Financial Crisis The American banking system was in crisis from late 2007 through to early 2009. The subprime mortgage crisis had left many banks with large amounts of so-called "toxic assets" on their books, mainly in the form of subprime mortgages and mortgage-backed securities that were now under water. The mortgage-backed securities were one of the biggest problems, because they were presented as being of investment grade, which did not align with their risk characteristics. For a time shortly after Washington Mutual failed, there was concern that the banking system was at risk of failure. Invoking the doctrine of "too big to fail," the Bush Administration responded with the Toxic Assets Relief Program, or TARP, wherein the federal government bought back some of the worst assets from the banks in order to stabilize their banking systems.

Since that point, the U.S. economy has recovered, albeit slowly. The stock market recovery has been the strongest point, and that is largely due to successive rounds of long-range open market transactions colloquially known as quantitative easing, and the Federal Reserve holding interest rates near zero for what is now a period of seven years. Both of these aspects of monetary policy have pumped tremendous amounts of money into capital markets, through the banks, and have enriched the banks. Other macroeconomic indicators have not been as favorable, as unemployment has taken the entire Obama Administration to drop to a reasonable level, and GDP growth has never accelerated enough to cause inflationary pressure.. The latest announcement on the Fed funds rate indicates that the central bank remains concerned about the pace of economic expansion, citing rather vaguely "recent global economic and financial developments" (FOMC, 2015), speculatively referring to the slowdown of the Chinese economy and the ongoing Euro crisis with Greece.

This paper will outline the state of the U.S. banking system since TARP was implemented. Since that point, the banking system has enjoyed a healthy recovery, based in part on the effects of expansionary monetary policy, and in part on the improvements in the U.S. economy. The Dodd-Frank Act was also passed, bringing a measure of reform to the financial system. All of these issues will be discussed, with particular reference to the largest U.S. banks.

The State of the Banking Industry at the time of the Recession

The starting point for this discussion is the state of the banking industry at the time of the recession. Most U.S. banks were in peril at this time. The U.S. banking system has traditionally been fragmented, but regularly changes brought about the emergence of major regional banks, some of which are now approaching national saturation levels. Structurally, this represents a shift to the model followed by pretty much every other major country in the world. Banks throughout Europe and all the other major Western economies are typically national-scale entities, and these industries arose in this way. There were no trade barriers preventing Canadian banks from operating across provinces, or Australian or South African banks from operating across states. National-level banks are more diversified in terms of their customer bases, and moreover they enjoy greater economies of scale, both of which reduce the risk that they face. U.S. banks, with state limitations, were at their riskiest. The larger banks, even ones that operated in many different states, remained at risk, as the Washington Mutual failure evidenced.

As a consequence of apparently favorable risk-return characteristics (though this proved false, it was widely believed at the time), mortgage-backed securities were popular globally among banks. As such, banking systems around the world struggled mightily with the recession. European banks in particular held far too much risk on their balance sheets. There were crises in places like Iceland, but the more important crises were among the major British and European banks, who had gone down the same path as American banks with respect to risk, and were now similarly imperiled. Banking systems that fared well during this time, such as those of Canada and Australia, were limited in their exposure to the toxic assets, by virtue of the restrictions that had been placed on banks in those countries (Isfeld, 2012). Those countries' banks are now exposed heavily to resource sectors that are slumping, but that is another matter entirely (The Economist, 2015). The point is that with few controls on investments and risk, American banks were incentivized to seek out profit, and were imperiled as a result. That said, they also knew from past history that they would be bailed out...

At Wells Fargo, for example, community banking is 61% of the business, wholesale banking is 29% and the remaining 10% is in wealth and investment management (Keats, 2015). This is consistent with the norms in the industry, as these major retail banks arose primarily in the consumer market, and have only recently begun to make greater inroads into other banking categories.
The U.S. Banking Business Model

There are still two types of banks in the U.S. -- the small local banks that have always existed and were once the backbone of the U.S. banking system, and the major "too big to fail" banks. The former category is not of particular relevance to this paper, which instead will focus its attentions on the latter group. The major banks -- Citigroup, Bank of America, Wells Fargo -- are all at the national scale or close to it. They have grown dramatically over the past couple of decades since the industry was deregulated somewhat, and this growth has come almost exclusively through acquisitions. There is evidence now that this trend is only just starting to slow (Jones & Critchfield, 2006) now that the industry has become sufficiently concentrated at the top, where the five largest banks hold around a 50% share in industry assets (Schaefer, 2014).

The largest banks now are diversified in terms of their operations. They are not just retail banks, but are commercial ones as well. The industry is also moving to a model where banking is not really a local industry, but a national one, not only as a result of regulatory changes but also as a result of technological changes that have dramatically lowered the cost of obtaining banking services from distant providers (Wheelock, 2011). This structural change basically expands the competitive field in any major market, where multiple major banks and many more smaller banks all compete for the same business.

The major banks compete on a couple of bases. On the revenue side, they leverage their multitude of service offerings from their diversified businesses to attract customers. Their size likely makes them more attractive as well, secure in a way that small local banks can never be. On the profit side, they have economies of scale that they seek to leverage to increase their profits. These bases of competition are well-supported by the current structure of the major banks, who at this point are dictating the terms of condition on the basis of their vastly superior resources.

Citigroup

Citigroup has enjoyed strong performance in recent years. While it has experienced fluctuations in both revenue and profits, the company has earned at least $7 billion in each of the past four-year (MSN Moneycentral, 2015). Citigroup has thrived since the TARP era, and has rebuilt its capital position to a greater level than it enjoyed pre-recession. As of the 2014 fiscal year, Citigroup has $140 billion in regulatory capital, a Tier 1 common capital ratio of 10.6% and over $400 billion in "highly liquid assets," all of which indicate that the company has a very strong capital position (Corbat, 2014). Citigroup has become a smaller company in order to accomplish this. The assets are of higher quality than they were before, including a steep reduction in Citi Holdings and a reduction in the number of legal entities in order to simplify the company's balance sheet (Corbat, 2014).

These balance sheet improvements have come with a steady, strong profitability over the same time period. Citi has operations in other countries around the world, notably Germany, and this has helped as it is one of the more internationally diversified American banks. The industry remains focused on the domestic market other than Citi, however, and internationalization represents a deviation from conventional U.S. banking strategy.

Bank of America

Where Citigroup has fared well since the recession, Bank of America's performance has been more mixed. Its revenues and profits have both fluctuated somewhat dramatically in that time -- Bank of America earned ten billion less in 2014 than it did in 2011, but in 2011 it posted an operating loss on a major writedown (MSN Moneycentral, 2015). The 2011 writedown left the company with a net income that was still, positive, however, at $1.446 billion, but this equated to a one cent per share EPS (MSN Moneycentral, 2015).

There have also been issues with Bank of America's capital position. In 2014, the bank disclosed that it had $4 billion less in…