Historical Perspectives on the Number of Banks

In this series, we discuss the historical rise and recent decline in the number of banks operating in the US. The number of banks, as well as their size, has often been the subject of policy debates.

Scholars who study general antitrust matters have traditionally focused on industry concentration of firm-specific market shares and how important that is, rather than the raw number of firms in the industry. In industries with many firms, concentration may be lower, while in industries with a small number of firms, concentration will be high.

We will show that the US banking sector still has many banks, and the industry does not exhibit high levels of concentration, as traditionally measured, even though the share of assets and deposits held by the largest US banking entities is fairly high.

At the same time, policymakers have recently emphasized the importance of the number of banks, especially smaller ones, since their numbers have declined. One key reason for that attention is that smaller banks are generally thought to offer a large percentage of loans to small businesses.

In the second post, we investigate the decline of small banks by covering three subtopics. First, we will show that while the number of banks and thrifts continues to decline, many small banks still exist. In addition, even though the fraction of banks and thrifts operating within a holding company continues to rise, the number of parent bank holding companies has also been declining.

Since we currently have three federal regulators, the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), and the Federal Reserve System (FRS), we will also show in the second post that the FDIC regulates the largest fraction of entities and the share of banks that it regulates is rising, as is the share of banks regulated by the FRS.

Finally, as there is no universally accepted definition of a small bank, we show that the fraction of small banks remains high, whether we define a small bank as: 1) banks with under $1 billion in total assets, 2) banks with under $10 billion in total assets, or 3) banks that meet the FDIC’s definition that focuses more on its business model and less on total assets.

In our third post, we discuss why the decline in the number of banks should invoke questions about why we had too many in the past, rather why we have too few now. We show that the decline has been happening since the number of commercial banks reached an all-time high in 1921. We also discuss key institutional factors that might have influenced that number.

In our last post, we focus on where bank assets, as well as deposits, are located. While most banks tend to be small, most assets are concentrated in a relatively small number of large banks—although since the crisis, that fraction has held constant.

Moreover, using standard measures of concentration, we find that from a national perspective the banking sector in the US may not be concentrated. Lastly, we also look at small business lending and find that the small bank share of small business lending is declining, while the share of small business lending done by the largest entities is rising.

Overall, our results suggest that while most banks are still small, and serve an important role in financial services provision, focusing on the number of banks gives misleading insights into the organization of the banking sector, and offers no insights about the welfare of banking customers. The policy debate will likely be better informed by focusing on access to financial services, and the extent to which banks can compete to lower the costs of their financial services provision.

Photo credit: Tim Evans/Unsplash.