Economic Policy Review

The Role of Retail Banking in the U.S. Banking Industry: Risk, Return, and Industry Structure

December 2007Volume 13, Number 3
JEL classification: G21, L22, L25

Authors: Timothy Clark, Astrid Dick, Beverly Hirtle, Kevin J. Stiroh, and Robard Williams

The U.S. banking industry is experiencing a renewed interest in retail banking, broadly defined as the range of products and services provided to consumers and small businesses. This article documents the “return to retail” in the U.S. banking industry and offers some insight into why the shift has occurred. At the bank level, the principal attraction of retail banking seems to be the belief that its revenues are stable and thus can offset volatility in nonretail businesses. At the industry level, the authors show that interest in retail activities fluctuates in rather predictable ways with the performance of nonretail banking and financial market activities. They document the features that the recent “return to retail” has in common with past cycles, but also identify factors suggesting that this episode may be more persistent. The most important of these factors is the role of large banks: this retail banking cycle is being driven almost entirely by the very largest U.S. banking firms. The key role of very large banks gives extra weight to this retail banking episode.

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