the costs and risks associated with payment processing.

The measurement of FISIM can be complex, as it involves estimating the value of the services provided by financial intermediaries, which may not be directly observable. As a result, various methods have been developed to estimate FISIM, including the "cost approach" and the "output approach."

The cost approach involves estimating the costs incurred by financial intermediaries in providing their intermediation services, and subtracting these costs from the interest margins earned by the intermediaries. The output approach involves estimating the value of the intermediation services based on the output of the financial sector, such as the volume of loans and other financial instruments issued by the intermediaries.

In summary, FISIM is a measure of the economic value of the intermediation services provided by financial intermediaries, such as banks and other financial institutions. It is an important concept in national accounts and macroeconomic analysis, as it helps to capture the contribution of the financial sector to economic activity.

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