Robert DeYoung
Economic Review, Vol. 92, Nos. 1 and 2, 2007
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Although the banking system appears to be safer and sounder today than it was two decades ago, new risk challenges have arisen that could not have been anticipated in the 1980s. This article outlines the fundamental structural changes in the U.S. commercial banking industry since then.
The author's strategic analysis of the current state of the industry compares the "transactions banking" business model practiced by large financial companies to the more traditional relationship-based banking business model. In particular, the author focuses on the different production technologies, product mixes, strategic behaviors, and risk-return trade-offs that characterize these two opposite approaches. In closing, the article discusses what these new developments may mean for the industry's ongoing safety and soundness.
Commentaries
Some Thoughts on the Evolution of the Banking System and the Process of Financial Intermediation
Loretta J. Mester
The author discusses three areas she considers important in the evolution of the financial services industry: consolidation and the economies gained from it, governance issues that emerge as the structure of the banking industry changes, and the decline in the market share of banking. This decline in market share, she believes, may reflect a decline in demand for deposits rather than a decline in demand for relationship lending.
How Have the Banking System and the Process of Financial Intermediation Changed?
Myron L. Kwast
Comparing and contrasting the U.S. banking and financial system in 1986 and in 2006, the author notes that the most notable difference is the current system's resilience and health in spite of some significant shocks. One reason for this health, he believes, is the changing bank supervisory environment, particularly the move toward stronger capital standards and more risk-focused supervision. Among other positive developments he highlights are the increase in market discipline and improvements in risk measurement and management.
April 2007