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 Rules
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:1
- 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.2 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.3 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 13.4 Even the large Japanese economy only had 170 banks in 1998.5
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.6
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:7
- 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 company structures)
- 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.8 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.9 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.
1. Zimmerman, Gary C. 1996. "Integrating Banking Markets in the EC." Federal Reserve Bank of San Francisco, FRBSF Economic Letter, 1996-12; April 5, 1996. /econrsrch/wklyltr/el9612.html
2. Summary of Deposits data reported by the Federal Deposit Insurance Corporation (FDIC) for June 30, 2001 indicate that 2,176 of 8,178 commercial banks had a national charter (and would be regulated by the Office of the Comptroller of the Currency). The remaining 6,002 banks are chartered at the state level. The Federal Reserve regulates the 902 state-chartered banks that are members of the Federal Reserve System. The remaining 5,027 banks are state chartered and are regulated by their respective states and the FDIC. http://www3.fdic.gov/sod//index.asp
3. Federal Deposit Insurance Corporation. http://www.fdic.gov/bank/statistical/statistics/0112/cbrc01.html
4. Department of Finance, Canada. August 2001. http://www.fin.gc.ca/toce/2001/bank_e.html
8. Furlong, Fred. 2000. "The Gramm-Leach-Bliley Act and Financial Integration." Federal Reserve Bank of San Francisco, FRBSF Economic Letter, 2000-10; March 31, 2000. /econrsrch/wklyltr/2000/el2000-10.html
Bank for International Settlements, Group of Ten-Consolidation in the Financial Sector. January 2001.
"Global Survey 2000." 2000. Institute of International Bankers. September. Pages 1-15
Furlong, Fred. (1998) "New View of Bank Consolidation." Federal Reserve Bank of San Francisco Economic Letter, 1998-23, July 24, 1998. /econrsrch/wklyltr/wklyltr98/el98-23.html
Furlong, Fred, and Gary C. Zimmerman. (1995) "Consolidation: California Style." Federal Reserve Bank of San Francisco Economic Letter, 1995-36, October 27, 1995.
Furlong, Fred. (2000) "The Gramm-Leach-Bliley Act and Financial Integration." Federal Reserve Bank of San Francisco, FRBSF Economic Letter, 2000-10; March 31, 2000. /econrsrch/wklyltr/2000/el2000-10.html
Levonian, Mark E. "Why banking isn’t declining." Federal Reserve Bank of San Francisco, FRBSF Weekly Letter. 95-03. Jan 20, 1995.
Zimmerman, Gary C. 1996. "Integrating Banking Markets in the EC." Federal Reserve Bank of San Francisco, FRBSF Economic Letter, 1996-12; April 5, 1996. /econrsrch/wklyltr/el9612.html