Peculiarities of bank concentration

Unlike other developed countries, the U.S. has a banking system consisting of many thousands of banks. Although in the U.S. in the twentieth century the total number of banks declined sharply (they numbered 31076 in 1931, and 13877 in August 1972), nevertheless outwardly it looks as if the U.S. has a decentralized banking system.

This appearance is also created because the banking branch network is more restricted in the United States than in other countries. For a long time American banks were not allowed to open branches; later (by laws of 1927 and 1933) they were allowed to do so, but with serious restrictions. For example, banks could have branches only within a given state, and in some states banks were forbidden to open branches at all. Although the number of bank branches has increased dramatically in recent decades (from 4,168 in 1945 to 5,6513 in 1995), the number of bank branches nationwide is still only 1.5 times the total number of all banks. However, the seeming dispersion of banking in the United States hides the dominance of a small group of giant banks.

One manifestation of the concentration of banks in the United States – the so-called local concentration, ie, the concentration of the bulk of banking resources in a few points, ie, the banks in 5 states (New York, California, Illinois, Pennsylvania and Texas) were about 1/2 of the resources of all American banks; only in one state, New York was concentrated about 18% of the resources of banks – members of the Fed.

Local concentration is coupled with a concentration of banking resources in a few large banks. For example, in August 1972, 160 large banks (out of a total of 1,877 commercial banks), a mere 1.2 percent of all banks, held 57 percent of the total assets and liabilities of all commercial banks in the country. At the end of 1971, 178 of the 500 largest commercial banks in the capitalist world were in the United States, and their total deposits amounted to $328 billion, or about 29 percent of the total deposits of the largest banks.

A clear expression of bank concentration in the U.S. is bank mergers. The number of these mergers increased greatly after World War I: in 1910-1920 there were 1,523 mergers covering 2,968 banks, and in 1921-1931 – 5,094 mergers involving 9,538 banks. After World War II, the total number of bank mergers declined (from 1953 to 1970 it was 2,754), but a number of large bank mergers (e.g., Chase Bank with Manhattan Bank) greatly increased the concentration process in U.S. banking.

A peculiarity of bank concentration in the United States, unlike, for example, in England, is that it occurs mostly in disguised forms. One of the forms of disguised concentration of banks is the use by large banks of resources of small ones through the system of correspondent relations. Major banks of central cities in the United States enter into correspondent relations with a multitude of small provincial banks and, in fact, get a part of their resources at their disposal. Interbank deposits serve as a clear indicator of this. Thus, the largest American banks increase their resources through correspondent relations.

A form of hidden concentration of banks is the so-called system of intertwined directorates, consisting of mutual participation of directors of some banks in the management of others. Another form of hidden concentration of banks in the U.S. is the chain-link system. In this case the whole “chain” of banks is united by an agreement of temporary nature on joint carrying out of any large financial operations or by permanent agreements on mutual support and mutual exchange of shares, implementation of uniform credit policy, etc.

An important form of hidden concentration of banks in the United States is the system of banking groups. It consists of the association of many banks under the control of one joint stock company, which acquires their shares and is usually referred to as a “holding company” (holding-company).

In recent years in the U.S., as well as in other developed countries, there has been increasing government intervention in the banking sphere. It is true that the country’s central banks of issue (the federal reserve banks) are not (unlike the United Kingdom) state-owned. However, they are managed by the state, are closely connected with the Treasury and invest their money mainly in government securities. The Federal Land Banks, the Commodity Credit Corporation and the Export-Import Bank are directly state-owned.