same economies of scale , may undertake riskier strategies in their drive to keep up with much larger competitors . In recent response to critics , however , Jamie Dimon , CEO of the largest US bank , JP Morgan Chase , has emphasized the necessity of having “ large , successful banks in the world ’ s largest and most prosperous economy .” As such , it is important to understand the pattern and dynamics of bank concentration within the United States .
A Long-Run View of US Bank Concentration
Despite the significance of bank concentration , understanding of its long-term patterns and impacts remains limited . We ( Fohlin and Jaremski , 2020 ) take a significant step by compiling bank asset concentration measures on a national level spanning almost the entire history of the United States ( see Figure 1 ). We employ concentration ratios calculated as the combined assets of the top five ( or 25 ) banks relative to the total amount of bank assets in the country . For example , the five-bank concentration ratio in 2019 of 45.2 % means that the largest five banks own 45.2 % of the total assets in the system . Total assets fully capture a bank ’ s size regardless of its investments or funding sources .
To create such a long time series , we assemble a unique bank-level dataset from a range of sources . For the antebellum period ( 1820 – 1861 ), we use the individual bank balance sheet database created by Warren Weber and made available on the Federal
FIGURE 1
US Bank Concentration ( 1820 – 2019 ).
Reserve Bank of Minneapolis ’ website . For the postbellum period through 1938 , we hand-collect individual bank balance sheets published in the Annual Report of the Comptroller of the Currency for national banks ( see Figure 2 for an example page ) and state regulators ’ publications for state banks and trust companies .
For the period 1938 through 1976 , we use lists of the largest banks published in the Rand McNally Banker ’ s Directory ( see Figure 3 for an example page ). Finally , for the modern period , we use data from individual bank call reports made available on the Federal Reserve Bank of Chicago ’ s website . Despite originating from multiple sources , the resulting concentration measures coincide closely when compared in overlapping periods . Notably , prior to 1820 , concentration was extremely high due to the paucity of banks operating during that early period .
What Caused the Observed Pattern of Concentration in US banking ?
By definition , concentration ratios rise when the total assets of the largest banks either increase faster or contract more slowly than the rest of the system . Banks grow most rapidly through mergers and acquisitions or via the de novo creation of branches , so the numerator of the concentration ratio increases rapidly when the largest banks engage in those expansion strategies . On the flip side , significant reductions or stagnation of total assets of the entire system that do not affect the largest banks would lead to higher concentration . These phenomena in turn point to a range of events — economic and political — that have transformed the structure of the banking industry over the past 200 years .
Two sets of dynamics appear in the concentration ratios shown in Figure 1 . Over the very long-term , the ratios largely follow a U-shaped pattern , but in the short-term financial panics and macroeconomic factors often drove significant fluctuations in concentration . Concentration declined over much of the 19th century , as the nation expanded westward , the population grew and the banking industry matured . The ratios reached their lowest point in the mid-1870s and remained relatively low through the early 1920s . The pattern began to reverse during the boom of the Roaring Twenties , as branching gained popularity and concentration took off with relatively few disruptions .
The Long and Winding Road to Nationwide Branch Banking
The path of American banking regulation demonstrates how politicians respond to competing political forces : lobbying by the financial industry on the one hand and to voters on the other . Each act of legislation reflects a balancing of the exigencies of economic conditions and the desires of banking industry leaders . Frequently , the demands and incentives of various political constituencies clash with one another , resulting in a patchwork of shifting regulation that usually seems suboptimal and often distorts incentives of both consumers and banks . This dynamic is clearly visible for branch banking regulation .
Despite near universal acceptance of the benefits of branching today , early politicians feared the power that large banks might wield if allowed to branch . Farmers and others in more rural areas of the country also worried about the power of branching to usurp local funds to far away financial centers , thus reducing local loan supplies . Relatively few states allowed branching within their borders before the early 20th century . The handful that did were developing states that restricted branching by the mid-to-late 1800s . For example , in 1900 , there were fewer than 100 branches operating outside their headquarters city . The limits on branching constrained bank concentration , given the large geographical
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