FOOTNOTES

^*Katherine Samolyk is a senior financial economist in the FDIC’s Division of Insurance and Research.

¹Banks issue liquid deposit accounts that can be easily used to make payments; banks also make the payments.  The special liquidity of bank liabilities and the extent to which they serve as a means of payment are reflected in the fact that deposit liabilities are included in various measures of the money supply.  Seminal works discussing the special role of money and banks include Gurley and Shaw (1960), Tobin (1963), Fama (1980), and Diamond and Dybvig (1983). 

²Two frequently cited papers that analyze the importance of banks as lenders are Diamond (1984) and Fama (1985).  Of course, banks can and do hold credit-market instruments issued by others—including securities issued by the U.S. government and government agencies—although in some sense this involves less of a provision of banking services per se.  When a bank invests depositors’ funds in corporate or government securities, it is not providing the same banking services as when it originates a loan.  Rather, the bank is simply buying securities that were issued in (and could easily be resold in) direct capital markets.  Mutual funds, as well as individual investors, can do the very same thing.

³Indeed, one decade ago, the title of the May 1994 Federal Reserve Bank of Chicago Conference on Bank Structure and Competition was “The Declining [?] Role of Banking.”

⁴These market-share measures are the author’s estimates based on Federal Reserve Flow of Funds Account data and are described in more detail below.

⁵Ip (2002).

⁶The Flow of Funds Accounts (FFA), the only truly comprehensive data on broad U.S. financial flows, use a wide range of data sources to produce a consistent set of quarterly estimates of financial flows and balance-sheet stocks for various sectors of the U.S. economy.  See Teplin (2001).

⁷For example, see Mishkin (2003).

⁸The FFA define credit-market debt to include corporate and foreign bonds, U.S. government securities, tax-exempt debt and securities, residential and business mortgages, consumer credit, bank loans not elsewhere classified, open-market paper (commercial paper and banker’s acceptances), loans to businesses from nonbank financial intermediaries, loans from the U.S. government or sponsored credit agencies, foreign loans to U.S. nonbank borrowers, and customer liabilities on acceptances.  Credit-market debt does not include security credit, trade credit, and other miscellaneous financial claims.

⁹Here it is useful to remember that traditional financial-intermediary liabilities in the form of deposits, mutual-fund shares, and accrual of pension and insurance fund reserves are not counted as credit-market debt; hence, they do not contribute to the double counting of debt.

¹⁰So, for example, when looking at the commercial banking sector to measure the share of nonfinancial-sector debt that it is funding on the balance sheet, we estimate the share of the banking sector’s holdings of commercial paper that are nonfinancial issues.  Specifically, we use the share of outstanding commercial paper issued by domestic nonfinancial corporations as an estimate of the share of commercial banking’s holdings that consist of nonfinancial issues.  The same method is used to estimate holdings of nonfinancial corporate bonds.

¹¹For an analysis of debt and money growth in the U.S. prior to 1950, see Gurley and Shaw (1957).

¹²Permissible activities were severely curtailed because of the bank failures of the 1930s, but the decentralization of the industry stems more broadly from a historical distrust of both centralized political control and concentrated market power.  The dual banking system allowed banks to choose whether to be chartered by state agencies or by the Comptroller of the Currency (the choice of charter determined who would regulate a bank).  Interstate banking was prohibited by the McFadden Act, and states themselves regulated intrastate branching.  The Glass-Steagall Act prohibited banks from engaging in investment banking activities.  For a discussion see Wheelock (1993).

¹³The Bank Holding Company Act of 1956 made all multibank holding companies subject to regulation by the Federal Reserve Board and prohibited further interstate holding company acquisitions.  In 1970, amendments to this act reined in the permissible activities of one-bank holding companies, which had proliferated as a means of circumventing regulations imposed by the 1956 act.  One effect of these amendments was to remove any disincentives for organizations to acquire multiple bank affiliates (albeit within the home state), which they did.  For a provocative assessment of the 1970 holding company amendments as well as a lively overview of post-war U.S. banking history, see Chase (1994). 

¹⁴In the mid-1960s the term credit crunch was coined to refer to periods when nominal interest rates rose above regulatory ceilings and banks faced disintermediation as depositors withdrew funds to earn higher returns available in direct credit markets.  For discussions, see Burger (1969) and Wojnilower (1980).

¹⁵The other direct means of payment was cash held by the public.  Savings institutions issued passbook savings accounts, which paid interest but the rates they could pay were subject to ceilings (and after 1962, savings institutions also issued CDs).  Commercial banks, too, could issue passbook savings accounts, which were subject to Regulation Q interest-rate ceilings.  Although savings institutions could issue close substitutes for money (passbook savings accounts with liberal withdrawal terms), these institutions had to maintain a high ratio of residential mortgage lending to total lending in order to qualify as a thrift institution.  Meeting the qualified-thrift-lender test allowed a savings institution to borrow at Federal Home Loan Banks, which were an important source of funding during credit crunches.

¹⁶Commercial banks held large amounts of government debt in their portfolios in the post-WWII years.

¹⁷These funds—which held very safe, liquid, money-market assets; maintained par value for their shares; and allowed some transaction privileges—became a popular alternative to bank deposits.  They lack deposit insurance but also carry fewer regulatory costs.

¹⁸Early articles assessing this phenomenon include Pavel (1986), Cummings (1987), and Carlstrom and Samolyk (1993).

¹⁹In 1986, the annual symposium sponsored by the Federal Reserve Bank of Kansas City was entitled “Debt, Financial Stability, and Public Policy.”  Policy research at this time also focused on the growth of borrowing by both nonfinancial businesses and households.  For example see Pearce (1985),  Faust (1990), Altig, Byrne, and Samolyk (1992), and Carlson (1993).

²⁰For discussions, see Carlson and Samolyk (1992); Duca (1992); Orphanides, Reid, and Small (1994); and Friedman (1993).

²¹By year-end 1994, the number of commercial banks had declined from a 1984 post-war high of over 15,100 to roughly 10,500, and average bank size had risen from roughly $250 million to $360 million in inflation-adjusted 1996 dollars.  (The number of savings institutions—savings banks and savings & loan associations—was also declining, from more than 3,600 in 1985 to just over 2,100 in 1994.)  In addition to merging charters, more institutions were becoming affiliates of bank holding companies.  Thus, if the bank holding company is considered the relevant measure of an individual banking organization, the number of firms in the industry declined even more.  By year-end 1992, 71.7 percent of domestic commercial banks were affiliates of bank holding companies.  For discussions, see Savage (1993), Samolyk (1994a), Holland et al. (1996), and Rhoades (1996). 

²²As noted in above, concerns about disruptions to the traditional linkages between standard monetary aggregates and output also led to much research focusing on the implication for monetary policy.  Also see Higgens (1992). 

²³For examples, see Kaufman (1993) and Gorton and Rosen (1995). 

²⁴For examples, see Boyd and Graham (1991) and Boyd and Gertler (1994a).  These studies suggest that the formation of very large institutions reflected regulatory incentives rather than attempts to become more efficient. 

²⁵For example, see Wheelock (1993).  Generally, more sanguine analysts argued that institutions had to be larger to meet the competition for traditional bank services, to develop new products, and to diversify geographically.  Samolyk (1994a) presented evidence that regional disparities in economic conditions did indeed explain much of the poor performance of banks (including large banks) during the 1980s and early 1990s. 

²⁶Small businesses and households have traditionally relied on financial intermediaries (particularly banks) for credit because of these borrowers’ small financial size and the information-intensive nature of the task of assessing their creditworthiness.

²⁷Finance companies, which faced less regulation of the geographic scale and scope of their activities, had gained significant ground during the 1980s and early 1990s.  Some finance companies are captive funding vehicles for large conglomerates (e.g., GMAC Finance), whereas others are independent firms that extend credit to a particular sector.  Some are subsidiaries of bank holding companies and, as such, allow the holding companies to broaden the scale or scope of their activities and avoid banking regulations.  Within their respective specialized lending areas, finance companies diversify across many borrowers and develop expertise in transforming the risks associated with their particular types of loans.  By so doing, they reduce overall portfolio risks and the risk-adjusted costs of funding their activities.  In addition, the evolution of the commercial-paper market has been viewed as contributing to the success of those finance companies that shifted to commercial paper as a dominant funding source rather than borrowing from banks (D’Arista and Schlesinger [1994]).

²⁸The SCF has been gathering data on balance sheets and the use of financial institutions by U.S. households since 1983.  For example, see Avery and Kennickell (1993) and Kennickell and Starr-McCluer (1996).  The most direct precursors of the SCF were the 1962 Survey of Financial Characteristics of Consumers and the 1963 Survey of Changes in Family Finances.  For a discussion of survey evidence regarding small business financing trends from the early National Survey of Small Business Finances see Cole and Wolken (1993).

²⁹This paper uses data from the 1995, 1992, and 1989 SCFs to examine changes in the balance sheets and income of U.S. families and in the kinds of institutions where households obtained their financial services.  Also see Avery and Keninckell (1993) for trends in the SCF data between 1983 and 1986. 

³⁰The FFA and the SCF do not always paint the same picture of household-sector balance sheets.  Avery and Kennickell (1991) and Antoniewicz (1996) show that although some asset and liability categories in the SCF and the FFA are quite close, measures of liabilities tend to match up better than asset categories.

³¹Although commercial banks have long been viewed as competing with savings institutions and credit unions for deposit funding, finance companies represent competition on the asset side of the balance sheet, for they have a long history of lending to businesses and households (although they do not fund their portfolios by issuing deposits).

³²After bank data on small loans to businesses and farms were first reported, in 1993, numerous studies looked at the importance of large banks compared with small banks as small-business lenders, and at the implications of industry consolation for the provision of small-business loans by banks.  The findings of studies using data for the mid-1990s suggested that net consolidation activity among larger institutions tended to result in declines in small-business lending as a share of bank assets, whereas mergers among smaller or more focused banks increased the banks’ small-business loan shares.  Samolyk (1997) and Berger and Udell (1998) discussed some of the small-business loan studies done in the mid-1990s.

³³Consolidation has been related to the relaxation of geographic banking restrictions that limited the extent to which banks could expand their geographic reach (Samolyk and Morgan [forthcoming]).

³⁴Debt issued by government-sponsored enterprises (for example, by Federal Home Loan Banks and the Farm Credit System and to fund the on-balance-sheet lending of Fannie Mae and Freddie Mac) has also increased, but (as we discuss below) much of it funds financial sectors, mainly commercial banks and other depository institutions.

³⁵Finance companies have long used commercial paper as a source of financing, and banks began tapping this market for funds to offset disintermediation during periods when market rates rose above the deposit-rate ceilings.

³⁶The genesis of markets where business loans can be securitized has been linked to the Resolution Trust Corporation’s activity in disposing of assets in the wake of savings institution problems.

³⁷Insurance companies now hold roughly 12 percent of business mortgages, compared with 22 percent 20 years ago and 29 percent 50 years ago.  Savings institutions hold less than 8 percent, compared with 22 percent 20 years ago and a peak of 27 percent in the 1970s.  The share of business mortgage loans funded directly by nonfinancial borrowers has also declined.

³⁸Nonfinancial business-sector debt held by commercial banks is estimated to equal the sum of business mortgage loans, bank loans not elsewhere classified, liabilities on banker’s acceptances, and the estimated holdings by commercial banks of nonfinancial-sector issues of commercial paper and corporate bonds.

³⁹This report, produced every five years pursuant to section 2227 of the Economic Growth and Regulatory Paperwork Reduction Act of 1996, can be found on the Internet at www.federalreserve.gov/boarddocs/rptcongress/
sbfreport2002.pdf.

⁴⁰The Survey of Small Business Finances (SSBF) asks respondents to discuss specific types of loans, including vehicle loans, equipment loans, lines of credit, leases, and mortgages.

⁴¹See Canner, Durkin, and Luckett (1998).

⁴²Home-mortgage lending has always been mainly funded by financial intermediaries, and the share of such lending held by financial firms now stands at a 50-year high of 96 percent.

⁴³Netting out holdings of financial-sector debt for commercial banking and other financial sectors reported in the FFA requires detailed analysis of each sector’s financial asset holdings.  When detail is not reported in the FFA, specifically for corporate bonds and commercial-paper holdings, we estimate holdings of nonfinancial-sector issues using patterns evident for these markets in the FFA.

⁴⁴This is particularly true now that asset securitization has become the dominant funding mode for home mortgages—traditionally the primary asset held by savings institutions.

⁴⁵For some of these sectors, the flow of funds allows one to directly identify holdings of nonfinancial sector debt.  For others, such as the sectors that hold corporate bonds and commercial paper, we used the patterns evident in these markets to impute holdings owed by nonfinancial borrowers.

⁴⁶An example of a relatively recent paper arguing that banks have become less special is Herring and Santomero (2000).  These authors document the decline in banks’ funding of credit-card receivables, the rise in banks’ share of mortgages that are securitized, and the erosion of banks’ share of the short-term commercial lending market.  They also argue that banks are losing ground on the liability side of their balance sheets, as demographic trends and technological advances on the payments side make mutual funds an increasingly attractive alternative to bank deposits.

⁴⁷This phrase was used by Greenspan (1994) in addressing the conference where Boyd and Gertler presented their work on alternative measures of bank market share.

⁴⁸The SCF data do indicate a dramatic decline in the volume of household credit obtained from savings institutions. Ascorbi and Kennickell (2003) report trends evident from the 2001 SCF.

⁴⁹Boyd and Gertler (1994b); D’Arista and Schlesinger (1994); Avery and Berger (1991a), and (1991b).

⁵⁰As reported by Waldrop (2002), “The new report format introduced in the first quarter of 2001 still includes fiduciary income, deposit service charges, and trading revenues, but it now also breaks out income from investment banking services, revenues from venture capital investments, servicing fees, income from asset securitization activities, insurance commissions and fees, and proceeds from sales of loans, other real estate, and other assets.”

⁵¹Table 4, based on data reported by Waldrop (2002), shows the amount of noninterest income in each component category, as well as the number of banks reporting non-zero amounts in each category.  It also shows the share of income in each category represented by the combined totals of the five largest amounts reported, to indicate how highly concentrated each underlying activity was within the banking industry during 2001.

⁵²For example, the increased use of credit cards allow individuals to actually pay for the transaction made during a month at a single point in time.  Thus, individuals can transfer funds to their transactions accounts when they need to pay their credit card bills.  At other points in times they may hold relatively little “money.”  Payment system changes are discussed in The Effect on U.S. Banking of Payment System Changes by Neil B. Murphy of Virginia Commonwealth University, which follows this article.

⁵³As noted, the share of total credit market debt issued by financial firms was quite small, and insurance and pension funds didn’t hold that much in the way of equities fifty years ago (only around five percent of their portfolios were in corporate equities).

⁵⁴Credit-market debt issuance by financial intermediaries had also risen to 10 percent of total outstanding credit-market debt; hence it is important to point out that securities directly held by individuals were issued by financial firms as well as nonfinancial firms.