Loans account for over half of the total bank assets in the U.S. commercial banking system. Interest from these loans is a major source of bank income. Short-term loans to the most creditworthy borrowers usually are priced at the prime (interest) rate. Early in this century, such short-term financing to commercial enterprises was virtually the only type of loan commercial bankers would undertake. Today, bankers lend to businesses, consumers, and governments (both domestic and foreign), with maturities ranging from one day to several decades. In the late 1980s about 90 percent of the banking system's loans financed commercial and industrial enterprises, real-estate transactions, and consumer loans. The remaining loans were allocated to other financial intermediaries, to security dealers and brokers, and to foreign governments and official institutions. As a rule, the longer the maturity or the less creditworthy the borrower, the greater is the interest rate.
The second largest category of bank assets is investments, held by banks for both liquidity and income purposes. These investments include U.S. government and government guaranteed securities, the bonds of states and municipalities, and private securities. Banks also hold cash assets, mostly for liquidity purposes, but also because the banking authorities mandate that a certain fraction of deposits be held in cash-asset form.
Of the banking system's liabilities, about three-fourths are in the form of deposits, primarily from individuals and companies, but also from domestic and foreign government agencies. Since 1960, deposit composition has undergone a major shift, from a heavy concentration in demand deposits; by 1987, time and savings deposits exceeded demand deposits by more than a 3:1 ratio. Rising interest rates combined with changing banking practices go far to explain this reversal. Interest rates on assets comparable to time deposits in 1960 averaged 3.5 percent; in 1987 they averaged 7 percent. Bankers supplemented asset-management practices with management of liabilities; today, bankers are willing to acquire liabilities if the funds can be profitably lent out. Thus, beginning in the 1960s, new financial instruments such as large-denomination certificates of deposit were made available to depositors. As banks actively sought deposits in the United States and in Europe, the Eurodollar market was created, a market that was estimated to approach $1 trillion in the early 1980s. Nondeposit liabilities such as borrowings on the federal funds market, involving deposits with the Federal Reserve, were also pursued.
The largest banks account for the bulk of banking activity. In the late 1980s fewer than 5 percent of the commercial banks in the United States were responsible for more than 40 percent of all deposits, and 85 percent of the banks held less than one-fifth of total deposits. Competition for corporate and individual deposits is keen among the banking giants, whose growth is limited by the Bank Merger Act (1960) as well as by antitrust laws. The U.S. banking system differs radically in this respect from such countries as Canada, Great Britain, and Germany, where a handful of organizations dominate banking. In the past geographical constraints on expansion prevented banks from moving beyond their state or even beyond their county. Thus many small bankers were protected from competition. More recently most states as well as the federal government have loosened the regulation of banks, especially in the area of mergers and acquisitions. Many banks have grown by taking over other banks both within and outside their home states. In 1980 there were over 14,000 commercial banks in the United States; in the mid-1990s there were less than 11,000. Computer links among banks and the use of automated teller machines have broken down the geographical barriers to the growth of nationwide banking.
Overall government controls on banking were significantly loosened by the Depository Institutions Deregulation and Monetary Control Act (1980). Among its provisions are abolition of state usury limits on certain types of loans, gradual elimination of interest-rate ceilings on savings and time deposits, and extension of permission of all depository institutions to offer interest-paying checking accounts. The Garn-St. Germaine Financial Institutions Act (1982), among its many other important provisions, permits interstate acquisition of failing banks.
While government regulation of commercial banking since the mid-1930s has led to a low failure rate and preserved a substantial amount of competition in some markets, local monopolies have also been implicitly encouraged. Moreover, stringent regulations have caused some bankers to devote considerable resources to circumventing government controls. The present rethinking of the role of government regulation in the economy in general may lead toward even further liberalization of controls over the banking system.