Global Economic Intersection
Advertisement
  • Home
  • Economics
  • Finance
  • Politics
  • Investments
    • Invest in Amazon $250
  • Cryptocurrency
    • Best Bitcoin Accounts
    • Bitcoin Robot
      • Quantum AI
      • Bitcoin Era
      • Bitcoin Aussie System
      • Bitcoin Profit
      • Bitcoin Code
      • eKrona Cryptocurrency
      • Bitcoin Up
      • Bitcoin Prime
      • Yuan Pay Group
      • Immediate Profit
      • BitQH
      • Bitcoin Loophole
      • Crypto Boom
      • Bitcoin Treasure
      • Bitcoin Lucro
      • Bitcoin System
      • Oil Profit
      • The News Spy
      • Bitcoin Buyer
      • Bitcoin Inform
      • Immediate Edge
      • Bitcoin Evolution
      • Cryptohopper
      • Ethereum Trader
      • BitQL
      • Quantum Code
      • Bitcoin Revolution
      • British Trade Platform
      • British Bitcoin Profit
    • Bitcoin Reddit
    • Celebrities
      • Dr. Chris Brown Bitcoin
      • Teeka Tiwari Bitcoin
      • Russell Brand Bitcoin
      • Holly Willoughby Bitcoin
No Result
View All Result
  • Home
  • Economics
  • Finance
  • Politics
  • Investments
    • Invest in Amazon $250
  • Cryptocurrency
    • Best Bitcoin Accounts
    • Bitcoin Robot
      • Quantum AI
      • Bitcoin Era
      • Bitcoin Aussie System
      • Bitcoin Profit
      • Bitcoin Code
      • eKrona Cryptocurrency
      • Bitcoin Up
      • Bitcoin Prime
      • Yuan Pay Group
      • Immediate Profit
      • BitQH
      • Bitcoin Loophole
      • Crypto Boom
      • Bitcoin Treasure
      • Bitcoin Lucro
      • Bitcoin System
      • Oil Profit
      • The News Spy
      • Bitcoin Buyer
      • Bitcoin Inform
      • Immediate Edge
      • Bitcoin Evolution
      • Cryptohopper
      • Ethereum Trader
      • BitQL
      • Quantum Code
      • Bitcoin Revolution
      • British Trade Platform
      • British Bitcoin Profit
    • Bitcoin Reddit
    • Celebrities
      • Dr. Chris Brown Bitcoin
      • Teeka Tiwari Bitcoin
      • Russell Brand Bitcoin
      • Holly Willoughby Bitcoin
No Result
View All Result
Global Economic Intersection
No Result
View All Result

The Growth of Murky Finance

admin by admin
March 27, 2014
in Uncategorized
0
0
SHARES
11
VIEWS
Share on FacebookShare on Twitter

by Samuel Antill, David Hou, and Asani Sarkar – Liberty Street Economics, Federal Reserve Bank of New York

This post is the fifth in a series of twelve Liberty Street Economics posts on Large and Complex Banks. For more on this topic, see this special issue of the Economic Policy Review.

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.

Rise of Finance and Shadow Banks

We measure the relative size of the financial sector by the value of its assets (the market value of equity plus the book value of debt), relative to the value of assets in the business sector (that is, the financial and nonfinancial sectors). This measure, Tsize–qmv (in the chart below), includes only publicly listed firms, and is estimated at the firm level. A second measure, Fsize (also in the chart below), is the total liabilities (generated by all transactions, not just those of publicly listed firms) of the financial sector, relative to the total liabilities of the business sector, and is estimated at the sectoral level.

By either measure, the financial sector has been a growing part of the economy. It has mostly increased in relative size over the past four decades, interrupted in a major way only by the recent financial crisis (see chart below). On average, the financial sector has accounted for about 50 percent of the asset values of publicly listed firms, but roughly 70 percent of total business sector liabilities. Hence, one reason to worry about the size of this sector is its high representation among private firms that have virtually no transparency.

The-Relative-Size-of-Finance

The Relative Size of Shadow Banking

The shadow banking sector comprises specialized financial institutions (such as asset management and securities firms) that perform credit intermediation services similar to traditional banks or depository credit institutions (DCIs), but without the explicit central bank liquidity support or public sector credit guarantees received by DCIs. Pozsar, Adrian, Ashcraft, and Boesky argue that shadow banks contributed to the crisis through their excessive expansion of credit backed by illiquid assets. Consistent with their argument, we find that this sector has grown rapidly from about 8 percent of total business sector liabilities in 1975 to about 36 percent just before the crisis in 2007 (see chart below). For publicly listed firms, asset values increased from 4 percent to 15 percent during the corresponding period. Thus, similar to the financial sector in general, shadow banks make up a larger share of the liabilities of private firms than of publicly listed firms.

The-Relative-Size-of-Shadow-Banking

How big are shadow banks relative to the more heavily supervised DCIs? Shadow banking’s share of total credit intermediation (by shadow banks and DCIs) tripled in the period from 1975 to just before the crisis in 2007 (see chart below). Indeed, DCI actually shrunk in relative size while shadow banking expanded, fueled mainly by credit intermediation in the securities sector (for example, by investment banks) and asset management (for example, by exchange traded funds). Relatedly, portfolio management (also a part of asset management, but not involved in credit intermediation) has also grown explosively, as noted by Greenwood and Scharfstein. These authors discuss the poor performance and high fees of active managers, while the Office of Financial Research discusses the vulnerabilities of the asset management sector.

Shadow-Banking-as-a-Share-of-Total-Credit-Intermediation

Large and Small Firms

There have been long-standing concerns about too-big-to-fail financial firms whose failure imposes negative externalities on the rest of the economy. We find that large financial firms are a bigger share of all large firms (defined as the top 10 percent of all firms) than small financial firms are of all small firms (defined as the bottom 90 percent of all firms). Although the growth rates of large and small financial firms are similar, small shadow banks have grown faster than large shadow banks, while the reverse is true for DCIs (see chart below). Thus, the shadow banking sector has grown through the emergence of new firms, whereas DCIs have grown through consolidation among existing firms (especially since 1994).

Median-Percent-Change

Effect of the Recent Financial Crisis

The recent financial crisis reversed the steady growth of the financial sector in the economy. Shadow banking firms fared particularly poorly in the crisis, as their share in the economy shrank more than 6 percentage points from the pre-crisis peak to the crisis trough quarters. In comparison, financial firms in general shrank about 2 percentage points and large DCIs actually grew in size, especially during periods of government support such as when the FDIC debt guarantee program was in effect.

Stock Market Valuation of Different Financial Sectors

The financial sector and shadow banks have grown over time, but is the growth expected to continue? Since stock prices incorporate market expectations of future growth, we estimate the ratio of the market value of equity to the book value of equity (market-to-book) of the financial sector, which indicates the market value of $1 of book equity. This ratio is divided by the market-to-book ratio of the business sector in order to obtain the relative valuation of the financial sector.

Financial firms have had a lower valuation relative to business sector firms since the late 1980s, except for a brief period in 2000, and their relative valuation has been steadily declining since around 2003 (see chart below). Within the financial sector, however, shadow banking had a higher valuation than the business sector for the entire sample, and their relative valuation has been increasing since around 2003. The reverse is true for DCIs. These results suggest that the market expects shadow banks to grow faster than DCIs and/or to generate a more stable stream of earnings in the future.

Relative-Market-to-Book-of-Finance-Shadow-Banking-and-DCI

Conclusion

Although the policy response to the growth and vulnerabilities of the financial sector has been to enhance supervision and regulation of large firms and visiblefinancial sectors, our paper documents that, historically, growth has occurred mainly in areas outside the current regulatory ambit. If financial transactions migrate out of regulated sectors, as expected by some, then this trend is likely to persist. We need to improve our knowledge of these opaque financial sectors in order to understand what risks (if any) they pose to the economy.

Disclaimer

The views expressed in this post are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.

Source: http://libertystreeteconomics.newyorkfed.org/2014/03/the-growth-of-murky-finance.html


About the Authors

Antill_samuelSamuel Antill is a senior research analyst in the Federal Reserve Bank of New York’s Research and Statistics Group.

Hou_davidDavid Hou is a risk analytics associate in the Bank’s Financial Institution Supervision Group.

Sarkar_asaniAsani Sarkar is an assistant vice president in the Bank’s Research and Statistics Group.


Previous Post

Frank Li Book Promotion Starts Today

Next Post

22 March 2014 Unemployment Claims 4 Week Average Again Improves

Related Posts

Unlock the Future of Fashion with NFTs and Wearables
Business

Unlock the Future of Fashion with NFTs and Wearables

by John Wanguba
May 27, 2023
Are Bitcoin Casinos Legal?
Business

Are Bitcoin Casinos Legal?

by John Wanguba
May 26, 2023
What Are Deposit Tokens?
Economics

What Are Deposit Tokens?

by John Wanguba
May 22, 2023
If The Stock Market Crashes, What Will Happen To Bitcoin?
Finance

If The Stock Market Crashes, What Will Happen To Bitcoin?

by John Wanguba
May 20, 2023
Who Will Win XRP vs SEC Case?
Econ Intersect News

Who Will Win XRP vs SEC Case?

by John Wanguba
May 20, 2023
Next Post

22 March 2014 Unemployment Claims 4 Week Average Again Improves

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

Browse by Category

  • Business
  • Econ Intersect News
  • Economics
  • Finance
  • Politics
  • Uncategorized

Browse by Tags

adoption altcoins bank banking banks Binance Bitcoin Bitcoin adoption Bitcoin market blockchain BTC business China crypto crypto adoption cryptocurrency crypto exchange crypto market crypto regulation decentralized finance DeFi Elon Musk ETH Ethereum Europe Federal Reserve finance FTX inflation investment market analysis Metaverse NFT nonfungible tokens oil market price analysis recession regulation Russia stock market technology Tesla the UK the US Twitter

Archives

  • May 2023
  • April 2023
  • March 2023
  • February 2023
  • January 2023
  • December 2022
  • November 2022
  • October 2022
  • September 2022
  • August 2022
  • July 2022
  • June 2022
  • May 2022
  • April 2022
  • March 2022
  • February 2022
  • January 2022
  • December 2021
  • November 2021
  • October 2021
  • September 2021
  • August 2021
  • July 2021
  • June 2021
  • May 2021
  • April 2021
  • March 2021
  • February 2021
  • January 2021
  • December 2020
  • November 2020
  • October 2020
  • September 2020
  • August 2020
  • July 2020
  • June 2020
  • May 2020
  • April 2020
  • March 2020
  • February 2020
  • January 2020
  • December 2019
  • November 2019
  • October 2019
  • September 2019
  • August 2019
  • July 2019
  • June 2019
  • May 2019
  • April 2019
  • March 2019
  • February 2019
  • January 2019
  • December 2018
  • November 2018
  • October 2018
  • September 2018
  • August 2018
  • July 2018
  • June 2018
  • May 2018
  • April 2018
  • March 2018
  • February 2018
  • January 2018
  • December 2017
  • November 2017
  • October 2017
  • September 2017
  • August 2017
  • July 2017
  • June 2017
  • May 2017
  • April 2017
  • March 2017
  • February 2017
  • January 2017
  • December 2016
  • November 2016
  • October 2016
  • September 2016
  • August 2016
  • July 2016
  • June 2016
  • May 2016
  • April 2016
  • March 2016
  • February 2016
  • January 2016
  • December 2015
  • November 2015
  • October 2015
  • September 2015
  • August 2015
  • July 2015
  • June 2015
  • May 2015
  • April 2015
  • March 2015
  • February 2015
  • January 2015
  • December 2014
  • November 2014
  • October 2014
  • September 2014
  • August 2014
  • July 2014
  • June 2014
  • May 2014
  • April 2014
  • March 2014
  • February 2014
  • January 2014
  • December 2013
  • November 2013
  • October 2013
  • September 2013
  • August 2013
  • July 2013
  • June 2013
  • May 2013
  • April 2013
  • March 2013
  • February 2013
  • January 2013
  • December 2012
  • November 2012
  • October 2012
  • September 2012
  • August 2012
  • July 2012
  • June 2012
  • May 2012
  • April 2012
  • March 2012
  • February 2012
  • January 2012
  • December 2011
  • November 2011
  • October 2011
  • September 2011
  • August 2011
  • July 2011
  • June 2011
  • May 2011
  • April 2011
  • March 2011
  • February 2011
  • January 2011
  • December 2010
  • August 2010
  • August 2009

Categories

  • Business
  • Econ Intersect News
  • Economics
  • Finance
  • Politics
  • Uncategorized
Global Economic Intersection

After nearly 11 years of 24/7/365 operation, Global Economic Intersection co-founders Steven Hansen and John Lounsbury are retiring. The new owner, a global media company in London, is in the process of completing the set-up of Global Economic Intersection files in their system and publishing platform. The official website ownership transfer took place on 24 August.

Categories

  • Business
  • Econ Intersect News
  • Economics
  • Finance
  • Politics
  • Uncategorized

Recent Posts

  • Unlock the Future of Fashion with NFTs and Wearables
  • Are Bitcoin Casinos Legal?
  • What Are Deposit Tokens?

© Copyright 2021 EconIntersect - Economic news, analysis and opinion.

No Result
View All Result
  • Home
  • Contact Us
  • Bitcoin Robot
    • Bitcoin Profit
    • Bitcoin Code
    • Quantum AI
    • eKrona Cryptocurrency
    • Bitcoin Up
    • Bitcoin Prime
    • Yuan Pay Group
    • Immediate Profit
    • BitIQ
    • Bitcoin Loophole
    • Crypto Boom
    • Bitcoin Era
    • Bitcoin Treasure
    • Bitcoin Lucro
    • Bitcoin System
    • Oil Profit
    • The News Spy
    • British Bitcoin Profit
    • Bitcoin Trader
  • Bitcoin Reddit

© Copyright 2021 EconIntersect - Economic news, analysis and opinion.

en English
ar Arabicbg Bulgarianda Danishnl Dutchen Englishfi Finnishfr Frenchde Germanel Greekit Italianja Japaneselv Latvianno Norwegianpl Polishpt Portuguesero Romanianes Spanishsv Swedish