The Role of Large Banks in the Recent U.S. Banking Crisis

Abstract

The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System. The 1980s witnessed the greatest crisis in U.S. commercial banking since the Great Depression. Faced with both increased competition from open market sources of credit and nonbank intermediation and a series of adverse shocks to loan portfolios, banks experienced shrinking profits and a growing likelihood of failure. Indeed, the failure rate for banks jumped from an average of 2 per year in the 1970s to roughly 130 per year in the period between 1982 and 1991. Accompanying the increase in the failure rate was a rise in the number of banks in financial distress. By the end of 1992, the Federal Deposit Insurance Corporation (FDIC) listed 863 banks with combined assets of $464 billion as problem institutions (FDIC 1993, p. 7). It is true that the situation has improved very recently.