Commercial Banks, NEC

Due to ongoing consolidation, the commercial banking industry shrank considerably during the 1990s and early 2000s. Primarily the result of mergers and acquisitions, the number of commercial banks fell to 7,303 by late 2007, down from 8,129 in 2002 and down significantly from 18,769 at the end of 1975. Mergers and acquisitions, while still frequent, had slowed somewhat by the mid-2000s, with 219 in 2007, down from 452 in 2000. In addition, the number of new commercial bank openings declined, from 190 in 2000 to 120 through the fourth quarter of 2007.

In the late 2000s, the total number of commercial banks was declining as the financial industry struggled through the financial meltdown as bank closures reached new heights. There were 7,100 commercial banks at year-end 2008, compared to the reported 7,303 in late 2007. By year-end 2009 that number had fell to 6,900 commercial banks. Additionally, about 40 percent of all mergers involved a failed bank. A limited few new commercial banks were chartered during 2009.

In general, commercial banks are involved in financing the production, distribution, and sale of goods and services by acting as a source of short-term funds for the producer. Funds are acquired by the banks from the deposits of individuals who earn interest on these deposits. Whether the institution is a large national bank, or a small community bank, most commercial banks receive their revenue from various sources including investments, loans and mortgages, check writing, account management fees, and, most recently, internet banking services. National banks make up 25 percent of the commercial banking industry, but hold about two-thirds of banking assets, compared to state-chartered banks, which make up 75 percent of all commercial banks, but hold less than one-third of the industry's assets. National banks are organized under the National Bank Act of 1863 and overseen by federal agencies. State banks are organized under similar state regulations and overseen by state banking authorities. Organizations created under these regulations charter the banks and give them access to depositors' insurance.

The top five commercial banks by assets in 2006 were Bank of America, N.A. ($1,196 billion); JPMorgan Chase and Company ($1,179 billion); Citibank, N.A. ($1,019 billion); Wachovia Bank, N.A. ($518.1 billion); and Wells Fargo Bank, N.A. ($398.6 billion).

The top five commercial banks by assets in 2008 were JPMorgan Chase Bank N.A. ($1,746 billion); Bank of America, N.A. ($1,471 billion); Citibank, N.A. ($1,227 billion); Wachovia Bank, N.A. ($635.4 billion); and Wells Fargo Bank, N.A. ($538.9 billion).

According to the FDIC, the 1,659 national charter commercial banks maintained assets of $7.49 trillion in 2007 and state-chartered banks, which numbered 5,644 in 2007, held 3.30 trillion. Commercial banks earned $90 billion, a 7 percent decrease over the same period in 2006. Reflecting the stabilization of the commercial banking system, only one bank failure was reported for 2007, versus 10 in 2002.

Through the first half of the 2000s, the banking industry was fueled by a growing economy and historically low interest rates, which resulted in an 11 percent increase in loans during 2004. Although rates began to rise slightly during the second half of 2004, which curtailed mortgage loans in particular, overall construction loans on the year were up 25 percent and home equity loans were up 40 percent. Loan amounts in 2004 totaled $480 billion, including $131 billion in commercial real estate loans, $114 in home equity loans, $89 billion in residential mortgages, and $61 in credit card loans. By 2007, however, this climate had changed significantly, as the sub-prime mortgage banking crisis took hold. Nearly half of commercial banks reported lower profits in the third quarter of 2007, mainly due to their troubled residential mortgage portfolios. This combined with lower revenue, caused industry earnings to fall to their lowest levels since 2002. Additionally, loan-loss provisions hit a 20-year high. According to Forbes magazine, large commercial banks such as Citibank,N.A., Wachovia, and Bank of America, N.A., had taken huge losses on their asset-backed securities, CDOs, and other structured products. Citigroup reported $9.8 billion losses in these areas, Wachovia estimates $1 billion, and Bank of America estimates losses to be near $530 million.

A small minority of commercial banks are private--neither federally nor state chartered. These banks are sometimes owned by a small group of partners who assume unlimited liability, in effect insuring the bank themselves. These banks tend to focus on global custody and private banking.

Traditional global custodian services include paying for a security in local currency, minimizing settlement problems; collecting dividends and interest; handling safekeeping and tax reclamation; and taking care of bookkeeping for stock splits and rights issues. As this industry continues to grow at an estimated rate of 30 percent, bankers have had to develop new, high value-added services. These services include analytics, performance measurement, and full master trust reporting.

The repeal of the 1933 Glass Steagall Act with the passage of the Gramm-Leach-Bliley Act in 1999 broke down many of the restrictions on the kinds of activities banks are permitted to engage in. By allowing financial services firms to offer lending, insurance, and brokering services under one company, it was expected that customers would increasingly begin to place all their financial business with a single firm. Thus, banks were forced to find ways to make quick and efficient inroads into other financial sectors to secure or maintain a sound customer base. By 2006, 599 domestic firms and 44 foreign firms had gained status as a financial holding company (FHCs). Of the domestic FHCs, 34 had assets in excess of $15 billion; 110, between $1 billion and $15 billion; 82, between $500 million and $1 billion; and 374, less than $500 million. During 2004, a total of 47 domestic BHCs applied for and received FHC status

Private banking involves offering banking services to very wealthy customers. These services are generally more personalized and flexible than services offered by other types of commercial banks. Private banks usually set net worth or minimum deposit requirements that vary from $250,000 to $2 million.

Banks in the United States are chartered to impose discipline on the individual banks. In the private bank system, discipline is imposed by the need for consensus, the unlimited liability of the partners, and the limitation of capital. This structure also has the benefit of allowing the partners, who often serve for many decades, to take a long-term view of their business. Perhaps the most important of these banks is Brown Brothers Harriman, the oldest and largest private bank in the United States, founded in 1818. In 2006, it employed 3,000 people nationwide and had total assets of $4.3 billion, up from $1.95 billion in 1997. Annual estimated sales during 2006 totaled $270 million. Brown Brothers Harriman had assets grew to $6.1 billion in 2010 with 4,000 employees.

In the late 2000s, the financial services industry experienced unprecedented market conditions following the financial fallout, which led to bank closures and the federal government stepping in to prevent a total collapse of the financial market. As the financial crisis unraveled financial reform was at the forefront of the financial services industry, especially when it came to transparency.

On October 3, 2008, President Bush signed H.R. 1424, the Emergency Economic Stabilization Act of 2008 (the "Act"). "The Act creates a new Troubled Assets Relief Program (TARP), which authorizes the federal government to purchase "troubled assets" (which includes residential and commercial mortgages, and securities, obligations, or other instruments that are based on or related to such mortgages) from financial institutions either directly or through auctions." More than half of the $700 billon provided through TARP were dispersed by August of 2009.

According to the Federal Reserve, as of January 30, 2009 U.S. commercial banks held $3.8 trillion in residential and commercial mortgages, as well as $700 billion in mortgage-related securities, which translated into nearly half of banks total financial assets or $9.8 trillion.

From merger deals totaling $117.45 billion in 2004, total deals fell to $64.71 billion in 2006 and $56.05 billion by 2009. While there have been deals, the deals have been small and analysts don't expect the days of the "mega bank mergers" to return until the economy is on solid ground. According to Money.CNN.com, "Almost all of the recent periods of frenzied deal activity, including 1998, 2000, and 2004, took place when the economy was growing robustly, unemployment was low and stocks were soaring."

Following the near financial collapse, regulatory reform was underway within the financial markets. The Federal Reserve Board and federal government called on the SEC and FINRA to adopt new rules and regulations following the signing of the Dodd-Frank Wall Street Reform and Consumer Protection Act in July 2010. Under Section 619 of the Dodd-Frank Act, referred to as the "Volcker Rule," the board issued another Section 13 to the BHC Act restricting banking institutions from participation in "proprietary trading and from investing in, sponsoring, or having certain relationships with, private equity funds or hedge funds."

While the banking industry was still experiencing financial strain from both bad loans and the mortgage disaster that ultimately led to the financial meltdown, the total number of bank closures reached 140 in 2009. That trend continued into 2010 with a reported 96 bank closures as of July 2010, according to the FDIC. Still, the banking industry was noticing a slight turnaround, something they hadn't seen since the first quarter of 2008. Bank profits reached $18 billion for the first quarter of 2010, compared to $6 billion for the same period a year earlier. Despite reported improvement, the FDIC cited 775 banks as "problem banks," that required watching. On a positive note, industry watchers predict after peaking in 2010 bank closures will lessen in 2011.

Another example of the industry moving forward came with the announcement that JPMorgan Chase & Co.'s profits were up during the first quarter of 2010 by $3.3 billion, a 57 percent increase compared to $2.1 billion during the same time period in 2009. Additionally, Chase reported that loans either in or near default had improved compared to the fourth quarter of 2009. The bank also satisfied the $25 billion it received in federal TARP funds during the financial crisis of 2008. However, according to The Huffington Post,"The proposed reforms�would restrict commercial banks from trading on their own accounts, what's known as proprietary trading" could dampen JPMorgan's bottom line if the legislation is enacted.