In other words, the core of the U.S. banking system should be more stable in the face of a broader range and greater magnitude of shocks. However, the increased size and scope of these entities necessarily exposes them to a wider array of potential shocks and risks and means that the failure of one of them could have a broader impact than in the past and be considerably more difficult to resolve. The implications of such a failure would almost certainly fall outside of the range of experience captured in conventional models. At the same time, despite their size and scale, banks now account for a smaller share of financial intermediation in the United States than was true in the past. Depository institutions now hold about one fifth of all assets held by financial institutions, or less than half of what they did in 1984. This crude comparison understates the importance of banks in the credit origination process and wholesale financial markets, but the broad picture it paints of the increased role of non-bank financial intermediaries is still noteworthy. To put it differently, financial intermediaries that are not subject to consolidated risk-based capital frameworks and the full complement of supervisory constraints applied to banks and bank holding companies, now account for most of the assets of financial institutions in the United States. There has also been substantial convergence in the types of financial transactions bank-centered and non-bank affiliated financial intermediaries perform.
Timothy F Geithner: Changes in the structure of the US financial system and implications for systemic risk Remarks by Mr Timothy F Geithner, President and Chief Executive Officer of the Federal Reserve Bank of New York, to the Federal Reserve Bank of Chicago Conference: Systemic Financial Crises Resolving Large Bank Insolvencies, Chicago, 1 October 2004. *  *  *  My compliments to Michael Moskow for putting together this conference and for bringing together this formidable group of talent on systemic banking crises. There are those who regard this type of enterprise - that of strengthening the regime for managing financial failures - as misdirected. Some think focusing on bank resolution is like devoting resources to redesigning the morgue rather than improving the hospital. Some think that by preparing to deal with crises you make them more likely. I think the wiser judgment is the contrary. In this area at least, if you want peace or stability, it’s better to prepare for war or instability. I think this is particularly important for us in the United States. Although we have a rich history of banking crises in our past, and have watched other countries confront such crises more recently, it’s been some time since we’ve experienced the prospect or the reality of a systemically significant bank failure in this country.