The Transformation of the U.S. Banking Industry: What a Long, Strange Trip It’s Been

This paper summarizes and quantifies past changes in the U.S. commercial banking industry and forecasts what the future may hold. It emphasizes regulatory changes and technical and financial innovations as the central driving forces behind the transformation of the industry. Changes in the regulatory environment include the deregulation of deposit accounts, several major changes in capital requirements, reductions in reserve requirements, expansion of bank powers, and liberalization of geographic restrictions on intrastate and interstate banking. Importantechnical innovations that have affected the banking industry include the advances in information processing and telecommunications technologies that facilitate the low-cost, rapid transfer of information and funds that fuel modern financial markets. Innovations in applied finance include those that have allowed the securitization of many traditional bank assets and have expanded the scope and volume of financial derivative activity. Many of these regulatory, technical, and financial changes have altered the way in which banks compete with each other and have brought about substantial external competition to U.S. banking organizations from foreign banks and from nonbank financial intermediaries.

Allen N. Berger, Anil K. Kashyap, and Jospeh M. Scalise

Brookings Institution

Spring 1995

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