financial crisis laws and regulations and new Federal Reserve monetary policies have left a lasting impact on the industry. By 2021, the number of independent depository institutions declined to just over half of the number that existed in 2000, and the assets and activities of the industry have become much more concentrated in a few large “systemically important” institutions.

Moreover, the characteristics of the largest banks has changed. In 2000, they invested 57.5 percent of their assets in private sector business and consumer loans. By 2021, that share fell to a historically low 40 percent. In response to higher regulatory capital requirements and other enhanced prudential regulations, the largest banks replaced business and consumer loans with interest-bearing Federal Reserve deposits, US Treasury securities and other federally-guaranteed securities. The largest banks now dedicate 30 percent of their assets to directly funding the federal government and government-guaranteed activities.

Under the post-crisis policy regime, the largest banks increased slightly their share of equity funding whereas these same banks dramatically increased their use of government-insured and implicitly-insured deposits. In 2000, the largest banks used deposits to raise about 66 percent of their funding. Today deposits fund 80 percent of their operations. The increase in deposits was used to replace subordinated debt, federal funds and other credit instruments whose owners faced loss should the bank fail. Historically, at-risk bank creditors were the most active monitors of a bank’s financial condition, increasing interest rates or withdrawing their funding at the first sign of bank distress. Today, monitoring of the largest banks is left almost exclusively to federal government regulators who have a checkered history when it comes to prescience and transparency.