Economic Characteristics of the Commercial Banking Industry Term Paper

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Commercial banks went through various changes and confronted traumas in the last 50 years from World War II with other intermediaries, financial market innovations and regulations. In very recent years, they have increasingly shifted from the traditional mode of financing loans and investments with deposits they collected to becoming brokers that originate loans (Hester 2002). Thereon, they securitize and lodge the loans with other less informed investors, who are correspondingly more vulnerable to risks and losses. Commercial banks today do not face the risk of holding these assets any longer and non-standard requests have evolved because of this shift (Hester). It is believed that non-bank lenders will replace this traditional role and function of commercial banks as sources of funding, but loans may be acquired with less accommodating terms and conditions.

Despite these unprecedented changes in the industry, much of the money has remained in commercial banks. Many clients still maintain checking accounts and operate through the ATMs. Deposits made in bank branches or credit union still support economic activity though small business loans, mortgages, auto loans and home repair loans (Wet Feet 2004) as well s credit card charges as loans.

Yet there have really been changes in the industry.

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Banking has moved into the websites, through which companies, like Bank of America conducts transactions with customers (Wet Feet). There has also been expansion in branch banking, as in the case of Washington Mutual Bank, which has outlets in 7-11 stores. And, through the repeal of the Glass-Seagall Act that limited the venues of commercial banks, they can not move into non-traditional businesses, such as insurance products and securities (Wet Feet).

Consolidation, competition and technological change have characterized commercial banks today (Wet Feet) - unusual developments that are said to be shaking the very roots of the industry by retrenching while creating opportunity.

Since 1995, more than 200 big and small banks merged, the representatives of these consolidated giants being the Citigroup, Bank of America, JP Morgan Chase and Bank One (Wet Feet). They are entering a new market and replacing traditional service personnel with online technologies. They compensate by hiring an increasing number of non-banks, such as MBNA, Capital One and First Data Fiserv, which provide new ways of delivering financial services, such as credit card lending and transaction processing and data servicing.

Today's commercial banks face nightmarish bankruptcies, though, because of problem….....

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