Commercial Banking Q2 2004

Flow of funds accounts for the commercial banking sector in Q2 2004 show that the major application of funds were in mortgages ($369.0 billion, net) and miscellaneous assets ($158.6 billion, net).

The increase in “miscellaneous assets” is presumed to relate to intangibles and good will, the result of bank merger activity.

The principal changes in funding were from savings deposits ($378.1 billion, net) and short-term borrowing with federal funds and repurchase agreements ($195.7 billion, net).

“Bank loans (not elsewhere classified)” are a measure of general business activity, as distinguished from mortgages and consumer credit. This type of loan increased by $64.3 billion in Q2 2004, after having shown net reduction in balances outstanding throughout 2001-2003. The total of these business loans was $1,295.8 billion, down 6.3% from $1,383.8 billion in 1999. This indicates that business activity was only beginning to emerge from the 2000-2003 recession.

In general, commercial banking has been going through a long-term consolidation and restructuring. The number of banks has fallen 37% since 1990, down to 7,752 banks by 2003. However, during the same period, the number of bank branches increased by 33% to 66,766.

With a trend towards securitization since the 1970s, the revocation of Glass-Steagall limits on involvement in investment banking, and increased bank activity in speculative trading and derivatives, with accounting that does not reveal potential losses from interest or currency risk, the banking system may be weaker than supposed.

For example, in 2003, the speculative trading assets of JP Morgan Chase were shown on the balance sheet at five times shareholders’ equity, and the derivative portion of these assets, alone, was 1.8 times shareholders’ equity.

See Uncontrollable Risk.

For statistics on U.S. banks see the FDIC web site.

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