The Federal Reserve Bank of New York works to promote sound and well-functioning financial systems and markets through its provision of industry and payment services, advancement of infrastructure reform in key markets and training and educational support to international institutions.
The Outreach and Education function engages, empowers and educates the Second District communities that the Bank serves, especially civic leaders, students, educators, small business owners, policymakers and the general public. It furthers the Bank's commitment to the region by listening to the communities we serve and leveraging our unique attributes to positively impact school and university programs, as well as analysis and research.
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.