Bank Branches Are Increasing Right Now

Regarding http://www.straightdope.com/mailbag/mmultiplyingbanks.htm Why are banks opening so many branch offices?

In replying to Andy Ville’s question about the increase in bank branches, Gfactor explained that the increase began after WWII and continues to this day. Unless Andy is 90, I don’t think he’s asking about a 60 year trend. I can’t speak for Andy, but in my neighborhood in Brooklyn and most of the neighborhoods around it, bank branches are sprouting up like mushrooms, with new branches every two blocks or so. There can’t possibly be a demand for so many banks. It could be deregulation in NY (although I haven’t heard about any), but my guess is that they are competing for the new money flowing into the borough. The cost of housing has skyrocketed throughout Brooklyn and the people moving into these homes are very well-off. Banks are competing for this new money. Once incomes in Brooklyn level off, the growth of banks will taper off and and the losers will shut down their branches. That’s my theory, at least.

Same thing here in the northern suburbs of New Jersey. Bank branches seem to outnumber bars, restaurants, fast-food joints, and pizzerias combined.

It seems like “GFactor” doesn’t live in such an urban area and as such completely missed the point of the question. In my rapidly gentrifying neighborhood in Chicago, there are now as many bank branches as restaurants - it truly seems like new branches are opening left and right. In the Wicker Park neighborhood’s iconic corner, there are now something like 6 branches all facing each other from each side of the streets around it.

I applaud gfactor’s great report, but am also interested in the branch opening trend in the past few years.

If you look at the graph, it seems there was a bit of a plateau in branch expansion about 1990, with slow growth through the 90s. However, there has been exponential expansion from 2003-2004 to the present.

As another New Yorker, I see the trend first hand in my neighborhood. It seemed like a few years ago some of the smaller, more consumer-focused banks like North Fork Bank and Commerce Bank each planted several branches in the Upper West Side. Lately, and perhaps in response, the major commercial banks have been growing like topsy. As an example, Chase, where I bank had two branches within a few blocks of my apartment, one at 72nd and Columbus, my corner, and one at 74th and Broadway, three blocks away. They’ve just opened a new branch at 76th and Columbus, and there are signs for another branch coming at about 68th and Broadway (which is itself just a few blocks up from the branch at 63rd and Broadway).

It’s all about regulatory change and it’s consequences. The Gramm-Leach-Bliley Act permitted financial service providers to form financial holding companies. Most of the largest banks belong to financial holding companies that offer a variety of financial services. They want to cross-sell these products to their customers. That makes retail exposure more important. http://nreionline.com/strategies/corporate/real_estate_bidding_war/

A friend of mine who markets title services to banks read this piece and said:

By the way, here is the data from which I made the graph: http://www2.fdic.gov/hsob/hsobRpt.asp

And see, http://www.northjersey.com/page.php?qstr=eXJpcnk3ZjczN2Y3dnFlZUVFeXkzJmZnYmVsN2Y3dnFlZUVFeXk3MDc0MDQ2JnlyaXJ5N2Y3MTdmN3ZxZWVFRXl5Mg== (attributing branching to increased competition and less regulatory supervision)

2 additional observations:

  1. Smaller city/suburb governments hate the overbranching phenomenom–branches take up prime “city center” real estate without generating sales tax or providing the kind of shopping/restaurant/similar amenity that will bring in people. Of course they want a bank or two or even three, but not a whole lot more.

  2. Branching is important for smaller banks looking to position themselves for acquisition. Here in the fragmented Chicago banking market, there are lots of big outside banks that periodically claim they want to enter the market in a big way in one swoop. The big players won’t sell, but that smaller bank that can offer 30 or so branches, it might get itself a buyout offer.

This is fascinating. Why on earth were there such restrictive rules about banks’ not having branches back in the 19C? I can understand fear of monopolies and exposure to failure, but it seems a bit extreme to prevent even limited branching.

Second, here in Australia, the exact opposite phenomenon is occurring. We’re doing pretty well financially, so its not as if closures are a consequence of national financial contraction, but banks don’t seem to be able to shut their branches quickly enough. That is so particularly in small towns (I can understand that, what with the general contraction of the bush population and all) but even in cities, banks are aggressively encouraging people to bank electronically. The cost of RealPeople™ serving at counters for retail banking is vast compared with a couple of ATMs, and boiler room phone services. Why is this not so in America, too?

The banks here all have the same imperatives towards builing market share, etc, as exist in the US. Yet we are not seeing this Starbucks-like growth in physical branches at all. Puzzling.

Originally, the restrictions addressed a different problem:

http://www.allbusiness.com/legal/laws/279757-2.html

Later on fears of bank monopoly and bank failure were cited as justifications.

Interesting indeed. Here is a debate I found about the National Australia Bank’s plan to close some branches. http://www.parliament.nsw.gov.au/prod/PARLMENT/hansArt.nsf/V3Key/LA20020409025 and an article about the phenomenon http://www.smh.com.au/news/business/are-bank-branches-overrated/2005/09/29/1127804598778.html

I’m not sure that I understand the differences between the demographics involved or the two banking systems to offer much insight. A few possible influences:

  1. Banks in Australia have been free to open branches (as I understand it) forr a century or so. Limitations on US branching were lifted more recently.

  2. Also there appears to be less competition from foreign banks there: http://findarticles.com/p/articles/mi_m0PAO/is_4_25/ai_n16910781

  3. Australians pay higher banking fees than those in the UK or Canada. http://www.fujitsu.com/au/news/pr/archives/2007/20070327-01.html This might indicate that there is less competition in the financial services market.

Thanks for that, Gfactor. Your suggestions seem to revolve around lack of competition. We certainly don’t have 14,000 banks, but there are sufficient banks and bank-like institutions so that there is certainly no oligopoly. And the most aggressive competitors who are growing their market share fastest are the ones without branches - just a phone set up and a guy who comes to your house in a car with extravagant advertising on the paintwork to arrange a mortgage. Their selling point is that they are cheaper because they have less overheads. I will ponder this mystery further.

I’d be interested in hearing what you come up with.