James R. Barth, Auburn UniversityJohn S. Jahera Jr., Auburn University
Alabama's banking industry includes nearly 150 different banks with more than 1,300 branches located throughout the state. All banks are now privately owned, and the largest banking area in the state is Birmingham. Banks play an important role in the economic development of states by taking deposits through checking accounts and savings accounts and then lending these funds to consumers to purchase goods such as homes and automobiles or to small businesses to help fund their operations.
Available data indicate that only 31 banks were operating in Alabama in 1875, but that number grew to 107 by 1900. In that year, the total assets of the banks were $41 million, with about half that amount in state-chartered banks and the other half in federally chartered banks. The existence of both types of bank charters is referred to as "dual banking," and this practice continues to the present. The state-chartered banks are regulated primarily by individual state banking departments, and the federally chartered banks are regulated primarily by the U.S. Office of the Comptroller of the Currency (OCC). The OCC was established in 1863, and the Alabama State Banking Department was established more than a half century later in 1911.
The operations of both types of banks and the ways in which they are regulated and supervised are quite similar today. Both types, moreover, offer deposits that are insured by the Federal Deposit Insurance Corporation (FDIC). This federal government agency was established during the Great Depression to protect depositors from losses in the event of a bank failure. The primary purpose of deposit insurance, however, is to prevent depositors from "running" on banks. When depositors become concerned about the safety of their deposits, they might run to banks to withdraw their funds, which could send otherwise financially healthy banks into insolvency by forcing them to sell assets at depressed prices to meet deposit withdrawals. Banks of course do not actually keep enough cash on hand to allow all depositors to withdraw their funds at once. Instead, they try to earn profits by using the individuals' deposits to make loans to other individuals and businesses. So a "run" on a bank can deplete the actual cash a bank has on hand very quickly and thus force it to sell good assets such as loans to get additional cash.
As a result of the Great Depression and more recent financial crises, it is widely acknowledged that well-functioning banking systems are vital for financial stabilityand economic development. When banking systems function poorly, credit is either not adequately available or is misdirected to less productive uses. In such situations, the result is not only an increase in the likelihood of a banking crisis but also slower economic growth than would otherwise occur. More generally, banking systems that perform well contribute in important ways to economic development, reducing income inequality, alleviating poverty, and promoting financial stability. This is true of the banking sector in Alabama as well as those in the other states and in other parts of the world.
Fortunately for people living in Alabama, the banking industry has performed relatively well throughout its existence when compared with the entire U.S. banking industry. According to the FDIC, as of March 2011, 135 commercial banks operated in Alabama with total assets of $223 billion and more than 42,790 employees. In addition, Alabama was home to nine savings institutions with $4.1 billion in assets and 1,209 employees. Approximately 90 percent of the assets are in state-chartered banks with the primary regulator being the Alabama State Banking Department. Nationwide, Alabama ranks 15th in term of total assets, higher than all southeastern states except for North Carolina, which ranks second with $1.7 trillion in total assets, and Georgia, which ranks thirteenth with $269 billion in total assets. Alabama's relatively high ranking results from the strategy of many Alabama banks to expand into other states through mergers and acquisitions, allowing them to increase their total assets and serve more customers.
The biggest bank in Alabama as of March 2011 was Regions Bank, which was established in 1871, accounting for nearly 56 percent of total banking assets. AmSouth Bank merged with Regions in 2006, following the 2004 acquisition of SouthTrust Bank by Wachovia, a North Carolina banking organization. Wachovia was subsequently merged with Wells Fargo at the end of 2008. All the banks within that organization then took the Wells Fargo name. With such consolidation, relatively few banks account for the vast majority of the assets in Alabama's banking industry. This trend is not unique to the state, as consolidation has been happening throughout the United States in recent years as banks merge and acquire other banks. More importantly, recent research finds that increased consolidation does not necessarily imply less competition in banking and therefore need not harm customers of banks through higher prices.
The most recent data indicate that in 2011 the FDIC-insured banks in Alabama had a return on assets (ROA) of 0.31 percent and a return on equity (ROE) of 2.32 percent. These figures compare to an ROA of 0.87 percent and an ROE of 7.75 percent, respectively, for all FDIC-insured institutions. ROA is considered a measure of the overall profit a bank is earning on its assets. Those assets include all types of loans and investments in securities (stocks and bonds). ROE is a measure of the rate of return to the stockholders who have become its owners. Both ROA and ROE for Alabama's banks were lower than for all banks in the United States. However, this difference is largely the result of the equity capital-to-asset ratio for Alabama banks being much higher than the same ratio for all U.S. banks (15.1 vs. 10.4 percent). This ratio represents the investment by shareholders in the bank in proportion to the total assets of the bank. This means that for every six dollars in assets there is approximately one dollar in equity capital. The higher ratio means that Alabama banks are in a stronger position to handle economic slowdowns that could result in losses. The fact that Alabama banks have higher equity capital ratios means that there is greater investment by shareholders, which contributes to making the banks more able to handle risk.
Alabama banks generally have been viewed as conservative lenders, making loans mainly to customers who are better able to repay. Over time, this conservative lending strategy has helped protect most Alabama banks from major losses during periods when the economy has been in a slump. Of course, economic activity always has up and down periods, referred to as business cycles, that lower the profitability of all banks during the downturns, including banks in Alabama; when severe enough, the down cycle can even cause some banks to fail. This occurred during the worldwide financial crisis that began in 2007. A number of banks in the state failed as the crisis led to record home foreclosures and a collapse in real estate values. Most notable was the failure of Colonial BancGroup, which failed in August 2009; it was the sixth largest bank failure in the United States at the time. Colonial had grown rapidly, expanding operations into Florida, Georgia, Texas, and Nevada. The branches and deposits of Colonial were sold to BB&T Corporation, a large North Carolina-based banking organization.
Over time and especially in recent years, some Alabama banks have expanded beyond their borders, and outside banks have entered Alabama. As a result of these developments, of the banks operating in Alabama with the largest market shares (accounting for 59 percent of total deposits as of June 30, 2010), all have more deposits outside the state than within the state. This development is not surprising given that two of the banks (Wachovia and Royal Bank of Canada) have acquired smaller banks within Alabama and the other two banks (Regions and BBVA Compass) have expanded outside of the state. As a sign of the times and future developments, one of the largest banks in Spain, Banco Bilbao Vizcaya Argentaria SA (BBVA) acquired Compass Bank for $9.1 billion in September 2007. These developments simply reflect the fact that globalization is affecting Alabama and other states in many different ways.
The growing consolidation within the banking industry has been facilitated by the Riegle-Neil Interstate Banking and Branching Efficiency Act of 1994. This federal legislation overrode state law by allowing banks outside individual states to purchase existing banks in other states, but it did not allow banks in individual states simply to open branches in other states, without purchasing an in-state bank. Alabama has not permitted branching within the state by out-of-state banks. One should expect to see even greater consolidation within banking throughout the United States, including Alabama. Banks welcome consolidation because they now compete not only with one another, but also with nonbank financial institutions such as securities firms, insurance companies, and hedge funds, as well as capital markets more generally. Through consolidation, banks become larger and are able to offer a wider range of services at better prices to consumers. As the banking industry has changed with regulatory changes, there is greater competition from nonbank financial service firms. The consolidation has allowed banks to be more competitive with these other firms. Despite this situation, Alabama banks will continue to be an important factor in facilitating continued economic growth and development in the state.
Two major organizations represent the banking sector in Alabama. The Alabama Bankers Association was organized in 1890 to represent the interest of banks in Alabama. The association provides assistance to banks through educational programs and information. The Community Bankers Association of Alabama also promotes sound banking practices through education and other services to their member banks, which are typically smaller banks. Both organizations are very active in the state of Alabama in terms of promoting safe and sound banking practices.
Curtis, Wayne C. Establishing and Preserving Confidence: The Role of Banking in Alabama, 1816-1994. Montgomery: Alabama Bankers Association, 1994.
Superintendent of Banks. Annual Report for Fiscal Year Ending September 30, 2007. Montgomery: State of Alabama, State Banking Department, 2007.
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