Economic Policy Review
Components of U.S. Financial Sector Growth, 1950-2013
Volume 20, Number 2    
JEL classification: G01, G18, G20, G10

Authors: Samuel Antill, David Hou, and Asani Sarkar

We provide measures of the size of the financial sector and its components, estimated relative to that of the total business (financial and nonfinancial) sector, and show how they relate to firm type, firm size and valuation. We find that the financial sector has been growing consistently since 1959, until reversed by the recent financial crisis. The relative size of finance is smaller when private firm liabilities are excluded. Although financial firms are more prevalent among large firms, on average large and small financial firms grew at similar rates. Shadow banks have doubled in size since the 1970s, and have grown consistently relative to traditional banks until the recent financial crisis. Small shadow banks have grown faster than large shadow banks, while the reverse is true for traditional banks. Finally, we find that, as compared to nonfinancial firms, the stock market has valued (as indicated by the market-to-book ratio) financial firms in general and traditional banks in particular lower, but shadow banks higher, and that this “value gap” has grown over time. Overall, these results show that growth in finance has mainly occurred in opaque, complex and less-regulated subsectors of finance.
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