A FUNCTIONAL ANALYSIS OF THE BANKING INDUSTRY

This paper proposes a functional analysis of input, output and capital of the banking sector in an endogenous money framework with the aim of determining the aggregates on which to calculate the bank profit rate. Although banks create bank money, State money is not producible by banks, which need it as an input. Deposits are the cheapest source of central bank money already in the system, so it can be argued that deposits are inputs to the banking industry. Assuming that loans are the banking output, we investigate what role regulation plays in defining a banking production technique. The framework developed from Basel Accords imposes a level of equity proportional to the level of risk-weighted bank assets. Thus, a bank capital-to-output ratio defined by these rules is conceivable.