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Traditional banks benefit from stock market tumult

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A weekly presentation of downloadable charts and short analyses designed to graphically illustrate important economic issues. Updated every Wednesday.

Snapshot for September 18, 2002.

Traditional banks benefit from stock market tumult
The stock market has been in a rut for more than two years. Trillions of dollars in financial assets have been lost, and many households have to reassess their financial situation. However, the decline in the stock market has also seen a few winners: traditional old-line banks have experienced unprecedented growth.

For the first time in almost 30 years, the share of assets held by commercial banks, savings banks, and credit unions has grown over the course of a few years. Beginning with the start of the bear market on Wall Street, the share of financial assets held by commercial banks, savings institutions, and credit unions has grown from $7.7 trillion in early 2000 to $8.8 trillion by the end of June 2002, or from 8.5% to 9.9% of total financial assets.

Assets of financial institutions as share of total financial assets

A lot of the increase for traditional banks reflects a move toward more secure investments amidst continued turmoil on Wall Street. For instance, the share of total financial assets in the U.S. economy that is invested in savings accounts with commercial banks has grown from 2.3% in early 2000 to 2.9% at the end of June 2002. This is the highest share of financial assets invested in savings accounts in eight years.

In comparison, mutual funds-the stars of the stock market boom of the late 1990s-have seen their assets decline. Total financial assets of mutual funds declined from $4.8 trillion to $3.9 trillion from early 2000 to the end of June 2002. This is equivalent to a decline from 5.4% to 4.4% of total financial assets.

Although a shift of assets towards traditional banks means that households will see lower rates of return, their investments are at least secure. Also, more funds for banks also means that more money is available for credit, especially to small- and medium-sized enterprises. Small manufacturing companies, for instance, were left out in the cold and received less funding than other borrowers during the 1990s, as investors were looking for the next hot new idea. However, with the chances of making a fast buck on Wall Street declining, Main Street may get another look by banks, which now have the funds to invest there.

This week’s Snapshot by EPI economist Christian Weller.

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