The Financial Crisis, the Collapse of Bank Entry, and Changes in the Size Distribution of Banks

Roisin McCord and Edward Prescott

Economic Quarterly, 2014, issue 1Q, 23-50

Abstract: We document the effects of the recent financial crisis on the size distribution of U.S. commercial banks. There was a 14 percent drop in the number of banks from 2007 to 2013. Proportionally, the largest declines were to the smallest banks, those with less than $100 million in assets. This drop in the number of small banks is not due to bank failures. Despite the severity of the crisis, the rate at which a bank exits the industry, either due to failure or acquisition, is similar to that before the crisis. We show that there has been very little entry into banking since the crisis and that this lack of entry accounts for about two-thirds of the recent decline in both the number of total banks and the number of smaller banks. We present counterfactual exercises that illustrate how the future number of community banks depends on the degree to which entry rates recover to historical rates. Finally, several explanations for the lack of entry are discussed.

Date: 2014
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