The Growth of Murky Finance

Samuel Antill, David Hou and Asani Sarkar

No 20140327, Liberty Street Economics from Federal Reserve Bank of New York

Abstract: 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.

Keywords: firm size; Financial sector size; asset management; commercial banks; regulation; leverage; shadow banks (search for similar items in EconPapers)
JEL-codes: G1 G2 N2 (search for similar items in EconPapers)
Date: 2014-03-27
New Economics Papers: this item is included in nep-fdg
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fednls:86931

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