What's behind the decline in US banks?

Most commercial banks that have operated in the US over the past century are gone. Compared to an all-time high of 30,456 banks in 1921, total US banks fell to 4,135 in 2022, down 86%.

After the Banking Act of 1933 created the Federal Deposit Insurance Corporation (FDIC), the number of banks remained between 13,000 and 15,000 for 50 years. It wasn't until the 1980s when the number of banks started falling year-over-year.

Over the last four decades, the number of FDIC-insured commercial banks has fallen by more than 70%.

Many of these losses occurred during the banking crises of the 1980s and 1990s. More than 4,000 banks closed between 1980 and 1994.^[1]

Several factors contributed to this prolonged financial instability, including high interest rates, insufficient oversight, and new legislation deregulating the banking industry.

However, even after the industry stabilized, the number of US banks continued to decline. However, this is due less to bank failures than the increasingly commonplace practice of bank mergers.

Certain acts, such as the Depository Institutions Deregulation and Monetary Control Act of 1980, deregulated the banking industry under the belief they were beneficial to consumers and savers by imposing fewer restrictions on financial institutions.

The repeal of the Glass-Steagall Act in 1999, which allowed commercial and investment banks to merge, also led certain banks to make riskier investments.

These acts, among others^[2], caused bank mergers to rise significantly in the 1980s and up to today.

Since 2003, nearly all banking sector losses have been from community banks either going bankrupt or, more commonly, being acquired by larger institutions.

What does the decline of US banks mean for the economy?

The drop in US commercial banks can have long-term implications for the resilience and sustainability of the financial system and the economy at large.

For one, the number of new banks established over the past decade is insufficient to outpace those that have closed, meaning the industry is expected to continue shrinking over time.

Obstacles, such as regulatory costs, make it more difficult for small banks to compete against larger institutions.

While the FDIC has stated it doesn’t want to prop up banks that have been managed poorly, it has indicated that policymakers should remain vigilant and avoid the temptation to prescribe more regulations.

To learn more about the US economy, read how bank assets have changed, or who doesn't have a bank account in the US. Get the data directly to your inbox by subscribing to our newsletter.