Industry Structure Trends In U.S. Commercial Banking: Emergence Of The Top 5 Banks

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Discusses 40 years of changes in the structure of the U.S. commercial banking industry.

Covers the last two banking crises: the 80s-90s crisis and the financial crisis.

Since 1990, the largest five banks have dominated growth relative to the industry and to GDP.

The U.S. banking system has traditionally been composed of a relatively small number (20 to 50) of very large banks and a large number (5,000 to 10,000) of small banks. In contrast, the Canadian banking system has had its "Big Five" banks (Bank of Montreal (BMO), Bank of Nova Scotia (NYSE:BNS), Canadian Imperial Bank of Commerce (CM), Royal Bank of Canada (RY), Toronto-Dominion Bank (TD)), which have been its hallmark for decades. (The overall number of banks and trust companies in Canada numbers less than 200.) However, the past 40 years have witnessed major changes in the structure of the U.S. banking system that will be reviewed in this article. In preparing this article, I have come to the realization that the U.S. banking system has become dominated by its largest five banks (Bank of America Corporation (BAC), Citigroup Inc. (C), JPMorgan Chase & Co. (JPM), U.S. Bancorp (USB), Wells Fargo & Co. (WFC)) as well.

The Raw Numbers

All data were obtained from the bulk Call Report data files for 1976 through 2000 obtained from the Chicago Federal Reserve Bank website and for 2001 through 2016 from the FDIC website. (Caution: The data in this article are reported by banks, not bank holding companies.) The most fundamental measures of industry size are total industry assets, total number of employees, and total number of banks (here defined as the number of Call Reports reported). The next two exhibits show these raw values from 1976 until 2016. (All annual values are as of year-end, except for 2016 where September 30 Call Reports were used.)

Exhibit 1: Total assets and total number of full-time equivalent (FTE) employees reported in all bank Call Reports.

Exhibit 2: Number of banks filing Call Reports. (Note: If a banking company owns several bank affiliates with their own bank charters, then each must file quarterly Call Reports.) The values indicate the number of Call Reports with total assets greater than zero.

Exhibit 1 shows significant growth in total assets and moderate growth in headcount over 40 years. (These patterns will be discussed further below.) Probably more surprising is exhibit 2 with its steady decline in the number of banks since the mid-1980s. The banking crisis of the late 1980s through early 1990s was a trigger of the persistent merger and consolidation trend in the banking industry. However, the major driving force for this trend was the demise in the 1980s and 1990s of unit banking and state branching restrictions. It will be shown below that these consolidations were a major impetus in the continued growth of the largest banks. Basically, it denotes a concerted effort toward the creation of a few truly nationwide banking franchises.

Top 10 Lists: Remember These Banks?

Bankers traditionally enjoy industry rankings, especially top 10 rankings. The next exhibit shows the Top 10 banks by asset size as of 12/31/1976 and 12/31 1996. (Later, the same ranking as of 9/30/2016 will be shown.)

Exhibit 3: Top 10 banks by total assets as of 12/31/1976 and 12/31/1996. The far right column shows the current banks that ultimately acquired the listed banks. Total assets are in $ billions. (Source: Call Reports)

Notice that the 1976 list has five banks that ultimately became components of JPMorgan Chase Bank. Other than Citibank and Bankers Trust, these were the major New York money center banks. Notice that there are relatively few "current banks" listed.

The next exhibit shows the most recent top 10 listing as of 9/30/2016.

Exhibit 4: Top 10 banks by total assets as of 9/30/2016. The column labeled "# Affiliates" shows the total number of banking entities currently owned by the parent bank holding company. (Note: Toronto-Dominion Bank is one of Canada's Big Five and the # Affiliates indicated are only those operating in the U.S.) Most importantly, the column labeled "# Charters" shows the number of U.S. banks with separate charters that over decades have ultimately merged into the listed banking companies. (Sources: Call Reports and FDIC Institution Directory)

The last column of this exhibit shows the immense number of mergers and consolidations that have occurred to culminate in today's largest banks. This process has been the main driving force in the general decline in the number of banks shown in exhibit 2. (The source of the "# Affiliates" and "# Charters" data was the "" file located at and classified as the "FDIC Institutions Directory -- Insured Institution Download File.")

From exhibit 2, it is apparent that there has consistently been more disappearances of bank charters than new charters issued over recent decades. The next exhibit displays the overall number of banks that were merged or consolidated ("outflows") and the number of new bank charters issued ("inflows") by year.

Exhibit 5: Numbers of banks that merged or consolidated ("outflows") and the number of new bank charters issued ("inflows") by year. (Source: FDIC institution directory)

The outflows peaked initially around the 1981 recession, then later during the height of the banking and S&L crisis of the late 1980s and early 1990s. The number of outflows has been relatively steady since about 2003 even during the more recent financial crisis. The inflows matched outflows only in the 1970s and in 1980. After that, outflows always exceeded inflows. What is particularly striking is that since the financial crisis, there has only been a trickle of new bank charters issued ("Inflows"). Indeed, in the past five years, there have only been four new bank charters issued. This is probably attributable to heightened regulatory scrutiny, the Dodd-Frank Act, and increased emphasis on Bank Secrecy Act and anti-money laundering burdens. Since the financial crisis, the overall cost of compliance and regulation on all banks is immense, but is probably prohibitive for new entrants to the industry.

Emergence of the Top 5

The next exhibit shows the percent of industry total assets held by the Top 5, Top 10, and Top 25 banks as ranked by assets. Please keep in mind that the detailed banks comprising any of these "Top" categories can change from year to year as mergers occur.

Exhibit 6: Percent of industry total assets ("industry share") held by the Top 5, Top 10, and Top 25 banks. (Source: Call Reports)

What is striking about this exhibit is how parallel the three lines are. This implies that the major changes in all three groups were all driven by changes with the Top 5 group only. Hence, the relative asset shares of the banks ranked from 6 through 25 have been relatively stable over the decades.

Also, notice that in the 1980s, the relative asset share of all largest bank groups actually declined. That is, the industry was gravitating away from the largest banks. But starting around 1990, the relative share of the Top 5 banks increased dramatically from about 10% to about 45%. Again, this was due to the aggressive mergers and consolidations occurring in the industry mainly among the Top 5 banks.

Because the Top 5 banks were so instrumental in this industry shift, we will now focus on the structure of the Top 5 banks versus the rest of the industry in the remaining discussion.

Industry Size Relative to the U.S. Economy

Industry size must be assessed relative to the size of the U.S. economy. The next exhibit shows total banking assets as a percent of GDP (Source: St. Louis Fed FRED database).

Exhibit 7: Total banking assets as a percent of GDP. Also shown are the total assets of the Top 5 banks and the assets of the rest of the industry ("Not 5") as percentages of GDP. (Sources: Call Reports and St. Louis Fed FRED database)

It appears that total assets have been relatively stable at 70% to 75% of GDP for earlier periods. Moreover, it has increased since about 2004 to the current level of close to 90% of GDP. And as we suspect, the Top 5 group has shown an even larger increase from a low of about 8% to a current level of just under 40% of GDP. The rest of the industry ("Not 5") shows a concomitant decline.

Exhibit 8: FTE employees as a percent of civilian labor force ("CLF") for all banks, Top 5, and all banks excluding the Top 5 ("Not 5") groups. (Sources: Call Reports and St. Louis Fed FRED database)

The total industry has remained relatively stable as a percent of the total civilian labor force over all of the decades. There was a modest decline in the 1990s that has since recovered. However, as with the prior exhibit, the Top 5 group has increased and the Not 5 group has declined by substantial inverse amounts.

Drilling Down to Loans and Deposits

Similar exhibits were prepared for loans as percent of GDP and deposits as percent of GDP. However, they are qualitatively similar in appearance to exhibit 7, so they will not be displayed. However, in banking, it is the ratio of loans to deposits that is usually monitored. Generally, the higher that ratio, the more aggressive the bank is considered in underwriting loans and taking liquidity risk. The loan-to-deposit ratios of the relevant bank groups is shown in the next exhibit.

Exhibit 9: Loan-to-deposit ratios for all banks, Top 5 group, and the rest of the industry ("Not 5"). (Source: Call Reports)

For the entire industry, there was a steady increase in the loan-to-deposit ratios from 1976 until about 2000. Since 2000, there has been a steady decline which was accentuated by the financial crisis. The ratios for all banks and the Not 5 group behaved similarly in all decades. The behavior of the Top 5 group was quite different. It peaked at about 90% in 1984 and 1990, but has shown a steady decline since 1990. (Note: There was a small increase during the height of the financial crisis which was probably related to the failure of numerous asset securitization and SIV structures that necessitated putting securitized loans back on the balance sheet.)

Surprisingly, the loan-to-deposit ratio of the Top 5 group has been quite a bit lower than the Not 5 group since about 1995 to this day. This observation raises interesting questions about whether the consolidation trend and corresponding emergence of the Top 5 group has been helpful or not in supporting lending activities and general economic growth.

Concluding Remarks

The observations described above lead to the general conclusion that, if anything, the "too big to fail" issue is much bigger now than ever before. The Dodd-Frank Act notwithstanding, it is hard to imagine that the government will not support any of the largest banks that may become endangered in any future financial crisis.

The inexorable drive to create truly nationwide banking franchises has resulted in a U.S. banking system that now parallels the Canadian banking system in its most distinctive feature. It now has its own version of the "Big Five" banks. The financial crisis did not impede this progression. Ironically, it may have unexpectedly accelerated it by creating greater impediments to new bank creation and challenges to the viability of smaller banks. At some point, one wonders whether there may develop a political backlash to this series of events.

In closing, it is not my intention to overstate the significance of the number five. After all, what constitutes the true "mega-banks" is a matter of opinion and debate. Indeed, there is now also a "Big Six" group in Canada. What is significant is that there are only a handful of truly nationwide franchises in both the U.S. and Canada. Is that purely coincidence? Somehow, I doubt it. After all, how many nationwide mega-banks does any country need?

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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