The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System. It is widely believed that in the United States, commercial banking is a declining industry. Two factors are often cited to support this contention. First, nonbank credit alternatives have grown rapidly over the last 15 years. Second, in the late 1980s, banks experienced record levels of failures and loan losses, symptoms of an industry in distress. The view that banks are declining in importance is held by banking executives, academics, and high officials in many branches of government. For example, William Isaac, former chairman of the Federal Deposit Insurance Corporation and now a prominent banking consultant, was recently quoted as saying that “the banking industry is becoming irrelevant economically, and it’s almost irrelevant politically ” (Bacon 1993, p. A1). Carter Golembe, the

-< r o _ cFederal Reserve Bank of Minneapolis Quarterly Review vol.18.no. 3 ISSN 0271-5287 This publication primarily presents economic research aimed at improving policymaking by the Federal Reserve System and other governmental authorities. Any views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System.