Turbulent Years for U.S. Banks: 2000-20

Abstract

The first 20 years of the twenty-first century have presented U.S. banks with three recessions, long periods of very low interest rates, and increased regulation. The number of commercial banks operating in the United States declined by 51 percent during this period. This article examines the performance of U.S. commercial banks from 2000 through 2020. An overall picture is provided by examining the evolution of assets, deposits, loans, and other financial characteristics over the period. In addition, new estimates of technical inefficiency are provided, offering additional insight into banks' performance during the recent difficult years.

Introduction

The first two decades of the twenty-first century have been turbulent for U.S. commercial banks. Banks have confronted recessions in 2001, 2007-09, and 2020, increased regulation, unprecedented periods of low interest rates, and other disruptions. The number of Federal Deposit Insurance Corporation (FDIC) insured commercial banks and savings institutions fell from 10,222 at the end of the fourth quarter of 1999 to 5,002 at the end of the fourth quarter of 2020. During the same period, among the 5,220 banks that disappeared, 571 exited the industry because of failures or assisted mergers, while the creation of new banks slowed. From 2000 through 2007, 1,153 new bank charters were issued, and in 2008 and 2009, 90 and 24 new charters were issued, respectively. But from 2010 through 2020, only 48 new commercial bank charters were issued. The decline in the number of institutions since 2000 continues a long-term reduction in the number of banks operating in the United States since the mid-1980s.

Banks are a critical part of the U.S. economy and, among other roles, serve as financial intermediaries for all types of businesses. Banks in effect arbitrage financial capital by renting funds from depositors and renting funds to borrowers. The rents received on either side depend on prevailing interest rates and in particular on the spread between rates on deposits and loans. This role also requires that banks manage risk to avoid becoming insolvent. Diamond and Rajan (2001) note that banks perform valuable functions on both sides of their balance sheets. Banks provide liquidity on demand to depositors while at the same time making loans to illiquid borrowers, thereby enhancing the flow of credit in the economy. Despite the unusually low interest rates experienced during 2009-16 and 2020, banks remain an important and substantial part of the U.S. economy. As shown below, financial sector profits accounted for approximately 24.5 percent of corporate profits at the beginning of 2000. The share of corporate profits accruing to the financial sector fluctuated widely during 2000-20, but at the end of 2020 still accounted for approximately 23.2 percent of corporate profits, down only slightly from the beginning of 2020.

This article examines the performance of commercial banks over 2000-20.