SIC 6021

This classification includes commercial bank and trust companies (accepting deposits) chartered under the National Bank Act. Trust companies engaged in fiduciary business but not regularly engaged in deposit banking are classified in SIC 6091: Nondeposit Trust Facilities.

NAICS Code(s)

522110 (Commercial Banking)

522210 (Credit Card Issuing)

523991 (Trust, Fiduciary, and Custody Activities)

Industry Snapshot

The U.S. commercial banking industry remained healthy in the early 2000s, despite a sluggish economy. The frenetic pace of industry consolidation that had characterized the 1990s began to slow, partly because the number of players had dropped so considerably. Indicative of the massive consolidation of financial services in the United States, there were 8,129 commercial banks in operation at the start of 2002, dramatically down from 18,769 at the end of 1975. The number of mergers and acquisitions that took place in 2001 fell to 376, compared to 475 in 2000. At the same time, the number of new banks established in 2001 dropped to 149, compared to 217 in 2000. Similarly, the number of mergers and acquisitions between bank holding companies (BHCs) fell from 180 to 155 over the same time period.

Commercial banks held about $6.4 trillion in assets in 2001, registering an increase of 5.2 percent from 2000. That year, the 10 largest commercial banks in the United States held 40 percent of total domestic bank assets, and the top 50 U.S. BHCs held nearly 78 percent of domestic banking and nonbanking assets.

Commercial banking was among the first industries to develop in the United States. Subject to a convoluted set of regulations at the state and federal levels, the banking industry is broad in scope and complex in nature. Modern commercial banks provide both individual and corporate customers with an increasing number of financial services. Recent innovations in this industry include the introduction of credit cards, accounting services for corporate firms, factoring, leasing, trade in Eurodollars, lock box banking, and security investment. Banks are constantly seeking to improve service to customers by expanding the quality and number of their services.

Commercial banks perform at least eight major functions in the U.S. economy. First, banks facilitate the elastic credit system that is necessary for economic progress and steady growth. Second, they allow the efficient transfer of money between firms and individuals. Third, they encourage the pooling of savings, making these savings available for lending. Fourth, banks extend credit to credit-worthy borrowers, increasing production and capital investment. Fifth, banks facilitate the financing of foreign trade by converting various currencies. Sixth, they act as trust administrators and advisors. Seventh, they aid in the safekeeping of valuables. Finally, banks have recently been allowed to engage in brokering activities, buying and selling securities for customers.

Several banks in the early 2000s continued to take advantage of the Gramm-Leach-Bliley Act—landmark legislation passed in late 1999 that opened the door to deals between banks and other financial institutions, such as securities brokers and insurance companies. The number of BHCs that have transformed themselves into financial holding companies grew from 552 in 2000 to 672 in 2001.

Despite the increasingly relaxed regulatory climate, the banking industry is one of the most regulated parts of the U.S. financial system. The industry operates under the supervision of three regulatory agencies: the Federal Reserve System, the Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corporation (FDIC). The Federal Reserve System, created in 1913, is the central bank of the United States and is responsible for monetary policy. Its operations are carried out by its 12 regional banks. The OCC has wide discretionary authority, which it uses in routine examinations of all national banks' books to identify unsafe or unsound banking practices. This agency is the most involved with national bank regulation. The OCC has the authority to take any actions necessary to correct the conditions resulting from violations of law or sound and safe banking practices. Finally, the FDIC was created to reduce the risk of making deposits by insuring the deposits of member banks, both national and state.

Organization and Structure

The National Bank Act of 1863 created the basis for the first national U.S. banking system and continues to serve as the basic banking law for American national banks. The act was originally created to provide a uniform national currency backed by U.S. Government bonds that would replace the various currencies issued by state banks and other forms of exchange that were then in use. The original plan for the national banking system was outlined by Salmon Chase, the secretary of the treasury, in 1861.

National banks are chartered and supervised by the Comptroller of the Currency of the United States. The charters issued by the comptroller are of indefinite duration. Upon the submission of an application, a national bank examiner in the region where the proposed national bank will be located initiates an investigation of the bank, focusing on the character and experience of the organizers, existing banking facilities, and prospects for success. A national bank must meet certain capitalization requirements depending upon its location and cannot begin operation until it has paid-in surplus equal to 20 percent of its capital. The examiner puts the capital and paid-in surplus of each bank to an "adequacy" test that subjects each potential bank to criteria based on established minimal capitalization levels and analysis of local conditions. If the application is accepted, the Comptroller of the Currency issues the necessary documentation to the bank and, eventually, a certificate to commence business.

All national banks are required to be members of the Federal Reserve bank of their district and to invest in the capital stock of the bank as required by the Federal Reserve Act of 1913, which requires that 6 percent of the national bank's capital and surplus must be pledged and 3 percent deposited as payment. National banks are further required to be insured by the Federal Deposit Insurance Corporation (FDIC).

National banks have 20 enumerated, general powers, which are effective upon the execution and filing of the articles of association and the organization certificate. Such powers include the obvious—receiving and loaning money—as well as the obscure—providing travel services for customers. National banks are granted general corporate powers, which include making contracts, suing and being sued, electing and appointing directors, and prescribing bylaws. They are also allowed to establish branch offices in the United States and abroad, under specified conditions. They conduct a range of activities involving real estate, U.S. government securities, the establishment of trusts, and other financial activities. Such broadly construed powers enable national banks to engage in far more than strictly commercial banking.

Commercial banks may be classified as either unit or branch banks. In the United States, unlike other countries, banks of both types exist. Historically, however, unit banking has been the most common. Under unit banking, services are provided by a single office or institution. The system of unit banking is the product of an earlier American social and economic structure in which a single local bank could serve the needs of a relatively small and insular town. As communication became more efficient and the economic environment became more complex and interdependent, however, branch banking became dominant in many areas of the country. Branch banking is a system under which a single banking firm operates at two or more locations. There are different degrees of branch banking across the country. In general, the more densely populated areas, such as the East and West Coasts, have adopted branch banking, while more sparsely populated areas have maintained unit banking.

Background and Development

The first incorporated commercial bank in North America was opened in Philadelphia on 7 January 1782, one week after the Continental Congress had granted a perpetual charter to the Bank of North America. This bank was intended to be a pillar of American credit that would play a significant role in the financial management of the fledgling republic. The number of banks in the United States grew exponentially in the early nineteenth century. By 1816 there were 246 banks in the United States and, by 1840, there were three times as many as there had been in 1820. Between 1840 and 1860, this number again doubled, to 1,500.

By the outbreak of the Civil War, both the North and the South had well-developed banking, but the systems were decentralized. Before the war, banking policy was controlled by the individual states. But the war strengthened the central government and began a new era in banking. In 1863 the government crafted legislation giving the federal government powers to regulate banking. For the first time, the nation had a uniform bank currency controlled by a central authority. This step marked the beginning of what is called the "dual banking system," which consists of banks chartered by the states and other banks chartered by the federal government.

The existence of a strong federal banking structure after the Civil War underlay the explosion of productive capability that characterized the United States in the late nineteenth century. Yet, while a dependable money supply aided economic expansion, it also prompted distrust of those controlling the flow of money. By the end of the nineteenth century, reformers looked to further banking legislation to smooth economic turmoil. In 1913 the Federal Reserve Act created the system of Federal Reserve banks. The Federal Reserve Act was created to bring stability to commerce and industry, prevent financial panics, make commercial credit available, and dis-courage speculating by banks. Although this legislation was initially opposed by bankers, the Federal Reserve has since developed into a cornerstone of the current banking system.

Despite improved supervision and economic prosperity, nearly one quarter of the banks operating in the mid-1920s had closed by the end of the decade. Between 1921 and 1929, more than 5,700 banks closed, far exceeding the total for the previous 56 years. After the stock market crash in 1929, banks continued to close at an alarming rate. The rampant failure of banks led to the implementation of a deposit insurance program created by the Banking Act of 1933, or the Glass-Steagall Act. One important part of this legislation was the establishment of the Federal Deposit Insurance Corporation (FDIC), which guaranteed the deposits of investors up to a certain limit. The Glass-Steagall Act also created the distinction between commercial and investment banking. Commercial banks were prohibited from underwriting securities, engaging in the stock market, and a host of other activities that legislators felt had contributed to the financial crisis. Commercial banks were to focus on accepting deposits and providing commercial loans. The act also built on long-standing distrust in the United States of centralized monetary institutions by regulating and restricting bank branching.

After 1945 U.S. banks began to expand their operations to encompass a wide range of financial services. In the 1960s banks began to represent themselves as "full-service banks," indicating their involvement in a growing range of financial activities, as regulatory constraints were relaxed. This trend toward deregulation continued throughout the second half of the twentieth century. After 1965 banks began to expand into foreign markets, while foreign banks also began to gain footholds in the United States.

Commercial banking assumed an increasingly international posture through the late twentieth century. In 1965, 13 U.S. banks maintained operations abroad, controlling $10 billion in assets; by 1980 the number had grown to 159, holding assets of $340 billion. However, U.S. creditors began to realize in the early 1980s that they had overextended themselves in emerging markets, as foreign borrowers failed to service their debts, resulting in massive losses. Not until the early 1990s were commercial banks confident about lending in such markets again. U.S. bank assets held $861 billion in foreign assets in 1998, while 82 banks maintained foreign branch offices, down significantly from the 162 in 1985. This decline was primarily reflective of the intense consolidation of U.S. commercial banking; the number of branches in foreign markets was at a record high of 935 in 1998.

In February 1993, during the first few months of the Clinton administration, the General Accounting Office (GAO) announced that despite the extensive bureaucracy, the federal government did a poor job of examining the books of banks and thrifts. The Comptroller of the Currency, Charles Bowsher, indicated he felt that the regulatory agencies did not adequately ensure that unsafe banking practices were uncovered. Although these sentiments were not uncommon, many felt that there was no reliable evidence about what was happening in the banking industry.

The Treasury Department suggested that the fundamental changes needed in the banking industry required thorough reconsideration of the foundations of the financial system, including the scope and operation of the federal deposit insurance system, the nature of bank supervision and regulation, and bank and nonbank affiliations. Four broad principles to guide the reform process were proposed by the Treasury Department, which suggested that banks should: preserve deposit insurance for small depositors, but protect taxpayers by exposing large depositors to some risk; create a system of incentives and sanctions that encourages higher levels of capital; allow banks to engage in a broader range of business activities and to operate nationwide; and make the regulatory structure more efficient to strengthen the banking system.

By 1994 banking institutions had become far less restricted by geographical boundaries. That year the Riegle-Neal Interstate Banking and Branching Efficiency Act eliminated most of the remaining regulatory barriers impeding interstate banking activity. The act unleashed a massive reorganization of banking structures. Previously, banks maintained separate subsidiaries in states other than those in which they were headquartered. With the passage of Riegle-Neal, banks could organize all their operations under one institution with separate branches across state lines, enabling more streamlined networks and diversification of product lines. In the first six months after the bill's passage, the number of interstate branches of U.S. commercial banks more than doubled.

With the continued relaxation of the U.S. financial regulation climate, the reach of large national commercial banks expanded rapidly, moving across state and national borders and swallowing smaller banks that found it increasingly difficult to remain profitable in the face of competition from their more leveraged competitors. The fiercely competitive market forced banking institutions to offer a greater range of services and to "out-local" the national banks, "out-national" the local banks, or both. By 1998 roughly 25 percent of all commercial banking assets were controlled by institutions with operations in more than one state; only a small handful of banks were engaged over state lines in 1980. The control of assets likewise gravitated toward the largest national banks. The largest 100 commercial banks maintained about 70 percent of domestic banking assets in 1998, up from 50 percent in 1980. Small community banks, however, were not among the primary victims of this consolidation, managing to hold their own in their own localized markets, where they could market their service to and shared interests with the community.

The financial industry prepared for a complete transformation entering the 2000s, as the passage of the Gramm-Leach-Bliley Act, also known as the Financial Services Modernization Act, repealed the Glass-Steagall Act, capping a 20-year effort by lobbyists. The new law allowed banks to engage in a range of activities prohibited since the Great Depression. By establishing financial holding companies, banks could establish brokerages, insurance operations, and other financial service offerings in addition to their traditional banking activities all under one institution. The ruling sparked additional merger activity, especially across financial sectors. Bank of America, for instance, took advantage of the opening to become the first bank to reorganize its insurance operations from an operating subsidiary to a financial subsidiary, relocating it to the bank's headquarters. To establish a financial holding company, national banks were required to meet the following criteria: they must be considered well capitalized, determined by a ratio of at least 10 percent total capital to risk-adjusted assets, as evaluated by the Federal Reserve; they must receive a satisfactory rating under the Community Reinvestment Act; and aggregate, consolidated assets of all banks' financial subsidiaries must amount to either less than $50 billion or 45 percent of the banks' total assets, whichever is lower.

While the Gramm-Leach-Bliley Act was certainly a landmark piece of legislation, banks' nonbanking activities had been extensive for years. The Bank Holding Company Act of 1956 was filled with loopholes, particularly Regulations K and Y, which allowed banks to invest in nonbanking institutions through small business investment companies (SBICs). Moreover, in the years leading up to the new law, federal regulators had become so lenient in interpreting legal loopholes that the Glass-Steagall Act, meant specifically to prevent combinations between banks that lend money and Wall Street brokers in the business of offering corporate securities to the public, was nearly meaningless. Nonetheless, the Gramm bill did fuel further consolidation in the financial services industries.

Such changes did little to quiet fears (deemed irrational by many banking executives) that the U.S. banking system was unsound and might experience a disaster similar to that experienced by the savings-and-loan industry in the mid-and late 1980s. Bank deregulation under the Reagan administration was blamed for the failures of hundreds of savings-and-loans that would cost American taxpayers as much as $500 million in repayments to depositors. Those seeking lessons from the fi-asco tended to suggest that banks needed more rather than less regulation.

Perhaps validating many such fears that the dramatic surge in financial performance masked an unsound foundation was the alarming increase in consumer bankruptcies, which reached a record 1.35 million in 1997, up 20 percent from the year before, even in the midst of the strongest U.S. economy in years. As a result, the Federal Reserve warned banks against the relaxation of credit discipline, including the overreliance on the borrower's promise to pay.

Overall, however, banks did not seem worried by such developments. Commercial and industrial loans expanded 13 percent in 1998, reaching $847 billion, as bankers remained confident in the sound fundamentals of U.S. companies. Total deposits at commercial banks were also in good shape at $3.3 trillion, up 11 percent from 1997, while 95 percent of all bank assets in 1998 were held by banks considered well capitalized by the Federal Reserve.

Current Conditions

Commercial bank assets grew 5.2 percent to $6.4 trillion in 2001. While this growth had slowed from the 8.7 percent increase in 2000, it remained similar to the pace set in 1999. While the sluggish U.S. economy of the early 2000s did increase loan and lease losses, these were "offset in large part by realized gains in investment account securities: these gains developed as banks' portfolios benefited from declining short-and immediate-term market interest rates," according to the June 2002 Federal Reserve Bulletin . In response to the September 11, 2001, terrorist attacks, which undermined an already weakened economy, the Federal Reserve continued to reduce interest rates into 2003, and the resulting low interest rates on home mortgages helped to spark a refinancing boom, which bolstered the industry's performance as well.

The FDIC reported that seven U.S. banks liquidated their assets in 2000. This number dropped to four in 2001, and combined net income for U.S. commercial banks grew 8 percent to $75.3 billion that year. As in 2000, roughly 625 banks posted losses in 2001, accounting for 1.3 percent of total industry assets, compared to 4.7 percent in 2000. This decrease in overall losses reflected the improved performance of a number of banks that had taken one-time write-offs in 2000.

To handle the anticipated growth in loan losses, the result of the floundering economy, banks increased their loan loss provisions by 41 percent in 2000 and by another 45 percent in 2001. As a result, loan loss provisions in the early 2000s accounted for nearly 11.5 percent of total bank revenues, their highest level since the early 1990s.

In 2001 overall loan and lease growth declined to 1.8 percent, compared to a growth rate of roughly 9 percent in 1999 and 2000. The number of commercial and industrial loans fell 6.6 percent in 2001, while commercial real estate loans remained steady. Although slowing from their explosive pace in 2000, residential mortgage loans did grow by 5.6 percent, while home equity loans grew 21 percent.

While consolidation slowed, major deals did continue to take place, including the merger between Chase Manhattan and J. P. Morgan and Company Inc., which created J. P. Morgan Chase and Co., the second largest bank in the United States, in 2001. That year, U.S. Bank and Firstar Bank also completed a merger, creating U.S. Bancorp, the eighth-largest financial services holding company in the United States.

Industry Leaders

While the number of national banks is quite large, there are several recognized leaders in terms of size of deposits and range of services. These industry leaders include Citibank, Bank of America Corp., J. P. Morgan Chase and Co., and Bank One Corp.

Pittsford, New York-based Citibank, which continues to operate as the consumer and corporate banking subsidiary of Citigroup Inc., was originally organized in New York in 1812. It was chartered under the National Banking Act in 1865. The bank conducts general banking business, including retail and wholesale operation, and operates an extensive international network covering over 40 countries. Citibank is one of the nation's largest bank issuers of credit cards. Near the turn of the twenty-first century, parent company Citigroup became the first U.S. bank to record total assets of more than $1 trillion.

J. P. Morgan Chase and Co. operates the second largest U.S. bank. It was formed in 2001 via the merger of investment firm J. P. Morgan and Company Inc. and Chase Manhattan Corp. Chase Manhattan had emerged when Chemical Bank purchased Chase Manhattan in 1996. At the time, the combined entity was the largest commercial bank in the United States with approximately $300 billion in pro forma assets. With assets of $694 billion in 2001, J. P. Morgan Chase and Co. secured revenues of $50.4 billion and employed nearly 96,000 workers.

Bank of America Corp. was formed by the merger of San Francisco, California-based BankAmerica Corp. and Charlotte, North Carolina-based NationsBank Corp. in 1998. The bank is heavily involved in commercial banking, savings, trusts, safe deposit, and installment credit. It operates more than 4,000 branches across 21 states, as well as several foreign subsidiaries in Europe and Latin America. In 2001 Bank of America was the third largest U.S. bank, with $660 billion in assets.

Bank One Corp., based in Chicago, was formed via the merger in 1998 between Banc One Company and First Chicago NBD Company. The firm's business includes commercial and retail banking, and various investment activities. Bank One was the top bankcard issuer in 1998, with $70 billion in outstandings, and is also a leading manager of mutual funds. The company reported total assets of $274 billion in 2001 and employed 73,500 people.


The entire banking industry employed about 1.5 million people in the late 1990s, including 550,000 bank tellers, who earned an average annual salary of $16,300. However, the year 1998 witnessed a record number of layoffs in the financial sector. The top handful of banks eliminated more than 70,000 positions due to merger activity and the attempt to remain competitive by cutting costs. As banks become increasingly connected to the performance stock and other financial markets, the temptation to downsize a bank's labor force to mitigate sagging stock prices will likely intensify.

America and the World

Despite the intense consolidation, the U.S. banking industry remains highly fragmented when compared with other industrialized nations. However, even among those nations that already rely heavily on central banking institutions, U.S.-style consolidation is the order of the day. The globalization of financial markets is largely responsible for this development, since typically only larger, more leveraged institutions are able to compete in overseas markets. The increasingly liquid global financial markets invite the deregulated industries to tap into new markets abroad.

The most popular entity for international banking among U.S. national banks is the foreign branch office, which maintains full access to its parent bank's capital when making lending decisions, rather than being restricted by its host country to its own balance sheet. In 1998, 82 U.S. commercial banks maintained foreign branch offices, controlling assets of $704.5 billion. Almost $350 billion in assets was held by branches based in Europe, though that figure declined somewhat in the late 1990s. The Latin American market experienced the most pronounced growth for this type of foreign entity during the 1990s; at the start of the decade about 250 foreign branches held a total of $10 billion in assets in this region, while by 1998 $32 billion was controlled by 350 branches.

However, in many cases foreign tax laws or other considerations relating to the host country favor the establishment of foreign subsidiaries, legally separate entities that are responsible for, and limited to, their own asset holdings, even though they are wholly or partially owned by the parent bank. Foreign subsidiaries also shield the parent bank from liabilities accrued by the foreign operation. U.S. banks owned 1,133 foreign subsidiaries in 1998, controlling assets of $717.9 billion. About half of these assets were held in the United Kingdom.

The lending of currency in the host countries' denomination creates what is known as "transfer risk," which measures the exposure of a U.S. banking operation to that country's financial market. Foreign-currency lending is among the most tightly concentrated sector of the U.S. banking industry, with the six largest banks accounting for more about 83 percent of transfer risk. By the late 1990s, the strength of the dollar relative to foreign currencies had begun to slow the demand for such lending, however, as dollar markets opened up in many countries, emerging markets experienced dramatic volatility in their currency valuations.

The Japanese financial system was in the midst of sweeping reform, known as the "Big Bang," in 2000, which is completely overhauling the banking system in an effort to mitigate the country's decade-long economic woes. Most significantly, the reforms are opening Japanese financial markets to foreign players and, like the United States, breaking down restrictions against banks' engagement in other financial activities, such as securities underwriting.

Meanwhile, the European financial markets continue to integrate. In 1999 all European Union members with the exception of the United Kingdom, Sweden, and Denmark officially chained their currencies to the euro, with the United Kingdom expected to jump on board within a few years. The European Union thus constitutes the largest economic area in the world, with banking policy administered by the European Central Bank, which has worked to open its market to more liquid financial flows.

Research and Technology

As the banking industry became ever more complex in the mid 1990s, banks around the world began to adopt new technologies and automation. Much of the investment was for Automatic Teller Machines (ATMs), teller workstations, check processing equipment, and related software. Electronic check presentment (ECP), which involves check processing via electronic transfer and which was expected to save the industry some $2.8 billion in paper costs, was beginning to take firm hold in 1999, as was online banking. With increased emphasis on the electronic transfer of funds, however, banks were forced to invest heavily in security systems. Security spending for electronic systems was projected to skyrocket from $1.2 billion in 1996 to $7.4 billion by 2002, mainly for firewalls and encryption systems.

Further Reading

Anason, Dean. "Welcome for Reform Law Gives Way to Uncertainty." American Banker, 16 December 1999.

"Banking." Business Week, 10 January 2000.

"E-cheques Move a Stage Closer." Electronic Payments International, 30 November 1999.

Fraser, Katharine. "Big Banks' Fees Keep Going Up, Study Says." American Banker, 1 September 1999.

Garver, Rob. "Bank of America Is First To Seek Approval to Move Insurance Unit to HQ City." American Banker, 29 December 1999.

Hill, Sidney. "Web Banking's New Fledglings." Financial Services Online, 20 January 1999.

Hoovers Online. Austin, TX: Hoovers Inc. January 2003. Available from .

"Landmark Financial Services Legislation for the U.S." Reactions, December 1999.

Marjanovic, Steven. "Fed Rule Revision to Allow Wider Use of Electronic Returned-Check Images." American Banker, 23 December 1999.

O'Connell, Brian. "Plugging IT Security Leaks." Bank Technology News, December 1999.

"Profits and Balance Sheet Developments at U.S. Commercial Banks in 2001." Federal Reserve Bulletin, June 2002.

Rehm, Barbara A. "OCC Issues New-Powers Rules for National Banks." American Banker, 21 January 2000.

Rehm, Barbara A. and Dean Anason. "Fed: Consumers Flocking to Nonbank Lenders." American Banker, 19 January 1999.

——. "Fed Opens Lane for 1-Stop-Shop Applications." American Banker, 20 January 1999.

Snow, David. "New Banking Laws Prompt Yawns and Cheers." Buyouts, 22 November 1999.

U.S. Department of Commerce. International Trade Administration. U.S. Industry and Trade Outlook 1999. New York: The McGraw Hill Companies, 1999.

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