Financial Architecture, Systemic Risk and Universal Banking in the United States

Relying on various underlying drivers, consolidation has been a fact of life in the wholesale financial services sector, resulting in fundamental changes in the financial architecture and public exposure to systemic risk. Moreover, financial sector reconfiguration has accelerated as a result of the global market turbulence that began in 2007, with governments either forcing or encouraging combinations of stronger and weaker financial firms in an effort to stem the crisis and improve systemic robustness. In the process, financial firms that are “systemic” in nature and had a major role in creating the crisis have come out of it with even larger market shares and greater systemic importance. Given the episodic socialization of risk in the form of widespread use of public guarantees to firms judged too big or too interconnected to be allowed to fail, the role of systemically important financial institutions (SIFIs) is central to the financial architecture and the public interest going forward. This survey paper considers the sources of systemic gains, losses and risks associated with SIFIs in historical context, in the theoretical and empirical literature, and in public policy discussions – i.e., what is gained and what is lost as a result of the available policy options to deal the dominant role of SIFIs in the financial architecture?