Academic journal article Economic Review - Federal Reserve Bank of Kansas City

Changes in the Depository Industry in Tenth District States

Academic journal article Economic Review - Federal Reserve Bank of Kansas City

Changes in the Depository Industry in Tenth District States

Article excerpt

Recent developments in Congress and the courts have focused attention on the relative roles of commercial banks, thrifts, and credit unions. As concern mounted last year about the state of the thrift deposit insurance fund, Congress required commercial banks to share the burden of recapitalizing the fund. In return, Congress promised to come up with a plan for merging the bank and thrift charters, a move the banking industry has long favored. About the same time, a federal appeals court ruled against a major source of credit union growth since the early 1980s-the acceptance of new members with a common bond different from the original members. The Supreme Court later agreed to hear the case, sparking a renewed debate in Congress about the proper role of credit unions in the financial system.

These recent actions by Congress and the courts follow a decade and a half of dramatic changes in the depository industry in Tenth District states. Some of these changes have been due to shifts in laws and regulations. Others have resulted from shocks to the regional and national economy and long-run financial trends such as the growth of secondary loan markets. While the changes to the district depository industry have been many and varied, four stand out. First, there has been a significant decline in the number of district depository institutions-a decline in which banks, thrifts, and credit unions have all shared. Second, total deposits have declined when adjusted for inflation or measured relative to economic activity. Third, the share of thrifts in total deposits has plummeted relative to that of banks and credit unions. And fourth, while banks, thrifts, and credit unions still specialize in different loans and investments, the three types of institution do not look as different today as at the beginning of the 1980s.

Such changes are important because they affect the thousands of depository institutions in the district and the supply of credit and other financial services to district households and businesses. With those effects in mind, this article shows how the district depository industry has changed since 1979, explains the factors behind each change, and suggests what further changes may lie ahead. The first section documents and explains past changes. The second section discusses future changes, focusing on three forces that loom large in the period ahead: the merger of the bank and thrift charters, the debate over the proper role of credit unions, and the growth of secondary loan markets.


The period from 1979 to 1996 was one of dramatic change in the district depository industry-both for the industry as a whole and for each type of depository institution. By way of background, this section reviews the basic features of the three institutions at the start of the period. The section then documents and explains the four major changes in the industry over the period-the decline in the number of institutions, the decrease in total deposits, the decline in the deposit share of thrifts relative to banks and credit unions, and the narrowing of differences in asset composition.

Basic features of the three institutions

At the start of the period, the district depository industry consisted of three types of institutions that differed in ownership, tax status, and lending and investment powers. First were commercial banks, which were owned by their shareholders and subject to federal and state income tax. Commercial banks were prohibited from holding common stocks or junk bonds, but otherwise faced few restrictions on their loans and investments. Most banks took advantage of this freedom to diversify their portfolios, holding both a wide mix of loans and substantial amounts of securities.

Second were thrifts, which in Tenth District states consisted entirely of savings and loan associations.1 Some associations were stock associations owned by their shareholders, but most were mutuals, which meant that they were legally owned by their depositors. …

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