Competition Among Banks: Introduction and Conference Overview

Abstract

The U.S. traditionally had a radically different view of competition in the financial sector compared to other countries. Distrust of power in the hands of large financial institutions very early led to restrictions on the ability of banks to expand geographically or to diversify into other activities. Throughout the nineteenth century the U.S. banking system was highly fragmented and unlike every other industrializing country the U.S. failed to develop nationwide banks with extensive branch networks. Prior to the Civil War, states were free to regulate their own banking systems and there was no national system. Many states adopted a "free banking" system that allowed free entry. The advent of the Civil War in 1861 significantly changed the role of the Federal Government in the financial system. The National Bank Acts of 1863 and 1864 set up a national banking system. These granted limited powers to banks. In particular, the 1864 Act was interpreted as confining each to a single location. This ensured there were a large number of banks. It is often argued that this promotes competition.

In other countries, including both those with market-oriented systems and those with bank-oriented systems, the banking sectors became highly concentrated many years ago. For example, in the U.K. banks developed nationwide networks during the latter part of the nineteenth century, so that by the beginning of the twentieth century there were essentially only five major banks. Other industrialized countries also experienced consolidation and the development of nationwide networks around this time. In many cases governments actively encouraged this change.