Evolution of US banking in the 21st century: Evidence and regulatory implications

Samuel G. Hanson, Victoria Ivashina, Laura Nicolae, Jeremy C. Stein, Adi Sunderam, and Daniel K. Tarullo in this Brookings paper reviews US Banking in 21st century. The paper shows that large banks are seeing rise in deposits in terms of liabilities and rise in investments on the assets side:

As revealed by the failures of three regional banks in the spring of 2023, bank runs are not a thing of the past. To inform the ongoing discussion of the appropriate regulatory response, we examine trends in the banking industry over the last twenty-five years.

On the liability side of bank balance sheets, deposits—and especially uninsured deposits—have grown rapidly. On the asset side, there has been a notable shift away from the information-intensive lending traditionally associated with banks and towards longer-term securities such as MBS and long-term Treasuries. 

These trends appear to be related, in the sense that banks with the most rapid growth in deposits have seen the biggest declines in loans as a share of assets. Thus, while the banks that failed in early 2023 were arguably extreme cases, they reflect broader trends, especially among larger banks.

We construct a simple model to help assess the main regulatory options to reduce the risk of destabilizing bank runs—expanding deposit insurance and strengthening liquidity regulation— and argue that the industry trends we document favor the latter option.

Using the model, we offer some design considerations for modifying the Liquidity Coverage Ratio so as to require banks to pre-position sufficient collateral—largely in the form of short-term government securities—at the Federal Reserve’s Discount Window to ensure they have enough liquidity to withstand a run on their uninsured deposits. We also comment briefly on some other regulatory implications of our findings, including for interest rate risk regulation and merger policy.