U.S. Banks in Decline? Not in This Account

By Nicklaus, David | St Louis Post-Dispatch (MO), October 23, 1994 | Go to article overview

U.S. Banks in Decline? Not in This Account


Nicklaus, David, St Louis Post-Dispatch (MO)


To hear some bankers talk, you'd think they were going the way of the buggy-whip industry.

They tell Congress that they're losing business to Wall Street firms, and that they need expanded securities powers in order to stay viable. Backing their argument is the observation that most of the world's largest banks are based outside the United States, a situation that some people think reflects poorly on the world's largest economic power.

The story of banks' decline is so widely believed that it creeps into every political and academic debate about the banking system, whether the subject is interstate banking, regulatory reform or deposit insurance. Some people even worry that if banks become too insignificant, the Federal Reserve System will lose its leverage over the economy, because the Fed operates by affecting the level of bank reserves.

But there's one problem with the shrinking-bank story - it's not true, says John H. Boyd, senior research officer at the Minneapolis Federal Reserve Bank.

"There is no evidence of a significant decline in banking within the United States," Boyd writes in the current issue of his bank's Quarterly Review. The title of his article, borrowed from Mark Twain, is "Are Banks Dead? Or Are the Reports Greatly Exaggerated?"

Believers in the conventional wisdom usually cite one compelling set of figures: Bank loans represented just 34 percent of financial intermediation in 1992, down from 45 percent in 1974. Businesses are getting more of their funding from finance companies, the bond market or the commercial-paper market.

But, Boyd says, we shouldn't equate a loss of market share with a decline in the economic importance of banking. Banks may not have enjoyed the phenomenal growth that Wall Street has had in the 1980s and '90s, but they've at least held their own.

The market-share numbers look the way they do "because of the growth in the efficiency of the financial markets, not because of any decline on the part of banks," explained Alton Gilbert, an economist at the St. Louis Federal Reserve Bank.

The best way to measure any industry's relative importance is to chart it against the whole national economy, as measured by gross domestic product. …

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