The Declining Number of U.S. Banking Organizations: Will the Trend Continue?

By: Kenneth D. Jones and Tim Critchfield

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Introduction:

In 1995, the Brookings Institution published a paper entitled "The Transformation of the U.S. Banking Industry: What a Long, Strange Trip It's Been."1 Using a breathtaking array of facts and figures, the paper described in great detail the dramatic changes that had occurred in the U.S. commercial banking industry over the 15 years from 1979 to 1994. The banking industry was transformed during that period, according to the paper (p. 127), by 'the massive reduction in the number of banking organizations; the significant increase in the number of failures; the dramatic rise in off-balance sheet activities; the major expansion in lending to U.S. corporations by foreign banks; the widespread adoption of ATMs; . . . and the opening up of interstate banking markets . . .' The paper went on to explain that most of these major changes in banking could be traced to two developments: (1) the extraordinary number of major regulatory changes during the period, from deposit deregulation in the early 1980s to the relaxation of branching restrictions later in the decade; and (2) clearly identifiable innovations in technology and applied finance, including improvements in information processing and telecommunication technologies, the securitization and sale of bank loans, and the development of derivatives markets. Other research would later confirm the paper's assessments and its explanation of the course of events in the banking industry over that period, marking the paper as a noteworthy contribution to the literature.

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