A Diminished Banking System Is Bad for Americans

Is America getting the banking it needs?  A look at current statistics suggests that the disturbing answer may be no.

The number of banks in the U.S. fell to 6,730 at the end of March, with only one new charter since 2010. By comparison, in 1892 there were 7,118 banks in America—723 more than the year before.  The attrition is concentrated at the lower end of the size range, as the Federal Deposit Insurance Corp.’s consolidation study reported earlier this year.  If you prefer community banks and what they offer, your options are dwindling.  If you value a flourishing industry, the lack of new entrants should cause alarm.  

Broadening the perspective, erosion of U.S. banking is also happening on a global scale.  A recent report from SNL Financial confirmed that four of the top 10 global banks are headquartered in China.  Only one is headquartered in the United States. In 1999, six of the largest banks in the world were headquartered here, including the world’s two largest.

These new signs suggest a lack of growth and vitality.  Either one, taken in isolation, would seem to be a whiff of a smoldering problem. Taken together, they suggest a fire that is burning our national financial future at both ends. This is particularly worrisome because the U.S. banking tradition has historically encouraged the development of banks of all sizes and business models to accommodate a variety of banking customers. 

Banks are essential to the economic success of any modern nation.  They play a central role in the conduct of monetary policy, bring savers and investors together efficiently and operate a reliable, fast and safe national payments system. We cannot afford to be complacent about the industry’s future.

Some observers might argue that a concentrated banking system could be a good thing, pointing to the Canadian banking model.  That system has five very large banks that dominate the industry, along with a handful of boutique banks that could all be listed on one side of a single sheet of paper.  Maybe that works in an economy the size of California’s, but I question its suitability for the largest and most diverse economy in the world. 

Bank customers come in all sizes, shapes, and business models, and so do our banks. Over the years our economy has naturally bred some very large, internationally active banks, as well as thousands of community banks and hundreds of regional banks, working to meet the needs of customers at home and abroad.

We need to promote this system, not just preserve it. To that end, U.S. regulators must get back in the business of chartering new banks. As the economy recovers, we can expect to see more customers with growing needs, often in new places. Existing banks are ready to meet many of those needs, but customers are also increasingly reaching for bank lookalikes—demonstrating the growing demand for bank services.

Unfortunately, many of these substitutes are less safe, more exposed to fraud and have thin resources for weathering economic and financial storms.  New opportunities call for new bank entrants and a regulatory environment that supports industry growth.

The most recent reports from the FDIC reveal an American banking industry that has recovered from the recession.  Banks are holding record amounts of capital at a higher quality. Troubled loans are at pre-recession levels.  Deposits and liquidity are robust.   These measures apply to banks of all sizes, showing strength at all levels of an industry completing a turnaround.

Regulatory oversight has played a role in promoting the industry’s financial health.  But regulators cannot run a successful banking business. If government officials make the business decisions, the results will tend toward meeting the needs of government.  If customers drive the decisions, then results will tend toward meeting the needs of customers. The latest comments by federal bank regulators evince a willingness to review recent regulations and consider how well they fit the banking industry and meet the needs of our economy.  That is timely and appropriate. 

Within the context of suitable and effective supervision, let the bankers of an industry ready for growth get on with the business of supporting an accelerating economic recovery. As we do, customers will be more likely to obtain all the banking they need.

Wayne A. Abernathy is executive vice president for financial institutions policy and regulatory affairs at the American Bankers Association.  Previously he served as assistant secretary of the Treasury for financial institutions and as staff director of the Senate Banking Committee.

Is America getting the banking it needs?  A look at current statistics suggests that the disturbing answer may be no.

The number of banks in the U.S. fell to 6,730 at the end of March, with only one new charter since 2010. By comparison, in 1892 there were 7,118 banks in America—723 more than the year before.  The attrition is concentrated at the lower end of the size range, as the Federal Deposit Insurance Corp.’s consolidation study reported earlier this year.  If you prefer community banks and what they offer, your options are dwindling.  If you value a flourishing industry, the lack of new entrants should cause alarm.  

Broadening the perspective, erosion of U.S. banking is also happening on a global scale.  A recent report from SNL Financial confirmed that four of the top 10 global banks are headquartered in China.  Only one is headquartered in the United States. In 1999, six of the largest banks in the world were headquartered here, including the world’s two largest.

These new signs suggest a lack of growth and vitality.  Either one, taken in isolation, would seem to be a whiff of a smoldering problem. Taken together, they suggest a fire that is burning our national financial future at both ends. This is particularly worrisome because the U.S. banking tradition has historically encouraged the development of banks of all sizes and business models to accommodate a variety of banking customers. 

Banks are essential to the economic success of any modern nation.  They play a central role in the conduct of monetary policy, bring savers and investors together efficiently and operate a reliable, fast and safe national payments system. We cannot afford to be complacent about the industry’s future.

Some observers might argue that a concentrated banking system could be a good thing, pointing to the Canadian banking model.  That system has five very large banks that dominate the industry, along with a handful of boutique banks that could all be listed on one side of a single sheet of paper.  Maybe that works in an economy the size of California’s, but I question its suitability for the largest and most diverse economy in the world.

Bank customers come in all sizes, shapes, and business models, and so do our banks. Over the years our economy has naturally bred some very large, internationally active banks, as well as thousands of community banks and hundreds of regional banks, working to meet the needs of customers at home and abroad.

We need to promote this system, not just preserve it. To that end, U.S. regulators must get back in the business of chartering new banks. As the economy recovers, we can expect to see more customers with growing needs, often in new places. Existing banks are ready to meet many of those needs, but customers are also increasingly reaching for bank lookalikes—demonstrating the growing demand for bank services.

Unfortunately, many of these substitutes are less safe, more exposed to fraud and have thin resources for weathering economic and financial storms.  New opportunities call for new bank entrants and a regulatory environment that supports industry growth.

The most recent reports from the FDIC reveal an American banking industry that has recovered from the recession.  Banks are holding record amounts of capital at a higher quality. Troubled loans are at pre-recession levels.  Deposits and liquidity are robust.   These measures apply to banks of all sizes, showing strength at all levels of an industry completing a turnaround.

Regulatory oversight has played a role in promoting the industry’s financial health.  But regulators cannot run a successful banking business. If government officials make the business decisions, the results will tend toward meeting the needs of government.  If customers drive the decisions, then results will tend toward meeting the needs of customers. The latest comments by federal bank regulators evince a willingness to review recent regulations and consider how well they fit the banking industry and meet the needs of our economy.  That is timely and appropriate. 

Within the context of suitable and effective supervision, let the bankers of an industry ready for growth get on with the business of supporting an accelerating economic recovery. As we do, customers will be more likely to obtain all the banking they need.

Wayne A. Abernathy is executive vice president for financial institutions policy and regulatory affairs at the American Bankers Association.  Previously he served as assistant secretary of the Treasury for financial institutions and as staff director of the Senate Banking Committee.