Several trends in the financial industry over the past decade and a half have potentially threatened the competitiveness of small banks. Among these developments are the numerous mergers that increased the size and scope of large banks and the increased competition from mutual funds and other nonbank financial institutions. This article examines the economic performance of small banks during the 1985-2000 period by focusing on their ability to attract and profitably intermediate insured and uninsured deposits. It finds that the expansion of deposits and assets at small banks, when adjusted to account for the effects of mergers on measured growth, has consistently exceeded the growth at large banks. Moreover, the profitability of small banks has remained high over the period. These indications of strength among small banks as a whole also hold true for subgroups within the small bank sector. Aside from their success in attracting deposits, the key reasons for the generally good performance of small banks in recent years appear to be their ability to earn relatively high rates of return on their loans and an increase in the share of their portfolios devoted to loans.

Consolidation within the banking industry slowed significantly in 1999. The net reduction in the number of banks, 195, was only about half the decline in each of the preceding two years. Among the 450 banks that ceased operations last year, 8 failed, and the remaining 442 merged with other banks, were purchased outright, or otherwise changed their charters. Meanwhile, 255 new banks were createdthe most in one year since 1987. At the end of 1999, 8,620 banks were in operation, down from 12,728 a decade ago (chart 3). The share of industry assets held by the 100 largest banks moved up just 1 ⁄2 percentage point, to 70 percent, after having jumped an average of 4 percentage points per year between 1995 and 1998.Consolidation slowed even more dramatically among bank holding companies (BHCs) in 1999, perhaps in part because of the poor performance of 3. Number of commercial banks and share of assets at the largest 100 banks, 1970-99