SIC 6029

This category includes commercial banks (accepting deposits) that do not operate under federal or state charter.

NAICS Code(s)

522110 (Commercial Banking)

The 1990s have been characterized by dramatic consolidation in the commercial banking industry. The number of commercial banks fell 18 percent between 1993 and 1999, due primarily to mergers and acquisitions. In general, commercial banks are involved in financing the production, distribution, and sale of goods and services by acting as a source of short-term funds for the producer. Funds are acquired by the banks from the deposits of individuals who earn interest on these deposits. The vast majority of these institutions are either national or state banks. National banks are organized under the National Bank Act of 1863 and overseen by federal agencies. State banks are organized under similar state regulations and overseen by state banking authorities. Organizations created under these regulations charter the banks and give them access to depositors' insurance.

Industry leaders in commercial banking include: Citibank of New York; Bank of America National Association of Charlotte, North Carolina; Chase Manhattan Bank of North America; First Union National Bank of Charlotte, North Carolina; Morgan Guaranty Trust Company of New York; Bank One National Association of Chicago; Wells Fargo National Bank of Chicago; and Chemical Bank of New York.

The nation's 8,011 commercial banks maintained assets of $5.4 trillion in 1999. In a reversal of a trend that had characterized the national commercial banking sector since the mid-1980s, the number of commercial banks losing money has escalated in the late 1990s. While 17.1 percent of banks were losing money in 1985, that figure dropped to 3.6 percent in 1995, largely reflecting the declining number of banks as smaller and less profitable firms were forced out of business or swallowed by larger competitors. In 1998, 5.8 percent of commercial banks were unprofitable, due in part to relaxed lending regulations that allowed many banks to enter into risky loans.

A small minority of commercial banks are private—neither federally nor state chartered. These banks are sometimes owned by a small group of partners who assume unlimited liability, in effect insuring the bank themselves. These banks tend to focus on global custody and private banking, two growth sectors of banking in the 1990s.

Traditional global custodian services include paying for a security in local currency, minimizing settlement problems; collecting dividends and interest; handling safekeeping and tax reclamation; and taking care of bookkeeping for stock splits and rights issues. As this industry continues to grow at an estimated rate of 30 percent, bankers have had to develop new, high value-added services. These services include analytics, performance measurement, and full master trust reporting.

The repeal of the 1933 Glass Steagall Act with the passage of the Gramm-Leach-Bliley Act in 1999 broke down many of the restrictions on the kinds of activities banks are permitted to engage in. By allowing financial services firms to offer lending, insurance, and brokering services under one company, it was expected that customers would increasingly begin to place all their financial business with a single firm. Thus, banks will be forced to find ways to make quick and efficient inroads into other financial sectors to secure or maintain a sound customer base.

Private banking involves offering banking services to very wealthy customers. These services are generally more personalized and flexible than services offered by other types of commercial banks. Private banks usually set net worth or minimum deposit requirements that vary from $250,000 to $2 million.

One reason that banks in the United States are chartered is to impose discipline on the individual banks. In private banks, discipline is imposed by the need for consensus, the unlimited liability of the partners, and the limitation of capital. This structure also has the benefit of allowing the partners, who often serve for many decades, to take a long-term view of their business. Perhaps the most important of these banks is Brown Brothers Harriman, the oldest and largest private bank in the United States, founded in 1818. In 1999, it employed more than 2,000 people nationwide and had total assets of $2.6 billion, up from $1.95 billion in 1997.

Further Reading

American Banker. Washington: American Banking Association, 5 August 1996.

"The Fragmented Bank Industry Consolidates." Standard & Poor's Industry Surveys, 13 May 1999.

Rehm, Barbara and Dean Anason. "Fed Opens Fast Lane for 1-Stop-Shop Applications." American Banker, 20 January 2000.

U.S. Department of Commerce. International Trade Administration. U.S. Industry and Trade Outlook 1999. Washington, D.C.: GPO, 1999.

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