Commercial Banks' Investment in
Consumer Credit

The Federal Reserve has recently published data showing the percentages of commercial banks' assets that they have committed to consumer and residential mortgage credit. The data are provided for each year, 1990-1999, although only the three years 1990, 1995 and 1999 are provided here to show the basic trends. The full set of data is available in the Federal Reserve Bulletin. June 2000. It should be noted that at the end of 1999, the hundred largest banks held about 70 percent of the total assets of the industry.

It is important to keep in mind that the data show the percentages of total assets invested in each category. For example, assume a decline in the percentage of assets invested in consumer installment loans. This change does not mean that the banks in that group invested fewer dollars in consumer installment loans, but it does show that those banks put greater emphasis on other types of loans.

Credit cards. The smallest banks significantly reduced the portion of their assets invested in credit cards. While it might appear that the ten largest banks also cut the portion of their assets committed to credit cards, that is not the case. In 1999 the ten largest banks securitized almost 40 percent of outstanding consumer loans originated by all banks. With that point in mind, the data suggest that there are economies of scale in investing in credit cards that are not available to small banks.

Installment loans. The several thousand small banks increased the portion of their assets committed to consumer installment loans from 28.35 percent to 36.79 percent, while their larger competitors decreased the portion of their funds invested in this area. Moreover, the percentage of small banks' assets committed to these loans was significantly higher than that of larger banks—4.6 percent. These data suggest that there are few economies of scale in making personal loans, with the result that small banks have a comparative advantage relative to their billion-dollar competitors.

Residential mortgage loans. Over the past decade the ten largest banks slightly increased their commitment to mortgage loans on 1-4 family residences. At the end of 1999 the banks other than the 100 largest had committed a much larger portion of their net consolidated assets to these loans than did the 100 largest banks.