SIC 6022

This category includes commercial banks and trust companies (accepting deposits) chartered by one of the states or territories. 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)

522190 (Other Depository Intermediation)

523991 (Trust, Fiduciary, and Custody Activities)

Industry Snapshot

Despite a lackluster economy, the U.S. commercial banking industry remained healthy in the early 2000s. According to the Conference of State Bank Supervisors, total commercial banks' assets grew from $6.5 trillion in 2000 to $6.9 trillion in 2001, while assets at state-chartered commercial banks increased from $3.01 trillion to $3.08 trillion over the same time period.

The consolidation frenzy of the 1990s had lessened by the early 2000s, at least in part simply because the number of banks had been reduced rather dramatically. At the end of 2002, commercial banks in operation totaled 7,933, compared to 18,769 at the end of 1975. Of those banks, 5,841 were state chartered. In 2001 mergers and acquisitions totaled 376, compared to 475 in 2000. In addition, the number of new banks created in 2001 dropped to 149, compared to 217 in 2000.

As interstate banking restrictions gradually disappeared, the reach of large national commercial banks expanded rapidly, moving across state borders and swallowing smaller banks, which found it increasingly difficult to remain profitable in the face of competition from their more leveraged competitors. By 2002 nearly 70 percent of all commercial banking assets were controlled by the 50 largest bank holding companies, many of which operated in more than one state; only a small handful of banks were engaged over state lines in 1980. The challenge remained for state banks to prove capable of providing a range of new financial services in conjunction with their traditional operations while fending off competition from superregionals and foreign bank branches seeking to take advantage of more open financial markets to encroach on state banks' customer bases.

Despite the increasingly relaxed regulatory climate, U.S. state commercial banks are subject to a range of regulations at the state and federal level. In addition to the federal regulatory bodies that oversee national banks, each state has a system of supervisory bodies charged with the chartering and regulation of state commercial banks. These diverse structures and organizations are responsible for regulating the state's banking industry in a manner that is most appropriate for the financial, economic, and social environment of the state.

Historically, there were advantages to be found for banks in the multiplicity of rules and regulations state to state. At one time, for example, Minnesota was among the few states to allow its banks to sell insurance. Meanwhile, Texas once barred branch banking, so than any bank building had to exist as its own corporation with its own board of directors. While such differences smoothed out to a great extent, thanks to interstate banking deregulation in the 1980s and 1990s, enough perceived differences remained, in the form of tax incentives and loose restrictions, to convince many banks that it was still advantageous to be chartered by a state rather than by the federal government.

Organization and Structure

Commercial banks, which are organized primarily to conduct general banking business, are most often state or national banks. State banks are organized under a charter granted by the state government, while national banks are organized under charters issued by the Comptroller of the Currency of the United States. Many institutions that are chartered as trusts offer services that are generally considered commercial banking, while many banks also offer trust and savings services. These institutions and operations are also included under the commercial banking category.

The regulation of banks on the state level is delegated to a banking authority in each state. These bodies exercise primary and additional regulatory powers. There are four primary bank regulatory powers: new bank charter approval, new branch or separate facility application approval, cease and desist orders, and officer removal orders. There are also four additional state bank regulatory powers: power to fine, power to order affiliate examinations, power to order special examinations, and power to issue regulations. Such regulatory powers are exercised by either the state's primary banking authority or by the state's banking board, depending upon the structure of the state's system. Most states maintain a banking board consisting of between 5 and 17 members who are generally appointed by the governor for three to six year terms. Some states, however, regulate banking without a banking board.

The specific type of institutions that are regulated by the state banking authorities can also vary. Normally, the state authorities will regulate commercial banks, trust companies, money order companies, loan production offices, and foreign bank branches. The states may also regulate other entities, such as travelers check issuers, currency exchanges, and collection agencies. State banks may voluntarily join the Federal Reserve System, in which case they are required to adhere to the regulations that apply to all national banks, including those that apply to the purchase, sale, underwriting, and holding of investment securities and stock for national banks.

Background and Development

Among the first institutions created by the administration of President George Washington was the Bank of the United States. Washington's Secretary of the Treasury, Alexander Hamilton, insisted that a national bank was necessary to give the fledgling democracy stability and legitimacy. Centralized banking remained a politically divisive issue for over 70 years, as those fearful of a powerful federal government attacked the power vested in the bank. President Andrew Jackson made the Second Bank of the United States one of the primary issues in his presidential campaign of 1832, launching what is known as the Bank War, which left the nation with no central banking agency by 1834. Nearly 30 years later, the Federal Banking Act of 1863 brought banking under federal control and created a uniform bank currency controlled by a central authority for the first time in the nation's history.

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. Important steps were taken during the administrations of Woodrow Wilson (1912 to 1920) and Franklin D. Roosevelt (1932 to 1944) to further curb the power of bankers and provide equal access to and protection from the U.S. banking system. The Federal Reserve Act of 1913 established 12 regional banking districts and made the district banks answerable to regional as well as national concerns, thus addressing the historical dominance of eastern bankers. The creation of the Federal Deposit Insurance Corporation (FDIC) in 1933 ensured Americans that their deposits were safe in accredited banks, thus calming concerns over bank instability caused by the Depression.

The U.S. banking system is thus the product of two centuries of adjustment designed to make banks serve the interests of the widest number of people operating in a capitalist economic system. Banking regulation proceeds downward from the Federal Reserve Bank through a variety of national regulations to state regulations crafted to suit the needs of particular localities. The "dual" banking system created by the actions of independent national and state regulatory agencies has allowed innovation in local banking, while ensuring continuity in banking between the states.

The stock market crash of 1987 came at a bad time for commercial banks. After investing heavily in infrastructure to make them competitive in the investment banking industry, the banks were faced with a much smaller and more competitive market in the wake of the crash. Equally troubling to the banking industry was the failure of hundreds of savings-and-loan institutions. While these institutions were insured, the administration of President Ronald Reagan left them largely unregulated, and taxpayers were left to cover the roughly $500 million needed to repay depositors. In the aftermath of these two disasters, broad skepticism about the stability of the financial system brought the banking system under closer scrutiny. However, booming profits in the mid-1990s and a looser regulatory environment led to a blurring of the regulatory borders between various branches of the financial services world.

Throughout the 1990s banks were granted greater freedom to focus on other activities, such as investment banking. Following a series of concessions by regulatory bodies, state banks strived to court wealthier clients by delving into the surging hedge fund industry (investment strategies that in general "hedge" against market downturns), acting as management custodians, lenders, and brokers. Furthermore, commercial banks increasingly participated in the lucrative investment-banking sector, a practice forbidden commercial banks since the Great Depression. Thus the industry continued to chip away at the long-standing regulatory climate restricting the range of banks' activities. By the end of the decade, however, bankers finally achieved the sweeping legislation they were hoping for.

As U.S. banks enjoyed record revenues, the financial industry geared for a long-awaited overhaul as a result of the Gramm-Leach-Bliley Act in November 1999. Also known as the Financial Services Modernization Act, this legislation 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. To establish a financial holding company, banks must 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.

Current Conditions

In 2002 there were 7,933 commercial banks in the United States, about 73 percent of which were state chartered. While asset growth had slowed in 2001 and 2002, compared to the 8.7 percent increase in 2000, it remained similar to the pace set in 1999. Return on assets for state-chartered banks grew from 1.11 percent in 2001 to 1.14 percent in 2002. However, these figures did remain below the 1.25 return on assets percentage achieved in both 1999 and 2000. But national commercial banks realized a 1.54 percent return on assets, achieving a level higher than all three previous years. Some analysts believe that this discrepancy was due to the fact that the consolidation of the 1990s had favored the larger, more well-capitalized banking institutions, particularly national and superregional banks, which were able to achieve greater economies of scale than state and local banks.

Both national and state commercial banks in the early 2000s did see increased loan and lease losses, as the U.S. economy continued to weaken. However, 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 . The September 11 terrorist attacks in 2001 undermined the economy further, prompting the Federal Reserve to reduce interest rates repeatedly in 2001 and 2002. As a result, home mortgages' interest rates dropped to near record lows, fueling a refinancing flurry, which also helped to offset losses in other areas.

In 2000, in anticipation of increased loan losses, commercial banks had upped loan loss provisions by 41 percent; when recessionary economic conditions continued into 2001, banks increased those provisions another 45 percent that year. Consequently, by 2002 loan loss provisions had reached their highest level since the early 1990s, accounting for nearly 11.5 percent of total bank revenues.

Loan and lease growth at commercial banks declined to 1.8 percent in 2001, compared to approximately 9 percent in the two preceding years. Banks also closed 6.6 percent fewer commercial and industrial loans in 2001; however, the number of commercial real estate loan closings remained fairly even with the two preceding years. Residential mortgage loans increased by 5.6 percent, and home equity loans jumped 21 percent.

America and the World

In the late 1990s, 33 state banks maintained 188 foreign branches. Branches were the most popular mechanism by which U.S. commercial banks engaged in operations overseas. These entities maintained full access to their parent banks' capital when making lending decisions, rather than being restricted by their host countries to their own balance sheets.

Foreign banks, while operating under what seem to be very different regulatory frameworks, nevertheless shared a number of regulatory concerns with the American banking system. These included regulation of market entry, capital and liquid adequacy, permissible business activities, foreign currency exposure, concentration of loans and country risk exposure, and bank examination. These regulatory concerns transcended national boundaries. In contrast to the U.S. "dual" banking system, most countries regulate their banking systems exclusively on the national level. Thus there is generally no equivalent of a state commercial bank outside the United States.

Globally, patterns generally followed the U.S. trend toward relaxed regulation of financial services. Specifically, banks worldwide were being allowed to offer a broader range of financial services, contrary to past practices. The European Union's financial liberalization program was a catalyst, encouraging the liberalization of American and Japanese policies to keep pace with their European competitors. 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, as the E.U. worked to open its market to more liquid financial flows. The Japanese financial system, meanwhile, was in the midst of sweeping reform, known as the "Big Bang," in 2000, which was expected to completely overhaul the banking system in an effort to mitigate the country's decade-long economic woes. Most significantly, the reforms would open Japanese financial markets to foreign players and, like the United States, break down restrictions against banks' engagement in other financial activities such as securities underwriting.

Research and Technology

Changes in computer technology have radically altered the role of banks in American society. The most profound change was the capability of processing auto-mated transfers of money between banks, companies, and consumers. Electronic funds transfers (EFTs) are computer-based payment systems that substitute electronic and digital transfers for movements of cash and paper checks. EFTs virtually eliminated manual paper handling in payments between institutions. Direct deposit also eliminated some of the paper transfers between institutions and individuals. The trend was toward more and more automation of payments systems.

Similarly, it was estimated that by 2002, 20 percent of all U.S. households would engage in online banking. An expected 15,850 banks would offer online services by 2003. In 2000 over 3,000 banks maintained their own Web sites. There was also an increased use of intranets for staff conference, communication, and data management. The heightened emphasis and dependence on electronic information and funds transfers was expected to lead to an explosion in bank spending on information technology security systems and software, particularly electronic encryption systems, to generate a $7.4 billion market by the early 2000s.

More visible to the consumer were automated teller machines (ATMs), those ubiquitous computerized terminals from which consumers can access their savings, checking, or credit accounts. The ATM revolution began in 1969, when Chemical Bank in New York City installed one of the first cash dispensers in the country. Some 72,000 ATMs existed in 1990. In 1998, the number had grown to 187,000 ATMs, up 13.3 percent from 1997. ATMs allowed consumers to process account balance inquiries, make cash withdrawals and deposits, and conduct transfers between accounts.

These new technologies have made a number of significant changes to the American market place, including changes in the methods of personal finance and in the process of purchasing consumer goods and services; changes in the structure of financial and retail organizations and their methods of operation; changes in the flow of funds in the marketplace; increased potential for the invasion of personal privacy and new avenues for the occurrence of fraud and theft; and changes in the regulatory and competitive balance among financial institutions. These and other technological changes radically altered the American commercial banking industry in the 1990s and 2000s.

Further Reading

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

"Assets by Charter." Washington, DC: Conference of State Bank Supervisors, 2002.

"Banking." Business Week, 10 January 2000.

Friedland, Dion. "About Hedge Funds." Hedge Fund Association, 2003. Available from .

Hill, Sidney. "Web Banking's New Fledglings." Financial Services Online, 1 September 1999.

"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.

"Number of Commercial Banks by Charter." Washington, DC: Conference of State Bank Supervisors, 2002.

"Online Banks: Mixed Messages." Interactive Week, 20 September 1999.

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

Rehm, Barbara A., and Dean Anason. "Fed Opens Lane for 1-Stop-Shop Applications." American Banker, 20 January 1999.

"Return on Assets by Charter." Washington, DC: Conference of State Bank Supervisors, 2002.

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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