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The impact of network size on bank branch performance

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  • Beverly Hirtle

Abstract

Despite recent innovations that might have reduced banks' reliance on brick-and-mortar branches for distributing retail financial services, the number of U.S. bank branches has continued to increase steadily over time. Further, an increasing percentage of these branches are held by banks with large branch networks. This paper assesses the implications of these developments by examining a series of simple branch performance measures and asking how these measures vary, on average, across institutions with different branch network sizes. ; The key findings are that banks with 100 to 500 branches ("mid-sized networks") had lower bank-average deposits per branch and roughly equal volumes of small business loans per branch, but no reduction in net deposit costs, relative to banks with larger branch networks. When compared to banks with 100 or fewer branches, mid-sized branch networks had lower bank-average deposits and small business loan volume per branch, but had lower net deposit costs. The analysis shows no systematic relationship between branch network size and overall institutional profitability. The results imply that mid-sized branch networks may be at a competitive disadvantage, especially relative to the very largest branch networks.

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Bibliographic Info

Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 211.

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Date of creation: 2005
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Handle: RePEc:fip:fednsr:211

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Keywords: Branch banks ; Bank profits;

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  1. Athanassopoulos, Antreas D, 1998. "Nonparametric Frontier Models for Assessing the Market and Cost Efficiency of Large-Scale Bank Branch Networks," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 30(2), pages 172-92, May.
  2. Allen N. Berger & Anthony Saunders & Joseph M. Scalise & Gregory F. Udell, 1998. "The Effects of Bank Mergers and Acquisitions on Small Business Lending," New York University, Leonard N. Stern School Finance Department Working Paper Seires 98-007, New York University, Leonard N. Stern School of Business-.
  3. Timothy H. Hannan & Robin A. Prager, 2004. "Multimarket bank pricing: an empirical investigation of deposit interest rates," Finance and Economics Discussion Series 2004-38, Board of Governors of the Federal Reserve System (U.S.).
  4. Hirtle, Beverly J. & Stiroh, Kevin J., 2007. "The return to retail and the performance of US banks," Journal of Banking & Finance, Elsevier, vol. 31(4), pages 1101-1133, April.
  5. Berger, Allen N. & Hanweck, Gerald A. & Humphrey, David B., 1987. "Competitive viability in banking : Scale, scope, and product mix economies," Journal of Monetary Economics, Elsevier, vol. 20(3), pages 501-520, December.
  6. Hannan, Timothy H. & Prager, Robin A., 2004. "The competitive implications of multimarket bank branching," Journal of Banking & Finance, Elsevier, vol. 28(8), pages 1889-1914, August.
  7. Mitchell A. Petersen & Raghuram G. Rajan, 2000. "Does Distance Still Matter? The Information Revolution in Small Business Lending," NBER Working Papers 7685, National Bureau of Economic Research, Inc.
  8. Robert DeYoung & William C. Hunter & Gregory F. Udell, 2003. "The past, present, and probable future for community banks," Working Paper Series WP-03-14, Federal Reserve Bank of Chicago.
  9. Kwangwoo Park & George Pennacchi, 2007. "Harming depositors and helping borrowers: the disparate impact of bank consolidation," Working Paper 0704, Federal Reserve Bank of Cleveland.
  10. Nayantara D. Hensel, 2003. "Strategic Management of Cost Efficiencies in Networks: Cross-country Evidence on European Branch Banking," European Financial Management, European Financial Management Association, vol. 9(3), pages 333-360.
  11. Kwangwoo Park & George G. Pennachi, 2004. "Harming depositors and helping borrowers: the disparate impact of bank consolidation," Proceedings 939, Federal Reserve Bank of Chicago.
  12. Berger, Allen N. & Leusner, John H. & Mingo, John J., 1997. "The efficiency of bank branches," Journal of Monetary Economics, Elsevier, vol. 40(1), pages 141-162, September.
  13. Zardkoohi, Asghar & Kolari, James, 1994. "Branch office economies of scale and scope: evidence from savings banks in Finland," Journal of Banking & Finance, Elsevier, vol. 18(3), pages 421-432, May.
  14. Hannan, Timothy H., 2006. "Retail deposit fees and multimarket banking," Journal of Banking & Finance, Elsevier, vol. 30(9), pages 2561-2578, September.
  15. Timothy H. Hannan, 2001. "Retail fees of depository institutions, 1994-99," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Jan, pages 1-11.
  16. Allen N. Berger & Seth D. Bonime & Lawrence G. Goldberg & Lawrence J. White, 2004. "The Dynamics of Market Entry: The Effects of Mergers and Acquisitions on Entry in the Banking Industry," The Journal of Business, University of Chicago Press, vol. 77(4), pages 797-834, October.
  17. Robert Avery & Katherine Samolyk, 2004. "Bank Consolidation and Small Business Lending: The Role of Community Banks," Journal of Financial Services Research, Springer, vol. 25(2), pages 291-325, April.
  18. Allen N. Berger, 2004. "Potential competitive effects of Basel II on banks in SME credit markets in the United States," Finance and Economics Discussion Series 2004-12, Board of Governors of the Federal Reserve System (U.S.).
  19. Beverly Hirtle & Christopher Metli, 2004. "The evolution of U.S. bank branch networks: growth, consolidation, and strategy," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 10(Jul).
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Citations

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Cited by:
  1. Kondo, Kazumine, 2014. "Cross-Prefecture Expansion of Regional Banks in Japan and Its Effects on Lending-Based Income," MPRA Paper 52978, University Library of Munich, Germany.
  2. Kerstens, Kristiaan & Bouye, Ahmed Moulaye Hachem & Van de Woestyne, Ignace & Vestergaard, Niels, 2008. "Optimal capacity utilization and reallocation in a German bank branch network: Exploring some strategic scenarios," Working Papers 2008/59, Hogeschool-Universiteit Brussel, Faculteit Economie en Management.
  3. Wilko Bolt & David Humphrey, 2012. "A Frontier Measure of U.S. Banking Competition," DNB Working Papers 359, Netherlands Central Bank, Research Department.
  4. Portela, Maria C.A.S. & Thanassoulis, Emmanuel, 2010. "Malmquist-type indices in the presence of negative data: An application to bank branches," Journal of Banking & Finance, Elsevier, vol. 34(7), pages 1472-1483, July.
  5. Iftekhar Hasan & Heiko Schmiedel & Liang Song, 2012. "Returns to Retail Banking and Payments," Journal of Financial Services Research, Springer, vol. 41(3), pages 163-195, June.
  6. Paola Brighi & Valeria Venturelli, 2013. "The Effect Of Revenue And Geographic Diversification On Bank Performance," Centro Studi di Banca e Finanza (CEFIN) (Center for Studies in Banking and Finance) 13103, Universita di Modena e Reggio Emilia, Facoltà di Economia "Marco Biagi".

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