Post-Crisis Changes in the Stability of the US Banking System

Evidence from US Bank Holding Companies from 2004 to 2014

Following the financial crisis that peaked in 2008, a large number of regulatory initiatives have reshaped the rules that govern the financial system and the major institutions within it.

This study assesses the changes related to US financial stability that have taken place in light of those regulatory initiatives and the actions of the banks themselves.

In addition to highlighting the vulnerabilities of individual financial institutions, the financial crisis exposed systemic vulnerabilities in the banking system that proved detrimental to the wider economy. The system has since undergone a marked change in regulation as part of a broad policymaking effort to increase financial stability. Nonetheless, such changes come at a cost. There is a trade-off between levels of (and uncertainty in) capital and liquidity requirements, and the degree to which the banking system fulfills its core purpose in facilitating economic activity. In addition, overly stringent burdens placed on the banking sector increases the incentive for risk-taking activities to transition to the ‘shadow banking’ sector, with uncertain implications for the broader financial system as a whole. 

Overall, we find strong evidence of a broad set of changes to the US banking system that are consistent with policymakers’ financial stability goals. At the same time, financial stability achieved today cannot be taken for granted tomorrow. Ongoing care is needed to ensure that the new, more robust banking system architecture is sustainable, and will not be undermined as systemically important financial activity grows in the shadows beyond it.

This study was sponsored by The Clearing House Association. All findings and recommendations are solely our own.

Post-Crisis Changes in the Stability of the US Banking System