Why US has so many banks?

US financial system is popularly known as a market based system. There are two main reasons for it- One , US banks are large in number and as a result banking industry is a lot less concentrated than say in European economies. Though the second point has changed with concentration picking up, it still is lesser than other developed economies. Two, because of first reason, US relies more on capital markets to channelise financial resources.

The question is why did US come to acquire such a system. Why it has so many number of banks? For instance, if we see this FDIC statistics, it says there are around 7000 commercial banks as of June 2009 (In this crisis, 122 banks have closed so far). If we see 1990, it had around 12,343 banks and all this does not include savings and thrift institutions.

 I was reading this speech from Marc Olson, Fed Governor where he shed some light on this issue.  Though the speech is much like the Larry Meyer speech on explaining FOMC, still gives some idea:

The Federal Reserve System is generically described as the central bank of the United States. In the late eighteenth and early nineteenth centuries there were two attempts to establish a central bank of the United States, and neither endured for more than twenty years–in contrast to most European nations, where central banks were well established by the nineteenth century.

Though you may not be familiar with the history of our central bank, you may well remember learning about the debates on the concept of federalism by our nation’s founders, when the forces favoring decentralization, led by Thomas Jefferson, fought the proponents of a more centralized government, led by Alexander Hamilton. The Jeffersonian forces largely prevailed. As a result, the United States lacked a strong central bank presence but had no authority even to grant national charters to commercial banks until the Abraham Lincoln Administration. All bank charters were originally granted by the states and, as a consequence, the United States at one time had more than 25,000 bank charters. Today, we have about 8,000 separate bank charters. By contrast, most other developed nations have fewer than 100 separately chartered banks. 

Hmmm… this is very interesting. As is always the case, knowing history is very important. As US did not have a central banks it led to development of so many chartered banks in the various states.

How certain economies acquire certain type of financial systems is a very very interesting area, especially if explored from the political economy angle. Most economic studies ignore the political reasons and focus on economic reasons. But it is always politics which leads to the long term structure in anything.


4 Responses to “Why US has so many banks?”

  1. Why US has so many banks? « acc3ss.info Says:

    […] Link: Why US has so many banks? […]

  2. euandus Says:

    On Federalism and industry: I suspect that the latest compromise regarding state banking regulation points to the influence of large corporations on the Congress as a culprit in the on-going eclipse of federalism. I have just posted on this, in case you are interested.

  3. Osomec Says:

    This doesn’t really answer the question in full. Why does the average U.S. state have far more banks than the average independent developed country of the same size?

  4. Šta nedostatak novih banaka znači za budućnost industrije « Pavle Bašić Says:

    […] raznolikost tipova banaka u poređenju s drugim zemljama. Ova struktura u velikoj meri potiče od rasprostranjenosti decentralizacije unutar američkog privrednog sistema, koju je favorizovao još Tomas Džeferson (Thomas Jefferson) […]

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: