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Recent trends in the number and size of bank branches: an examination of likely determinants

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Author Info

  • Hannan, Timothy

    ()
    (Federal Reserve Board)

  • Hanweck, Gerald

    ()
    (George Mason University)

Abstract

In this paper, we examine the role of market characteristics in explaining the much discussed phenomenon of growth in the number of banking institution branches over time, and the much less discussed phenomenon of decline in the size of the average branch. We note first that substitution of bank branches in the U.S. for thrift branches accounts for much of the sharp rise observed for bank branches over time. Using a panel dataset that consists of over 2,000 markets observed from 1988 to 2004, we report a number of findings regarding the market characteristics that are associated with the number of branches (of both commercial banks and savings associations) in a market and the average employment size of those branches. We find, among other things, that the number of branches in a local market increases less than proportionately with market size, measured either as population or income, and that total personal income in a market is much more strongly correlated with the number of branches than is population over time. Furthermore, we find that the number of market branches is positively associated with the rate of return that banks in the market are able to obtain on their interest-bearing assets, inversely related to state branching restrictions, inversely related to market concentration, and, in the case of urban markets, positively related to measures of traffic congestion. These characteristics are found not to explain as much of the variation in average branch size over time, probably because of the dominant role of difficult-to-measure technological changes. We do find, however, that markets that experienced above average increases in the number of branches also experienced above average reductions in the size of their branches. We offer possible reasons for this finding.

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Bibliographic Info

Article provided by Capco Institute in its journal Journal of Financial Transformation.

Volume (Year): 23 (2008)
Issue (Month): ()
Pages: 155-164

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Handle: RePEc:ris:jofitr:0019

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Keywords: Banks Branching Location; Banking;

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  1. Beggs, Alan & Klemperer, Paul, 1990. "Multi-Period Competition with Switching Costs," CEPR Discussion Papers 436, C.E.P.R. Discussion Papers.
  2. Kim, Moshe & Vale, Bent, 2001. "Non-price strategic behavior: the case of bank branches," International Journal of Industrial Organization, Elsevier, vol. 19(10), pages 1583-1602, December.
  3. Avery, Robert B. & Bostic, Raphael W. & Calem, Paul S. & Canner, Glenn B., 1999. "Consolidation and bank branching patterns," Journal of Banking & Finance, Elsevier, vol. 23(2-4), pages 497-532, February.
  4. Randall S. Kroszner & Philip E. Strahan, 1999. "What Drives Deregulation? Economics And Politics Of The Relaxation Of Bank Branching Restrictions," The Quarterly Journal of Economics, MIT Press, vol. 114(4), pages 1437-1467, November.
  5. Erin Davis & Tara Rice, 2007. "The branch banking boom in Illinois: a byproduct of restrictive branching laws," Chicago Fed Letter, Federal Reserve Bank of Chicago, issue May.
  6. Evren Damar, H., 2007. "Does post-crisis restructuring decrease the availability of banking services? The case of Turkey," Journal of Banking & Finance, Elsevier, vol. 31(9), pages 2886-2905, September.
  7. Klemperer, Paul, 1995. "Competition When Consumers Have Switching Costs: An Overview with Applications to Industrial Organization, Macroeconomics, and International Trade," Review of Economic Studies, Wiley Blackwell, vol. 62(4), pages 515-39, October.
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