ChatGTP-4o image of customers at a teller’s window in a nineteenth century bank.
The United States has many more commercial banks than do other high-income countries. At the end of 2024, there were about 4,000 commercial banks in the United States. In contrast, in 2024, there were only 35 commercial banks in Canada, 20 in South Korea, and fewer than 400 in Japan, France, Germany, Spain, Switzerland, Norway, Sweden, and the United Kingdom.
But even 4,000 commercial banks is many fewer than the peak of 29,417 commercial banks in the United States in 1921. The following figure shows the number of commercial banks in the United States from 1781, when the Bank of North America became the first bank to operate in the United States, through 2024. The grey line shows the total number of banks; the blue line shows the number of state banks—banks with a charter from a state government; and the orange line shows the number of national banks—banks with a charter from the federal government.
A key to the rapid expansion in the number of banks in the United States—there were already 1,600 in 1861—was legislation in most states that restricted banks to a single location. Without the ability to operate branches and with travel slow and expensive, most banks collected deposits and made loans only to businesses and firms in a small geographical area. Research by David Wheelock of the Federal Reserve Bank of St. Louis has shown that in 1900, of the 12,427 commercial banks in the United States, only 87 had any branches. In addition, a series of federal laws limited the ability of banks to operate in more than one state. The most recent of these laws was the McFadden Act, which Congress passed in 1927. With their loans concentrated in one geographic area—and often in a single industry—unit banks were inefficient because they were exposed to greater credit risk. If a bank is located in a town in down-state Illinois where most local businesses depend on agriculture, a drought could force many farmers to default on loans, causing the bank to suffer heavy losses and possibly fail.
The figure shows a surge in the number of banks during the World War I period. The total number of banks rose from 24,308 in 1913 to 29,417 in 1921—an increase of 21 percent. Research by David Wheelock and Mathew Jaremski of Utah State University discusses the reasons for the sharp increase in the number of banks through 1921 and the rapid decline in the number of banks in the following years. World War I led to problems in European agriculture, which drove up agricultural prices worldwide. U.S. farmers responded by expanding production and new banks opened to meet farmers’ increased demand for credit. Newly opened banks were particularly aggressive lenders. When European agriculture revived following the end of the war in 1918, agricultural prices declined sharply and many farmers defaulted on their loans. As unit banks, the assets of many newly opened banks were highly concentrated in loans to local farmers. When defaults on these loans sharply increased, many banks failed.
The number of banks declined slowly through the 1920s, reflecting in part the continuing problems of U.S. agriculture during those years. The Great Depression, which began in August 1929, led to a series of bank panics that reduced the number of banks from 25,125 in 1928 to 13,949 in 1933.
Over time, legal restrictions on the size and geographic scope of banking were gradually removed. After the mid-1970s, most states eliminated restrictions on branching within the state. In 1994, Congress passed the Riegle–Neal Interstate Banking and Branching Efficiency Act, which allowed for the phased removal of restrictions on interstate banking. The 1998 merger of NationsBank, based in North Carolina, and Bank of America, based in California, produced the first bank with branches on both coasts.
Rapid consolidation in the U.S. banking industry has resulted from these regulatory changes. While in 1984, there were 14,496 commercial banks in the United States, in 2024, as noted earlier, there were only about 4,000. This consolidation is what we would expect in an industry with substantial economies of scale when firms are free to compete with each other. When an industry has economies of scale, firms that expand have a lower average cost of producing goods or services. This lower cost allows the expanding firms to sell their goods or services at a lower price than smaller rivals, driving them out of business or forcing them to merge with other firms. Because large banks have lower costs than smaller banks, they can offer depositors higher interest rates, offer borrowers lower interest rates, and provide investment advice and other financial services at a lower price. (We discuss many aspects of the history and economics of banking in Chapter 10 of Money, Banking, and the Financial System.)
Even though over the past 30 years there has been tremendous consolidation in the U.S. banking industry, 4,000 banks is still many more banks than in most other countries. So, it seems likely that further consolidation will take place, and the number of banks will continue to dwindle.
HubbardOBrienEconomics.com Blog 