The Evolution of Banking in the 21st Century: Evidence and Regulatory Implications

This article examines structural changes in the banking industry over the past twenty-five years and their implications for financial regulation. Motivated by the collapse of several regional banks in 2023, the authors document rapid growth in deposits—particularly uninsured deposits—and a corresponding shift in bank asset portfolios away from traditional relationship lending toward longer-duration securities such as mortgage-backed securities and Treasury bonds. The paper argues that these trends increased vulnerability to destabilizing bank runs and interest rate risk. Using a theoretical framework, the authors evaluate policy responses including expanded deposit insurance and strengthened liquidity regulation, concluding that reforms to liquidity requirements and discount window preparedness are particularly important for reducing systemic risk in modern banking systems.