Friday, August 28, 2009

Compared to Canada, The U.S. Has Way TOO Many Banks: Bank Failures Might Be Good for the U.S.

With more than 8,000 banks, does the U.S. have too many banks? The comparisons to Canada below provide some perspective. According to Wikipedia, Canada has a total of 72 banks, and that number is very high by historical standards.

From 1920 to 1980,
Canada had only 11 banks. By May 2006, that number had increased to more than 60 in the wake of regulatory changes permitting the entry of foreign competitors.

In contrast, the U.S. currently has
almost 8,200 banks, or about 114 banks for each one bank in Canada, see chart below.

Of course, the U.S. population (304 million) is much higher than Canada's (33 million), so the chart below shows the number of banks per million persons in each country, and the population-adjusted number of banks in the U.S. is still more than 12 times larger than Canada (27 banks per million in the U.S. compared to 2.2 banks per million in Canada).

Bottom Line: Maybe the U.S. has too many banks, and the recent bank failures are a positive development for the U.S. economy and banking system. Weak, failing banks can't facilitate the flow of credit in the economy, and the banking system is better off without those banks. Keep in mind that the assets, loans and deposits don't disappear when a weak bank fails, those assets, loans and deposits are usually taken over by a larger and/or stronger bank.

See the FDIC's list here of the 81 banks that have failed in 2009, and notice that in every case the deposits were assumed by another bank, and in most cases either all or most of the assets of the failed bank were purchased by the acquiring bank. It should also be noted that in most cases the assets/loans of the failed bank actually exceed the value of the deposits, although it's not clear how those assets are valued.

Even if we lost another 1,000 banks as some are predicting, we would still have more than ten times the number of banks in Canada, adjusting for the differences in population. We should welcome, not resist the forces of Schumpeterian creative destruction in the banking system.


At 8/28/2009 9:42 AM, Anonymous Anonymous said...

The US has as many banks as it does because of the legacy of Thomas Jefferson and Andrew Jackson who hated banks with a passion. (Both in particular hated the central bank at the time Hamiltons Bank of the US). This lead to the ban on interstate branching and in some states the unit banking requirement (each bank may have only one office). Canada did not have politicians with such strange ideas so it had more centralized banking

At 8/28/2009 10:07 AM, Anonymous Anonymous said...

Schumpeter's 'creative destruction' didn't refer to business failure. It referred to innovation replacing older technology - the automobile putting buggy makers out of business and/or forcing them to reconfigure their business for the newly structured technology.

27 banks per million people sounds like competition. 2 banks per million people does not. The current crisis had more to do with adolescent banks departing from their business plans, funding excessive growth with 'hot money'. That growth was spurred by a host of government inventions including but not limited to excessively low interest rates for a long period of time and a push for 'affordable' housing.

Banks have economies of scale and then their's 'too big to fail'. But it was medium size banks overexposed to real estate, not the number, which mattered.

Keep peeling back the onion skin.

At 8/28/2009 10:13 AM, Anonymous morganovich said...

this one gets a little tricky. large numbers of banks are good for consumers. more competition raises rates paid on accounts, reduces fees, and lowers interest rates on loans. all these things are bad for the banks themselves though as they tighten margins and increase incentives for leverage and risk taking.

which point on the customer friendly-stable bank continuum is optimal is is certainly an issue about which intelligent people can disagree.

canadian mortgage interest rates are generally 150 bp higher than in the US despite having higher down payment requirements and stricter income verification etc.

At 8/28/2009 10:30 AM, Anonymous gettingrational said...

8000 banks in the U.S. and do you think any of them rank in the top ten in the world? No, via Jesse's CafeAmerican blog, here are Global Finance World's 50 Safest Banks 2009.

Ranking for safety should be looked at very carefully but this is good starting point.

At 8/28/2009 10:43 AM, Blogger sethstorm said...

Schumpeter's 'creative destruction'

No real word that doesn't focus on destruction over the creation.

No real word of it helping the displaced either(when it destroys people's livelihoods).

8000 banks in the U.S. and do you think any of them rank in the top ten in the world?

European bias.

At 8/28/2009 11:33 AM, Blogger David Rotor said...


An added factor to consider is the degree of banking concentration. In other words, the comparison of 8,000 banks to 72 is irrevelant if 99.999% of banking was done by just a single bank in each country.

There is research, and an index "Herfindahl-Hirschman Index (HHI)", that measures banking concentration.

It measures the sum of the squared percentage market share of each bank in a country. With a single bank the HHI would be 10,000.

A quick google didn't give me recent figures, but I'd suggest that Canada's HHI has only marginally been reduced from the 1998 data I found*. In 1998 Canada's HHI was 1,427 and the US was 527. The top five banks in each country had 84% of banking assets in Canada and 47% in the US.

While, this suggests that the US has something like 2-3 times less concentrated banking industry, I'm not sure that a reasonable person wouldn't arrive at a conclusion that 2 to 3 times more competition, is a pretty healthy situation.

Canadian Banking Concentration:
An International Comparison
B Y H U G H W I L L I A M S April 2000.

At 8/28/2009 12:29 PM, Anonymous Benny The Libertarian said...

It is interesting that Asia is already roaring out of the recession, while we seem to just hitting bottom. Canada's banking system much more solid than ours.
I like free markets, but in a global economy that is infused with gigantic "institutional imperfections" I am beginning to wonder if we should not take a page out of Asia's book.
I suspect Asia will roar right past the USA in influence and wealth in the next 50 years---while we quibble about health care and our banking system and whether or not people deserve minimum wage.
Perhaps we need a banking system of giants, exteremly well-capitalized and regulated with an eye on strength. Let the private equity, venture capital and hedge funds guy finance risky propositions.
Banks should never lend on property at more than 90 LTV and maybe 80 LTV for property.

At 8/28/2009 1:09 PM, Anonymous morganovich said...


another interpretation might be that is was precisely the government breaking the free markets that caused our financial meltdown.

the $1 trillion in sub prime loans were MANDATED under the clinton administration. those banks (like citibank) that attempted not to participate in this massive coerced underpricing of risk were sued and forced to do so.

they laid off their risk by selling to freddy and fannie (who at their peak processed 47% of us mortgages) who then leveraged an unfree and uncompetitive tacit government guarantee to package this dogfood and call it AAA steak.

unwary institutions bought the AAA paper drawn by higher yields and a perception of the US treasury as guarantor.

the idiot irony of this whole situation is that if the us govt had just stepped in and bought all the CDS's, honoring their tacit promise, they would have head off the whole issue far more effectively and cheaply. they would have owned CDS's with some actual backstop to value, at attractive prices, and even better, would have headed off the whole cascade of derivative exposure by just making the loans good. given 3-6X derivative exposure on many of these, that would have reduced the size of the crisis by 2/3. recall that the S+L bailout turned out to be VERY profitable.

instead, we got TARP, a woefully bad idea guaranteed to fail. take your winners off early, let your losers run, and hamstring them in terms of ability to hire and retain talent is maybe the worst investment philosophy i've ever heard.

At 8/28/2009 1:48 PM, Blogger M T said...

I work for a bank. When I saw this posting - all I was thinking was - how can a bank with this bank (oakwood) make business sense with $3 million in assets ? I made a google search and found this:

They still have typewriters and each statement is typed ...........

Quite interesting !!!

At 8/28/2009 2:24 PM, Blogger Orlin said...

I'm convinced we have too many banks. I live in Marquette and on the corner down the street from our house, I can see 6 different banks of which 4 have finished multi-million dollar remodeling, or built new.

At 8/28/2009 2:49 PM, Blogger sethstorm said...


No, they're the problem. When they no longer can buy influence in our businesses and government, the economy will be better for it.

The only thing about them that is rising is Asia being a threat and the chances that the US will do something against it.

At 8/28/2009 3:18 PM, Blogger KO said...

After a year of "too big to fail" and seeing Iceland's handful of banks take their country down, I'm ok with lots of banks.

We of course could do just fine with fewer, but I'd rather be on this end of the spectrum starting out than the other end.

At 8/28/2009 3:44 PM, Anonymous Anonymous said...

Sethstorm, get yourself a small motorboat in Miami and putter over to Cuba. That's the only place other than North Korea which is going to make you happy.

Who's going to rescue workers from Schumpeterian destruction? In the words of Freddy Krueger:

"Help yourself, +µ(«er!"

At 8/28/2009 4:19 PM, Blogger QT said...


"I am beginning to wonder if we should not take a page out of Asia's book."

The U.S. might do better emulating the Swedish. The problem faced by Swedish banks was very similar to the present banking crisis.

At 8/28/2009 11:53 PM, Blogger QT said...

"The only thing about them that is rising is Asia being a threat and the chances that the US will do something against it."

The truly charming quality of liberals is that they believe in helping 3rd world countries...until of course, they start to succeed. The blagards!

At 8/30/2009 12:09 AM, Anonymous Anonymous said...

There is research, and an index "Herfindahl-Hirschman Index (HHI)", that measures banking concentration.

Don't bother a macroeconomist with microeconomic concepts. It risks having their brains explode.


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