Academic journal article Federal Reserve Bank of St. Louis Review

Is the Banking Industry in Decline? Recent Trends and Future Prospects from a Historical Perspective

Academic journal article Federal Reserve Bank of St. Louis Review

Is the Banking Industry in Decline? Recent Trends and Future Prospects from a Historical Perspective

Article excerpt

could reflect the resolution of a bank failure, I also list the total number of failures in each year.(2) Despite rising failures, the number of insured commercial banks increased through 1984 because the number of new banks exceeded those closed, converted to branches of other banks or consolidated. After 1984, however, the number of new bank charters declined while failures continued to rise. Although failures have dropped off recently, large numbers of banks--both failed and solvent--continue to be converted to branches of other banks. Consequently, the number of commercial banks has continued to decline by several hundred banks per year since the mid-1980s.

Texas accounts for much of the recent fluctuation in the number of banks in the United States. Between 1980 and 1989, 24 percent of all new U.S. bank "Banking is essential to a modern economy. Banks are not."

Edward Furash (1993)

COMMERCIAL BANKS ENJOYED record profits in 1992 and during the first half of 1993. Many observers believe the industry's future may be far less bright, however, if banks continue to lose market share to other intermediaries and providers of transaction services. Some policy makers, including Federal Reserve Board Chairman Alan Greenspan and Comptroller of the Currency Eugene A. Ludwig, have questioned whether banks will be able to maintain their role as providers of financial services in the future without significant changes in regulation.(1)

A shrinking banking industry may reflect a reallocation of resources toward more efficient uses, and, hence, should not necessarily be viewed as undesirable. But, because banks are heavily regulated, policy makers need to consider whether their policies are either hastening or interfering with changes in the size and structure of the industry. Such changes may impose significant social costs, since commercial banks are at the heart of the payments system and continue to be important sources of credit for small firms and other borrowers. Furthermore, changes in the size or importance of the banking industry might also affect the ability of the Federal Reserve to implement monetary policy, since monetary policy is conducted primarily by altering commercial bank reserve balances.(2)

The banking industry has been on a roller coaster ride since 1980. From World War II through the 1970s, banks generally had stable earnings and no more than 10 bank failures occurred in any year. The banks that did fail were usually tiny and largely unnoticed. The number of failures rose sharply in the 1980s, reaching 206 in 1989. Although the number of failures has since declined and bank profits have recently been high, the size and structure of the industry have continued to change dramatically.

The upheaval of the past 10 years and uncertain outlook for the industry's future make this an appropriate time to put recent changes in the size of the banking industry in a longer-term perspective. This article first examines the apparently diminishing role of commercial banks as intermediaries and providers of transaction services. Commercial bank shares of U.S. financial assets, commercial lending and transaction accounts have fallen in recent years, which some observers believe reflects an industry in long-term decline. Others, however, argue that banks will remain central to the payments system and important lenders for large classes of borrowers, and note that banks are generating an increasing amount of their income from "off-balance-sheet" activities. This article presents some evidence on both sides of the debate and addresses two major policy changes that many observers believe are needed for banks to remain prominent providers of financial services in the future: 1) removal of limits on branch banking and 2) relaxation of restrictions on the services that banks may offer.


Commercial banks specialize in the evaluation of credit risks and monitoring of borrowers, as well as clearing transactions. …

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