Improved Measures of Commercial Banking Output and Productivity: New Comprehensive Measures of Commercial Banking Output and Productivity More Accurately Reflect the Changes That Have Occurred in the Industry, Including Deregulation, Advances in Technology, and the Development of New Banking Services
Royster, Sara E., Monthly Labor Review
The services that commercial banks offer have changed greatly since the 1980s because of deregulation, the expansion of information technology, and innovations in the types of services offered. Traditionally, commercial banks' primary services included facilitating transactions, providing loans, and safekeeping money and other valuables. However, with the repeal of the regulatory limits of the Glass-Steagall Act, banks began performing an increasing variety of functions, including providing investment advice, underwriting securities, and writing insurance policies. (1)
Deregulation allowed commercial banks to hold riskier financial assets on their balance sheets and to merge with investment banks. As a result, banks expanded the types of services they offered and the fees from these services became a larger share of bank revenue. Commercial banks took advantage of the lower reserve requirements for investment banks, which allowed them to take on more debt and potentially earn higher profits. Deregulation also removed the prohibition on interstate banking, allowing commercial banks to operate freely across state lines. Increased competition because of deregulation caused a number of bank failures and triggered a series of mergers and acquisitions. Banks benefited from economies of scale as bank mergers resulted in larger and fewer banks. In addition, larger banks began merging with smaller local banks, thereby gaining access to their branch networks.
The recent financial crisis dramatically underscored the changes in the structure of the commercial banking industry that occurred with the proliferation of risky new investment products, the liberalization of lending practices, and the merging of commercial and investment banks. Many banks were forced to take large write-offs as the value of their assets fell sharply. The crisis led to the collapse of several major financial institutions, widespread mortgage foreclosures, and economic recession. The crisis also emphasized the changing role of banks, fostered new regulation to avoid future financial problems, and reinforced the need for improved measures of output and productivity in the commercial banking industry.
Advances in information technology over the last few decades also greatly increased productivity in commercial banking by enabling banks to offer many new services without a proportional increase in staff. Rising customer usage of online banking and automated teller machines (ATMs) has allowed banks to expand their presence into new areas while, at the same time, reducing costs and minimizing branch staff. (2) Banks now process the majority of payments electronically, including direct payroll deposits, funds transfers, and electronic bill payments. The increasing popularity of e-commerce has prompted banks to employ several new related products, such as identity encryption technologies, Internet portals, and electronic billing. (3) The computerization of interest rate adjustment, credit checks, and other accounting and auditing activities has sharply reduced the amount of time bank staff devotes to them. Banks have invested heavily in electronic data processing technology, and its proliferation has resulted in rising output, falling costs, and soaring productivity in the industry.
Deregulation and advances in information technology have shifted the types of services that commercial banks offer. For example, as electronic payments have replaced traditional payment methods, the number of deposit accounts at commercial banks has declined steadily. (4) At the same time, banks have developed an increasingly wide variety of savings and investment vehicles and pursued other business opportunities, such as underwriting debt or offering mutual funds, to acquire new sources of revenue and enable them to compete with other financial services companies. As a result, these new services have become an important source of income for commercial banks. …