Banks have expressed concerns their share of total assets of financial institutions has been declining. This is not a new situation as banks’ share of total assets of financial institutions fell below that of mutual funds in the 1990s as well. But bankers also admit they earned relatively high net interest margins, return on equity, and return on assets in the 1990s. Even now, banks’ fee income and trading profits from derivatives and other off-balance sheet activities have increased significantly in recent years which means they are most likely taking high levels of risk. Thus, it is clear there are certain similarities between circumstances surrounding banks now and in the 1990s and it is reasonable to argue that the lessons of the 1990s may be applicable today. The 1990s ended up in recession because banks had taken unnecessarily high levels of risk.

It is a well-known idea in finance that risk and return have a positive relationship. In other words, higher returns are associated with higher levels of risk. Banks earned relatively high net interest margins, return on equity, and return on assets even though their share of total assets of financial institutions fell below mutual funds in the 1990s because they were willing to accept higher levels of risk. Banks play an important role in the economic infrastructure of the country and by taking an unnecessarily high risk, they do not only put themselves in danger of default but may endanger economic stability and growth . This is why government agencies such as Fed and FDIC etc. closely monitor banks so they do not take more risk than what they can handle during difficult economic times.

It is also important to note not all assets are created equal. High levels of receivables may help banks boost their asset base but if they are of poor quality, the banks’ financial health may be significantly poor than what is implied by the financial statements. Similarly, there are different ways to value assets and the real market value of assets may be different from what is stated in the financial statements. It is also important to note that off-balance sheet activities may understate the actual level of assets and liabilities held by the banks as well as the true risk embedded in banks’ operations.

The regulators did not do an adequate job of monitoring banks in the 1990s and they do not want to repeat the same mistakes. It is actually possible that the optimal course of action would be to persuade banks to further reduce their asset base as banks seem to be acquiring risky assets again in search of higher returns.