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The Banking Industry: A Vital Component of the U.S. Economy
Banks are an essential part of the economy. In fact, banks are the single most important supplier of credit. Banks come in many varieties, including community, regional and money center banks and holding companies, as well as savings institutions, trust companies, and savings banks. With over $10 trillion in assets and $1 trillion in capital, the banking industry has the capital and commitment to support the financial needs of individuals, businesses and all levels of government. Banks make loans to consumers to finance purchases of homes, education, cars and major appliances. Bank credit helps small businesses get started, grow and prosper. Banks help state and local governments fund a variety of public improvements like schools, roads, water and sewer and public health facilities. And banks are major players in financing the federal government as both dealers and holders of Treasury and agency debt securities. In each of these roles, banks support the creation of jobs and the growth of our economy.
It is difficult to imagine what our lives would be like without banks. With over 91,000 bank offices and branches, and almost 400,000 ATMs, there are more banking locations in the U.S. than movie theaters or shopping malls. Banks' physical presence in nearly every community gives them a personal stake in the economic growth and vitality of small towns and large cities everywhere and assures bank customers have convenient access to local financial services. And now with telephone and Internet banking, customers can reach their banks every minute of every day.
Banks Provide a Safe Place for Storing Wealth
The banking industry provides a safe place for people, businesses and governments to both store and have easy access to their money. Checking accounts provide convenient ways to pay for day-to-day purchases, while the wide variety of savings accounts enables businesses and consumers to safe keep and grow wealth. In total, banks hold over $6.7 trillion in deposits. Further, households rely on banks to administer $940 billion in personal trusts.
Banks Have No Peers in Extending Credit
In addition to being a safe place to store money, banks put the savings of their communities to work by using deposits to provide loans directly back to those communities. As money is lent, it turns into new deposits that can be re-lent, helping growth and providing economic flexibility. It is estimated that every dollar deposited generates $7 to $10 in lending. Today, the banking industry holds $6.2 trillion of loans, not counting the billions of dollars of mortgage, credit card, auto loans, and commercial loans those banks originate each year that are packaged and sold to investors in the form of securities backed by these loans. This process, known as securitization, not only frees up billions of dollars for new loans, but also lowers the risk of lending for banks by spreading the risk across many investors. This means that the interest rate on these types of loans is lower for consumers as well.
Banks are the "Oil" That Keeps the Many Parts of the Economy Moving
Another major role of banks is serving as financial intermediaries, facilitating the exchange of payments between people, business and governments. Trillions of dollars flow through the banking system each day, and the Federal Reserve estimates that banks process more than 40 billion checks, valued at almost $40 trillion, per year. To help facilitate payments, the Federal Reserve provides the clearinghouse for transactions and assures that payments made are final. Automated clearinghouses electronically process interbank credits and debits, also handling electronic transfers of government securities and customer services, such as the automatic deposit of customers' wages, direct deposit of Social Security payments, and preauthorized payments of bills by banks.
Confidence in the banking system is what engenders confidence in the payments system. It is this confidence – that payments will be honored – that allows the free and efficient flow of commerce on a national and international scale.
A Healthy Economy Requires a Strong and Healthy Banking System
Consumer and business credit is essential to a healthy, diverse and innovative economy. In the U.S., personal consumption represents over two-thirds of GDP, and banks are the single largest source of credit for consumers. Due in part to technological efficiencies, the availability of credit cards, consumer loans, and home mortgages has grown significantly over the past decade, reaching across all income levels. Increased levels of consumer spending provide stability to the overall economy.
Bank lending to consumers adds flexibility to the economy and gives households better control over when and how to purchase goods and services, particularly big-ticket items such as cars and homes. Installment credit – with a fixed repayment period and regular payments – represents 57 percent of bank consumer credit. The other kind of consumer lending that banks provide, called revolving debt, includes loans that continually renew, such as credit card accounts. Consumer debt, excluding mortgages and home equity lines of credit, held by banks and other lenders exceeds $2.1 trillion, with banks holding 43 percent of the total amount outstanding.
A large part of installment credit is mortgage lending, which has seen tremendous growth over the past decade. Banks hold 27 percent of $9 trillion in mortgages, home equity loans and lines of credit.
Along with consumers, small businesses are not only vital to the economy, but an important customer base for banks. Small firms have helped to create more than 14 million new jobs over the past decade, and provide more than half of the private sector output and represent 96 percent of all exporters of goods. In addition, small businesses promote innovation because they are more flexible and often more daring than larger businesses. An important element of a healthy small business environment is the ability of firms to start up and grow – both of which require capital. Banks have almost $600 billion of small business loans, representing almost a quarter of all bank business loans. Moreover, the banking industry is the largest supplier of credit to farmers and ranchers, and has played an important role in improving agricultural productivity.
While banks are the primary source of working capital for small businesses, they also provide credit to large firms, and facilitate day-to-day transactions of both small businesses and large corporations. Many loans to the largest, global companies take the form of syndicated loans, made by a group of banks. These loans and loan commitments totaled over $2 trillion in 2004.
On top of the domestic activities, many banks provide international banking services. Over the past decades, as globalization has advanced, international activities by banks have grown phenomenally. The types of international services have increased, as have the volume and number of banks offering them. One of the most important functions performed by U.S. banks engaged in international banking is the financing of imports and exports. The role banks play in the payments system also helps to facilitate the flow of goods around the world, bolstering the global economy, in addition to the benefits trade brings to our national economy.
In addition to the contribution banks make to general economic growth, the banking industry itself is an important component of the economy. The industry employs more than 2.1 million people. Further, unlike some other institutions – particularly credit unions – banks pay taxes to support government services. The banking industry pays over $60 billion in federal, state and local income taxes every year.
Local, State and Federal Governments Rely on Banks To Help Finance Public Improvements
It is not just with the private sector that banks interact. Any federal, state, or local public governing body, such as the local park district, state toll road authority, or county tax collector, use banking services. Through direct loans, underwriting and investing in government debt obligations, banks are very important to the long-term financing of state and local government projects. Banks currently hold $250 billion of municipal securities – 15 percent of total obligations outstanding. The role of banks goes well beyond just holding of securities. Banks help state and local governments make a variety of public improvements such as building schools, improving water, sewer and public health facilities. Banks do this through direct loans (often in anticipation of tax collections and receipt of the proceeds of bond issues) and as underwriters for state and local bond issues. Banks often are the most important source of financial advice and other financial services to state and local jurisdictions.
Banks are also a major component in financing the federal government as both dealers and holders of Treasury and government agency debt instruments. Given the size of the federal debt, participation by banks in underwriting and distributing Treasury and agency debt – which adds considerable depth and liquidity to the Federal securities markets – is clearly an important role of banks in supporting the economy. In addition, behind individuals and mutual finds, banks are the third largest holder of government and agency debt. The banking industry current holds 14 percent of the $10.8 trillion of federal and agency debt outstanding.
Monetary Policy and Payments Would be Impossible without Banks
In addition to taking deposits and extending credit, the banking industry is both a critical component of the payments system and a conduit for monetary policy.
Managing the level and flow of money in our economy falls under the heading of monetary policy. Through the process of buying or selling U.S. Treasury securities in the open market (hence the term "open market operations"), the Federal Reserve can influence the growth of the money supply in our economy. Importantly, this has the effect of raising or lowering interest rates, including those charged on loans and paid on deposits by banks. The Federal Reserve typically sets a target interest rate for short-term financial instruments like overnight bank-to-bank lending (the fed funds market) or lending by the Federal Reserve to banks (the discount rate) and adjusts its open market operations to meet those goals. Of course, the banking industry is at the heart of this operation, quickly transmitting the changes in the money supply throughout the entire economy. As the Federal Reserve lowers rates, for example, banks also lower their rates for businesses and individuals. Thus, businesses often see opportunities to refinance existing loans and take out new loans for projects that were uneconomical at higher rates. Individuals see opportunities to refinance mortgages or borrow to finance home improvements or new cars. By raising interest rates, the Federal Reserve acts to raise the price of credit and reduce the amount of lending in the economy.
Beyond "Traditional" Banking
On top of the core services of deposit taking and lending, banks offer such services as investment management and advice, insurance and securities, and tax preparation. As technology has created greater efficiencies, the banking industry is evolving to better meet the changing needs of all of its customers. For example, Internet banking and electronic payment instruments have become an essential part of both commerce and the banking industry. Also, improved technology has reduced the costs of processing transactions, making bill payment and account management easier for the customers that depend on banks for their financial services needs.
A Bright Future
In summary, as the core of our financial system, banks are vital to a health, growing economy. From the time the first bank was chartered in 1782, the U.S. banking industry has been a significant part of our nation's economy. By safeguarding the country's deposits and providing ample credit to consumers and businesses, the banking industry has helped finance U.S. economic and industrial development for centuries. Going forward, the industry will offer an ever-expanding range of services as new technology continually makes new products possible, and enhances the way products are offered.
Questions? Please contact Christen Grant for more information.
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