Canada, a nation of 36 million people, has 19 banks.¹ If the United States had the same ratio of banks to population, there would be 158 banks in this country. In fact, more than 7,500 commercial banks and roughly 20,000 depository institutions exist within U.S. borders, all vying to serve some 300 million Americans. While the United States and Canada are extremes, most countries' banking systems more closely resemble the Canadian structure. In Japan, for example, 125 million people depend on about 100 banks; in the United Kingdom, 60 million people are served by fewer than 500 banks.

Amazingly, the United States once had even more banks than it does today. As Figure 13.1 (24.0K) shows, the number peaked at 15,000 in 1984 and has been falling ever since. The figure also shows an odd pattern in the structure of banks. For decades, most U.S. banks were unit banks, or banks without branches. Throughout the 1950s and 1960s, more than two-thirds of banks were unit banks confined to a single building. Over the last quarter of the 20th century, however, the pattern changed. Today, only one-third of banks in the United States are unit banks. What explains this change in structure?

The decline in the total number of banks and the increase in the number of banks with branches are not the only changes the U.S. banking industry has seen in recent years. In April 1998, the Traveler's Insurance Company, together with its investment banking and brokerage subsidiary Salomon Smith Barney, merged with Citibank, then the second largest commercial bank in the country, to become Citigroup. At the time of its creation, Citigroup had $700 billion in assets and over 100 million customers in 100 different countries. It was also illegal. But by the end of 1999, the law that forbid such combinations had been repealed, and Citigroup began buying up even more financial firms. Today, Citigroup not only offers the deposits and loans people expect of a commercial bank; it provides the same assortment of products offered by almost all other financial institutions. Citigroup is an insurance company, a pension fund, a securities broker, a collection of mutual funds, and a finance company, all rolled into one.

The U.S. financial system is composed of both depository and nondepository institutions. Together, they provide a broad menu of services: buying and selling securities, offering loans, insurance, and pensions, and providing checking accounts, credit cards, and debit cards. Most financial institutions perform at least a few of these functions. Visit the Web site of any large bank, for instance, and you will discover that you can get not only checking and savings accounts, loans and credit cards, but insurance and stockbrokerage services. To understand the structure of the financial industry, then, we need to put these services into a broader perspective. The first half of this chapter will consider current trends in the banking industry, including the tendency toward consolidation with nondepository institutions. The second half of the chapter will study the functions and characteristics of nondepository institutions.

¹This is the number of domestic Canadian banks as of May 2004. For a list of Canadian banks, see the Web site of the Office of the Superintendent of Financial Institutions at http://www.osfi-bsif.gc.ca.

FIGURE 13.1 SOURCE: Federal Deposit Insurance Corporation, Historical Statistics of Banking, http://www2.fdic.gov/hsob/index.asp.