Commercial Banking Industry in United States



Commercial Banking Industry in United States

Banking Industry and the general pattern in the market over the years

Commercial Bank Industry consists of regulated banks by Federal Reserve Board, Federal Deposit Insurance Corporation, and Office of the Comptroller of the currency. Banks earn their revenues majorly by depositing customers' money and then providing these deposits to businesses and other individuals at greater interest rates. The primary drivers of industry performance are the prime rate, aggregate household debt and corporate profit. Increasing legislation and technology driven competition from deposit-taking financiers are the largest industry threats. In the five years to 2011, industry revenue is expected to grow at an average of 2.0% annually. However, this growth hides the impact of the 2008 subprime mortgage crisis on commercial banking and the larger banking sector. According to the FDIC, huge losses on home-loan defaults cut industry net income (earning after taxes and interest) 9.7% to $69.7 billion in 2011, with the industry experiencing a $12.3 billion loss at the height of the crisis in 2008. Loan and lease losses totaled $216.6 billion in 2011, an average annual increase of 42.7% over the five-year period. This trend is expected to continue with a continued poor housing market. Despite deposit growth and high corporate profit, flat-lined commercial and retail loan demand coupled with rising loan write-offs are projected to decrease 2011 industry revenue 2.6% to $601.8 billion (Basu, Inklaar & Wang, 2011).

Basic short-run and long-run behaviors of the banking industry

The subprime crisis has caused large-scale M&A activity in the banking sector. Within the commercial banking sector, four out of the top five commercial banks have either merged or acquired larger banks struggling due to losses associated with the subprime crisis, which has resulted in a leap of concentration within the industry. In 2008, the four largest players accounted for an estimated market share of 23.0%. In 2011, this market share is expected to increase to 33.2%. Although the top four banks combined have increased their market share, tremendous losses by a significant player Citigroup have weakened its individual market share. Market concentration is expected it increase over the five years to 2011, as smaller commercial banks are unable to compete against larger commercial bank's diverse products and services (Basu, Inklaar & Wang, 2011).

Analysis of possible areas for the Banking Industry that could lead to transaction costs

The global credit crunch has significantly altered the cost structure of the Commercial Banking industry, most specifically in the loan and lease loss provision expense. As the economy begins to recover from the recession, the cost structure is expected to return to pre-recession proportions (Mishkin, 2007).

Loan and lease loss provisions

In 2011, the loan and lease loss provision is expected to comprise 24.3% of revenue. This is down from 38.4% in 2009. However, it is still high compared to the five-year average of 4.8% between 2002 and 2006. As the economy continues to improve and loan defaults slow, this expense is expected to fall to pre-recessionary ...