Go to the St. Louis Federal Reserve FRED database, and find data on the number of commercial banks in the United States in each of the following categories: average assets less than \(100 million (US100NUM), average assets between \)100 million and \(300 million (US13NUM), average assets between \)300 million and \(1 billion (US31NUM), average assets between \)1 billion and \(15 billion (US115NUM), and average assets greater than \)15 billion (USG15NUM). Download the data into a spreadsheet. Calculate the percentage of banks in the smallest (less than \(100 million) and largest (greater than \)15 billion) categories, as a percentage of the total number of banks, for the most recent quarter of data available and for 1990:Q1. What has happened to the proportion of very large banks? What has happened to the proportion of very small banks? What does this say about the “too-big-to-fail” problem and moral hazard?

The "too big to fail" problem refers to those financial institutions in the economy which can lead to disastrous effects if they failed. If such institutions face a financial crisis or insolvency situation. The government is likely to bail them out because not doing so would be extremely harmful for the economy.

The data obtained from the Federal reserve database can be represented in a tabular form as:

The percentage of banks in the smallest and largets categories can be shown as:

From the above data, it is evident the total number of banks has decreased over the years. The percentage of smallest banks has decreased from 76.45% in 1990 to 20.18% in 2020. On the other hand, the percentage of the largest banks has increased from 0.2% in 1990 to 2.17% in 2020.

The data shows the increase in a large number of banks has continued the problem of too big to fail commercial banks. Such banks are aware that the government would rescue them in case of failure. This leads to moral hazard as these banks knowingly get involved in risky lending.