“A Framework for Regulatory Relief” - Remarks of FDIC Vice
Chairman Thomas M. Hoenig, presented to the FDIC Community
Banker Conference, Arlington, VA
April 6, 2016
Introduction
The United States has a long history of economic success under a
decentralized and diversified banking system. Commercial banks, ranging in
size from small to very large, have successfully served the credit needs of
individuals, small businesses, and large international firms. This success was
based on a business model wherein the banker serves as a trusted
intermediary between savers and borrowers. Using this model, the banking
and financial industry created and supported the largest, most dynamic
economy in the world. But things have changed, and the community bank
model has come under enormous competitive and operational pressure -- so
much so that some are asking if the model is sustainable. In my view it is, but
not without some fresh thinking and concerted effort.
Consolidation
Over the past 30 years traditional community banks have become less
influential as they have lost market share of credit allocation within the
economy and as their numbers continue to decline.
The consolidation of the credit channel within the United States in recent
decades has been dramatic.1 For example, in 1984 the distribution of assets
among community, regional, and money center banks was nearly
proportional, with more than 15,000 commercial banks serving a variety of
borrowers, from consumers and small businesses to global conglomerates.
Today, the 20 largest banks by assets control more than 80 percent of
industry assets, and the number of banking firms has declined to less than
6,200. The group of community banks with less than $1 billion of assets,
1 Consolidation of the Credit Channel: https://www.fdic.gov/about/learn/board/hoenig/creditchannels.pdf
Chairman Thomas M. Hoenig, presented to the FDIC Community
Banker Conference, Arlington, VA
April 6, 2016
Introduction
The United States has a long history of economic success under a
decentralized and diversified banking system. Commercial banks, ranging in
size from small to very large, have successfully served the credit needs of
individuals, small businesses, and large international firms. This success was
based on a business model wherein the banker serves as a trusted
intermediary between savers and borrowers. Using this model, the banking
and financial industry created and supported the largest, most dynamic
economy in the world. But things have changed, and the community bank
model has come under enormous competitive and operational pressure -- so
much so that some are asking if the model is sustainable. In my view it is, but
not without some fresh thinking and concerted effort.
Consolidation
Over the past 30 years traditional community banks have become less
influential as they have lost market share of credit allocation within the
economy and as their numbers continue to decline.
The consolidation of the credit channel within the United States in recent
decades has been dramatic.1 For example, in 1984 the distribution of assets
among community, regional, and money center banks was nearly
proportional, with more than 15,000 commercial banks serving a variety of
borrowers, from consumers and small businesses to global conglomerates.
Today, the 20 largest banks by assets control more than 80 percent of
industry assets, and the number of banking firms has declined to less than
6,200. The group of community banks with less than $1 billion of assets,
1 Consolidation of the Credit Channel: https://www.fdic.gov/about/learn/board/hoenig/creditchannels.pdf
which in 1984 controlled nearly a third of banking assets, today controls less
than 10 percent of industry assets.
These trends put us on a path toward a system in which a few very large
financial firms control the allocation of credit within the national economy. It
is unclear, to me at least, whether this structure in the longer term will
support a vibrant, competitive system, able to serve the present and future
needs of consumers and business, or if it will become a highly concentrated,
controlled distribution system for credit. At a minimum, therefore,
consolidation in the banking industry deserves attention regarding its effects
on competition and reduced consumer and business options.
While any number of factors might contribute to consolidation, I would note
at least four.
First, branch banking laws were substantially liberalized. Where banks were
once confined to local or state boundaries, in the 1980s and ’90s state and
federal laws removed these barriers. While this change was inevitable and
necessary in an open economy, it also enabled and accelerated the banking
industry’s consolidation.
Second, activities insured banks are permitted to conduct -- including
insurance, investment banking, broker-dealer activities, and trading -- have
significantly expanded, as codified in the Gramm-Leach-Bliley Act of 1999.
The effect of this change has been to encourage and accelerate consolidation
among the largest financial firms in the United States, both within the
banking industry and among the largest commercial and investment banks
and some insurance companies. It has contributed to an enormous increase in
the concentration of the industry and an increase in the systemic risk facing
our economic system.
Third, monetary policy has sustained an interest rate environment near zero
for almost a decade. This has significantly affected the ability of community
banks to maintain net interest margins, manage risks, and achieve returns
necessary to operate safely and profitably. The result has been increasing
numbers of community banks exiting the industry and fewer investors
seeking new charters.
than 10 percent of industry assets.
These trends put us on a path toward a system in which a few very large
financial firms control the allocation of credit within the national economy. It
is unclear, to me at least, whether this structure in the longer term will
support a vibrant, competitive system, able to serve the present and future
needs of consumers and business, or if it will become a highly concentrated,
controlled distribution system for credit. At a minimum, therefore,
consolidation in the banking industry deserves attention regarding its effects
on competition and reduced consumer and business options.
While any number of factors might contribute to consolidation, I would note
at least four.
First, branch banking laws were substantially liberalized. Where banks were
once confined to local or state boundaries, in the 1980s and ’90s state and
federal laws removed these barriers. While this change was inevitable and
necessary in an open economy, it also enabled and accelerated the banking
industry’s consolidation.
Second, activities insured banks are permitted to conduct -- including
insurance, investment banking, broker-dealer activities, and trading -- have
significantly expanded, as codified in the Gramm-Leach-Bliley Act of 1999.
The effect of this change has been to encourage and accelerate consolidation
among the largest financial firms in the United States, both within the
banking industry and among the largest commercial and investment banks
and some insurance companies. It has contributed to an enormous increase in
the concentration of the industry and an increase in the systemic risk facing
our economic system.
Third, monetary policy has sustained an interest rate environment near zero
for almost a decade. This has significantly affected the ability of community
banks to maintain net interest margins, manage risks, and achieve returns
necessary to operate safely and profitably. The result has been increasing
numbers of community banks exiting the industry and fewer investors
seeking new charters.