To be sure, much, perhaps most, of the improvement has been due to the better performance of the overall economy – low and stable inflation and damped business cycles since the early 1980s. In addition, financial stability has been greatly enhanced by improvements in bank capital regulation that were implemented in the late 1980s and after the crisis in the early 1990s.
But greater diversification of risk has also contributed significantly; we could see this in the 2001-03 period, when a sharp decline in equity prices, a spike in spreads on corporate debt, and unanticipated business failures did not threaten depository institutions or the broader financial system.