The Changing Impact of National Banking Costs, 1921-1943

Abstract

Substantial changes in the sources of earnings and expenses of national banks have occurred in recent years. This study measures these changes from 1921 through 1943 and is confined to their impact rather than their incidence. National banking data' were used because of the more extensive information available for these banks. While the conclusions reached may not fully apply to commercial banking as a whole, the assets of national banks constituted between 45 and 55 per cent of total commercial banking assets during the period. The period witnessed far-reaching changes in commercial banking practices. Beginning with the aftermath of the First World War, commercial banks shared in the prosperity of the 1920's but were hard hit by the depression years of the 1930's. Beset by declining earnings and banking failures the commercial banking system underwent a series of drastic regulatory changes during the early New Deal period which culminated in the Banking Acts of 1933 and 1935. Although commercial banks have traditionally received the bulk of their income from borrowers as interest on loans and investments, the proportionate amount contributed by the borrowers as a whole and by the different groups of borrowers changed considerably during the period. Income from this source exhibited a secular decline in both absolute and relative terms throughout the period, the dollar amount dropping from 1,105 million in 1921 to 870 million in 1943 (Table I), while it fell as a proportion of total operating earnings from 87.6 per cent in 1921 to 80.2 per cent in 1943. This decline continued throughout the period with minor interruptions due to the fluctuations of the business cycle. Borrowers are divided into two general groups, loan borrowers and investment borrowers. Interest income has been divided between these groups since 1927 and these data show clearly the declining importance of earnings from loans as contrasted with earnings from investments. Reference to Table II will show that this relative decline was primarily due to a 46 per cent decline in the volume of loans from 1921 to 1943. Table III shows that loans as a percentage of total assets fell from 58.6 per cent in 1921 to 15.56 per cent in 1943, while simultaneously investments rose from 19.65 per cent to 56.90 per cent. In order to approximate the behavior of interest income from the various types of loans, they have been classified as follows: (1) loans commercial in form, including commercial and industrial loans and agricultural loans except those on security of farm land; (2) loans non-commercial in form, including those made on securities, consumer loans and miscellaneous loans; and (3) real estate loans on both urban and farm properties. Available data show only the amount of in-