Explaining the Decline in the Number of Banks since the Great Recession

The financial crisis of 2007–08 was a major shock to the U.S. banking sector. From 2007 through 2013, the number of independent commercial banks shrank by 14 percent — more than 800 institutions. Most of this decrease was due to the dwindling number of community banks. While some of this decline was caused by failure, most of it was driven by an unprecedented collapse in new bank entry. The rate of new-bank formation has fallen from an average of about 100 per year since 1990 to an average of about three per year since 2010. If this change persists, it will have a large impact on the composition of the banking sector as well as the flow of credit in the economy.