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Components of U.S. financial sector growth, 1950-2013
The U.S. financial sector grew steadily as a share of the total business sector from 1959 until the recent financial crisis, when the trend reversed. In this article, the authors develop measures based on firm-level data to estimate the size of the financial sector and its subsectors relative to the total business (financial and nonfinancial) sector over time. The analysis further sheds light on how these size measures are affected by a firm?s choice of financing (whether public or private), firm size, industry type, use of leverage, and regulation. The authors find that the relative size of finance is smaller when only publicly listed firms are included. Financial firms are more prevalent among large firms than among small firms, with the relative size of finance being two to three times bigger in the large firm sample than in the small firm sample within any period and for any measure. While large financial firms on average grew only at moderately higher rates than smaller financial firms, large traditional banks grew substantially faster than their smaller counterparts. Shadow banks increased rapidly in size at the expense of traditional banks, becoming a significant portion of the financial sector in the mid-1990s and peaking just before the crisis. Overall, the results show that both the pre-crisis growth and the crisis-era decline mainly occurred in opaque, complex, and less-regulated subsectors of finance.
AUTHORS: Antill, Samuel; Sarkar, Asani; Hou, David
The Growth of Murky Finance
Building upon previous posts in this series that discussed individual banks, we examine the historical growth of the entire financial sector, relative to the rest of the economy. This sector?s historically large share of the economy today (see chart below) and its role in disrupting the functioning of the real economy during the recent financial crisis have led to questions about the social value of costly financial services. While new regulations such as the Dodd-Frank Act impose restrictions on financial activities and increase their costs, especially those of large firms, our paper suggests that there may be limits to what regulation can achieve. In particular, we show that financial growth has occurred in the more opaque and harder to regulate sectors: private firms, shadow banks, and small nonbank financial firms. Moreover, we find that the stock market values these opaque areas of finance more, suggesting that they may expand even faster in the future.
AUTHORS: Sarkar, Asani; Antill, Samuel; Hou, David
Is size everything?
We examine sources of systemic risk (threshold size, complexity, and interconnectedness) with factors constructed from equity returns of large financial firms, after accounting for standard risk factors. From the factor loadings and factor returns, we estimate the implicit government subsidy for each systemic risk measure, and find that, from 1963 to 2006, only our big-versus-huge threshold size factor, TSIZE, implies a positive implicit subsidy on average. Further, pre-2007 TSIZE-implied subsidies predict the Federal Reserve?s liquidity facility loans and the Treasury?s TARP loans during the crisis, both in the time series and the cross section. TSIZE-implied subsidies increase around the bailout of Continental Illinois in 1984 and the Gramm-Leach-Bliley Act of 1999, as well as around changes in Fitch Support Ratings indicating higher probability of government support. Since 2007, however, the relative share of TSIZE-implied subsidies falls, especially after Lehman?s failure, whereas complexity and interconnectedness-implied subsidies are substantial, resulting in an almost sevenfold increase in total implicit subsidies. The results, which survive a variety of robustness checks, indicate that the market?s perception of the sources of systemic risk changes over time.
AUTHORS: Sarkar, Asani; Antill, Samuel