How does the U.S. banking system compare with foreign banking systems?
That's a pretty broad question. Let me narrow it to illustrate some ways
in which the U.S. banking system is similar to the banking systems in
other industrialized countries and other ways in which it differs from
them. Moreover, these differences change over time, since financial systems
and regulations are not static; in recent decades banking reforms have
increased the similarity of U.S. and foreign banking systems.
Banking Institutions, Structures, and Activities Vary, and So Do the
Historically, one feature that characterized the U.S. banking industry
was that banking institutions were chartered, supervised, and regulated
at both the state and federal level. A key characteristic of the U.S.
banking industry also was the very large number of very small banks. Another
feature was that U.S. banks had more limited authority to provide securities,
insurance, and real estate-related financial services than did foreign
banks in many countries. Finally, ownership of U.S. banks also was restricted.
Banks were allowed only limited investments in industrial companies, and
industrial companies were permitted only limited ownership interest in
banks. However, in the past two decades significant banking industry reforms
have resulted in consolidation in the U.S. banking system and increased
the scope of banking activities that are permitted in the U.S.
Around the globe, "banks" provide an array of banking-related
financial intermediation services, including:
- Credit cards
- Deposit taking
- Foreign exchange
- Loan making, and
- Payments-related services.
Differences, Too: Banking Structure
The structure and regulation of banking systems varies widely across
countries-just as it may across states within the U.S. In 2001, almost
three out of every four banks was chartered and regulated at both the
state and federal level.
Historically, U.S. banking laws prohibited interstate banking, and they
limited branching activity, restrictions that favored the existence of
many small local banks. Even though these restrictions were removed in
the 1990s as part of the process of authorizing and implementing interstate
banking, at year-end 2001 there were still more than 8,000 insured commercial
banks and about 1,500 insured savings institutions in operation in the
U.S. In contrast to the U.S.
experience, Canada's banking laws tended to favor larger national institutions-in
2001 that nation's banking industry had a relatively small number of domestic
banks, only 13. Even the large
Japanese economy only had 170 banks in 1998.
The U.S. banking industry also is less highly concentrated than the banking
industries in many other industrial countries. For example, the Bank for
International Settlements banking industry concentration ratio (a measure
of the cumulative percentage share of deposits or assets as a share of
total industry deposits or assets) for the five largest banks in the U.S.
was 26.6 percent in 1999. Concentration ratios for Canada (77.1 percent),
France (70.2 percent), and Switzerland (57.8 percent) far exceed the ratio
for the U.S.
Banks in many other developed nations are permitted to engage in securities
and insurance activities that until recently in the U.S. were restricted
by Depression-era banking laws. The Institute of International Bankers
lists several activities that may be permissible for banking organizations
across countries. In 2000 those five powers included:
- Securities powers (underwriting, dealing and brokering securities,
and mutual funds)
- Insurance powers (underwriting and selling insurance as a principal
and an agent)
- Real estate (real estate investment, development, and management)
- Bank investments in industrial firms (including through holding
- Industrial firm investments in banks
Securities and Insurance Powers
Securities and insurance powers have traditionally been permitted in
key European Union countries such as France, Germany, and the United Kingdom,
as well as in key trading partner nations such as Canada, Japan, and Mexico.
In the United States, following passage of the Gramm-Leach-Bliley Act
(1999), banks -- through financial holding companies -- are now permitted
to offer securities products (with restrictions on how these are offered)
and insurance products (for nonbank subsidiaries of financial holding
companies). For a more detailed review of the Gramm-Leach-Bliley Act,
see Furlong, "The
Gramm-Leach-Bliley Act and Financial Integration." Federal Reserve
Bank of San Francisco Economic Letter, 2000-10; March 31, 2000.
Investments in and by Industrial Firms
Finally, U.S. banks still face somewhat more limited power to invest
in industrial firms than do banks in Canada, France, and Germany, for
example. Likewise, industrial firms' investments in banks face more limitations
in the United States than in the European Union.
The U.S. banking system has experienced major competitive challenges
in the past two decades. Those challenges include financial market innovation,
competition from fast growing nonbank financial institutions, and from
foreign banking firms. Regulatory reforms have played an important role
in shaping the U.S. banking industry over this period. Interest rates
have been deregulated. Interstate banking reforms allowed bank holding
companies to expand across state lines and set up nearly nationwide operations.
Consolidation, in part driven by interstate banking, has cut the number
of commercial banks almost by half.
In March of 2000 the Gramm-Leach-Bliley Act extended the banking industry's
ability to offer securities and insurance services through the creation
of financial holding companies.
This banking reform now affords U.S. banking institutions the opportunity
to provide a broader and more competitive array of financial services,
more like banking institutions in many other developed nations, including
those in the European Union.
Banks also play a larger role in the financial systems in many other
countries than they do in the U.S., because the U.S. has a highly developed
set of competitive financial institutions and financial markets. For example,
despite expanding to reach $7.9 trillion in assets at yearend 2001, U.S.
banks' share of the financial service industry assets has been shrinking
for decades. Mutual funds and
pension plans have been growing much more rapidly than banks. Likewise,
the robust growth of U.S. financial markets has contributed to the shift
in financial services from traditional banks to other financial intermediaries
and financial markets.