Economic Brief

March 2015, No. 15-03

Explaining the Decline in the Number of Banks since the Great Recession

Roisin McCord, Edward S. Prescott and Tim Sablik

The financial crisis of 2007–08 was a major shock to the U.S. banking sector. From 2007 through 2013, the number of independent commercial banks shrank by 14 percent — more than 800 institutions. Most of this decrease was due to the dwindling number of community banks. While some of this decline was caused by failure, most of it was driven by an unprecedented collapse in new bank entry. The rate of new-bank formation has fallen from an average of about 100 per year since 1990 to an average of about three per year since 2010. If this change persists, it will have a large impact on the composition of the banking sector as well as the flow of credit in the economy.

Additional Resources

Adams, Robert M., and Jacob P. Gramlich, "Where Are All the New Banks? The Role of Regulatory Burden in New Charter Creation," Federal Reserve Board Finance and Economics Discussion Series No. 2014-113, December 16, 2014.

Berger, Allen N., and Gregory F. Udell, "Small Business Credit Availability and Relationship Lending: The Importance of Bank Organisational Structure," Economic Journal, February 2002, vol. 112, no. 477, pp. F32-F53.

Berger, Allen N., Seth D. Bonime, Lawrence G. Goldberg, and Lawrence J. White, "The Dynamics of Market Entry: The Effects of Mergers and Acquisitions on Entry in the Banking Industry," Journal of Business, 2004, vol. 77, no. 4, pp. 797-834.

Janicki, Hubert P., and Edward Simpson Prescott, "Changes in the Size Distribution of U.S. Banks: 1960-2005," Federal Reserve Bank of Richmond Economic Quarterly, Fall 2006, vol. 92, no. 4, pp. 291-316.

Jayaratne, Jith, and Philip E. Strahan, "The Benefits of Branching Deregulation," Federal Reserve Bank of New York Economic Policy Review, December 1997, pp. 13-29.

Keeton, William R., "Are Mergers Responsible for the Surge in New Bank Charters?" Federal Reserve Bank of Kansas City Economic Review, First Quarter 2000, vol. 85, pp. 21-41.

McCord, Roisin, and Edward Simpson Prescott, "The Financial Crisis, the Collapse of Bank Entry, and Changes in the Size Distribution of Banks," Federal Reserve Bank of Richmond Economic Quarterly, First Quarter 2014, vol. 100, no. 1, pp. 23-50.

Morris, Charles S., and Kristen Regehr, "What Explains Low Net Interest Income at Community Banks?" Federal Reserve Bank of Kansas City Economic Review, Second Quarter 2014, pp. 59-87.

Peirce, Hester, Ian Robinson, and Thomas Stratmann, "How Are Small Banks Faring Under Dodd-Frank?" Mercatus Center George Mason University Working Paper No. 14-05, February 2014.

Peters, Andy, "Amish Bank Charter to Set Standard for Future Applications," American Banker, December 4, 2013.

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