Is the Banking Industry in Decline? Recent Trends and Future Prospects from a Historical Perspective
Although commercial banks enjoyed record profits during the past two years, many observers contend that the banking industry is facing long-term decline. Many traditional banking functions are increasingly performed by specialty financial service firms and markets. Banks have responded to increased competition and technological change by offering new services themselves, and they continue to enjoy a unique role in the payments system. But, because they are heavily regulated, banks' ability to adapt to a changing, competitive environment is limited. David C. Wheelock examines the apparently declining role of commercial banks and addresses two major policy changes that many observers believe are needed for banks to remain prominent providers of financial services: 1) removal of limits on branch banking and 2) relaxation of restrictions on services that banks may offer. Wheelock describes the growth of branch banking in the United States during the 20th century and discusses how, by hampering diversification, restrictions on interstate branching may have contributed to the high number of bank failures of recent years. He then summarizes research on the security activities of commercial banks before they were largely prohibited by the Banking Act of 1933. This survey shows that, contrary to conventional wisdom, commercial bank involvement with securities did not lead to widespread abuses or to increased risk of bank failure.