Quarterly Review 1811

The Role of Large Banks in the Recent U.S. Banking Crisis

John H. Boyd
Mark Gertler

Winter 1994

This article argues that the poor performance of the U.S. banking industry in the 1980s was due mainly to the risk-taking of the largest banks, which was encouraged by the U.S. government's too-big-to-fail policy. The article documents the recent trend toward riskier bank portfolios and the corresponding decline in bank profitability. A breakdown of the data by location and by asset size reveals that bank problems were concentrated in areas with troubled industries (oil, real estate, and agriculture) and among banks with the largest assets. In a statistical study controlling for location, asset size remains a significant factor in bank performance. The article concludes with a rough quantitative estimate of the cost to the industry of the poor performance of large banks.

The article is an abbreviated version of a paper published by MIT Press in the NBER Macroeconomics Annual 1993.

Reprinted From: NBER Macroeconomics Annual 1993 (pp. 319-368)

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