Banking Credit System, 1970-2020

Published by the Office of Financial Research, U.S. Department of Treasury.

BY Alex J. Pollock, Hashim Hamandi, Ruth Leung, OFR*

This essay puts the depository institutions industry into broad historical perspective, looking at the fifty year changes from 1970 to 2020.

For this analysis, we aggregate the Banking Credit System, defined as the government-chartered depositories and their principal chartered support entities. We define the relevant components as:

• The largest ten bank holding companies (BHCs)

• All other insured depository institutions

• The Government Mortgage Complex (Fannie Mae + Freddie Mac + Ginnie Mae)

• The Federal Reserve Banks.

As the following five tables demonstrate, the changes in this system and its components over this period with respect to asset size, relative size, share, size relative to nominal GDP, and long-term growth rates are dramatic.

As shown in Tables 1 and 2, there has been dramatic expansion in the scale of the institutions involved. Table 1 measures this in nominal dollars. Table 2 adjusts these numbers for inflation, using constant 2020 dollars. The increase in size in both nominal and real terms is remarkable.

Over the same period, the number of insured depositories has dropped dramatically: from over 19,800 in 1970 to about 5,000 in 2020—a reduction of 75% since one co-author (Alex Pollock) was a bank management trainee.

Meanwhile, the huge residential mortgage sector has become dominated by the Government Mortgage Complex, which was in 1970 relatively small, almost a rounding error, but has grown very big indeed. In nominal terms, it is now almost 260 times as big as it was in 1970, compared to the depository institutions asset growth of 28 times.

Table 1.

(1)Our goal is to understand the banking sector. If we expanded to non-bank companies, the size and growth would be even larger. Some of these companies’ activity is reflected in the Government Mortgage Complex, where they have a dominant share of mortgage servicing, and also in auto loans, credit cards and other consumer lending.

(2)1971

Of course, a lot of the growth when expressed in nominal dollars represents the endemic inflation of the post-1970 monetary regime. Table 2 shows the system’s still remarkable growth after adjusting for inflation.

Table 2.

(1)Values for 1970 are expressed in constant 2020 dollars using CPI values for June 2020 and December 1970.

Equally remarkable is the shift in the composition of the system, as shown in Table 3.

The ten largest BHCs in 1970 together equaled only 16% of the Banking Credit System, equal to about one-quarter of the aggregate size of all the other insured depositories. By 2020, the top ten have become 34% of the total system and have 1.3 times the assets of all the rest of the banks put together. Alternately stated, over these decades the consolidation of the historically highly fragmented American banking business has proceeded very far.

The big winners of share of the system over 50 years are the largest ten banks, the Government Mortgage Complex, and the Fed. The big losers of share are all the other depository institutions.

Table 3.

(1)Totals may not sum exactly due to rounding.

As shown in Table 4, the Banking Credit System over 50 years grew enormously relative to the economy as a whole—from 89% to 182% of GDP.

Table 4.

(1)Totals may not sum exactly due to rounding.

The assets of the biggest ten banks grew much faster than the other banks, increasing from 14% to 62% of GDP. All the other banks put together, now numbering about 5,000, fell from 63% to 47% of GDP.

The Government Mortgage Complex hugely inflated from 3% of GDP to 40%, by far the biggest change.

Table 5 shows the 50-year compound average rates of growth, both nominal and real, for the Banking Credit System, and GDP growth rates as a baseline comparison.

Table 5.

The Banking Credit System as a whole grew substantially faster than GDP over 50 years.

The Federal Reserve, now by far the biggest bank of all, grew much faster than GDP.

The Government Mortgage Complex grew fastest of all by far, at 11.8% per year in nominal terms, almost double the 6.1% for nominal GDP.

In Sum

Over the last 50 years, the Banking Credit System grew vastly bigger relative to the economy, much more consolidated, and much more dependent on both the government mortgage complex and the government’s central bank, greatly increasing its dependence on explicit and implicit government guarantees. This history exemplifies the maxim of Charles Calomiris and Stephen Haber (1) that every banking system is a deal between the bankers and the politicians.

(1)Fragile by Design (2014)

*Views and opinions expressed are those of the authors and do not necessarily represent official positions or policy of the OFR or Treasury. All the data used in this paper are from public sources, including the Board of Governors of the Federal Reserve System, Congressional Budget Office, Federal Deposit Insurance Corp., Department of Housing and Urban Development, Office of Federal Housing Enterprise Oversight and U.S. Bureau of Labor Statistics.