America’s banking landscape has changed dramatically over the past 20 years. The change started with banks being allowed to branch unfettered within state borders. The process expanded to banks being allowed, for the first time in our nation’s history, to branch unrestricted across state borders. Permitting intrastate and interstate banking and branching led to thousands of mergers and acquisitions in the industry. Today, the number of banking organizations is about half of what it was in the 1980s. Still, thousands of banks remain, some as very large, multistate organizations and many others as small or moderate-sized institutions. All the while, new banks are created each year.
With so many banks disappearing, you might believe that banking competition must also be disappearing. But this is actually not the case. Fewer banks overall does not have to mean less banking competition in your neighborhood or mine. In fact, one of the Federal Reserve’s jobs is to make sure that banking competition stays vigorous in local markets, even as the industry consolidates.
You might also believe that the consolidation trend has caused some banks to jeopardize their safety and soundness. This, too, is certainly not the case. Another of the Fed’s jobs is to make certain that banks remain safe and sound, and that they are complying with all laws and regulations, even as the industry consolidates.
This year’s annual report describes the role we play in monitoring, evaluating and overseeing mergers and acquisitions in the banking industry to ensure that consolidation occurs in an orderly and regulated manner. That is, we will describe how we act as a “checkpoint” on the road of an evolving banking landscape.
There was a time when American banking was quite different than it is today. In the 19th and early 20th centuries, our banking system was a model of active competition among tens of thousands of small banks. Unfortunately, our environment of many small, independent banks prevented these institutions from achieving maximum efficiency, and the system turned out to be fragile. Some banks failed, even in relatively good economic times. Many failed when economic conditions deteriorated. The Great Depression resulted in almost half of all U.S. banks failing, which devastated the economy. This period in U.S. history illustrates vividly that the number of banking institutions reveals little about the effectiveness or efficiency of the banking industry.
Although the total number of institutions has recently been dropping, these declines, fueled chiefly by intrastate and interstate banking and branching, have enabled banks to structure themselves more efficiently than ever before. No merger or acquisition, however, can proceed without the Federal Reserve or another regulator first reviewing, adjusting and, ultimately, approving or denying it.
Our annual report examines this less well-known, but very important, role that the Federal Reserve plays in making sure that such mergers and acquisitions do not endanger a bank’s safety and soundness, compliance with laws and regulations, or the level of banking competition that is vital to economic welfare. Our goal is to make certain that the banking industry evolves in a way that preserves the benefits of competition and ensures a safe and sound banking system. So, even if your bank has changed owners three times in the past two years, rest assured that the Fed (or another regulator) has scrutinized each transaction to make sure that the best interests of the industry, the local market, the bank and you are upheld.
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