Changes in the Distribution of Banking Offices
Avery, Robert B., Bostic, Raphael W., Calem, Paul S., Canner, Glenn B., Federal Reserve Bulletin
Over the past twenty years, major structural changes, including rapid consolidation among institutions, have altered the shape of the banking industry. Structural change has been driven by advances in technology, efforts to increase efficiency and reduce costs, the general performance of the economy, and the globalization of financial services markets. Deregulation of various aspects of banking, including a relaxation of regulatory restrictions on the ability of banking organizations to purchase other institutions and to establish branch offices, has also contributed significantly to the changes in banking structure.
Consolidation in the industry has resulted from mergers of previously independent institutions, the failure of a large number of commercial banks and savings associations (savings banks and savings and loan associations), and consolidation within bank holding companies. Industry analysts have advanced certain explanations for the drive to consolidate. In one view, consolidation is primarily a response to an oversupply of banking institutions and offices, or "overcapacity." Overcapacity has resulted from advances in technology, the easing of some regulatory restrictions, and inroads by nonbank financial institutions into traditional banking service markets. Another view is that some consolidation is motivated by strategic considerations and may, in some cases, have anticompetitive effects.
These structural changes may have influenced the distribution of banking offices, that is, their number and location.(1) This article explores the relationship between these changes and the distribution of offices between 1975 and 1995, particularly across neighborhoods grouped by the median income of residents and location (central city, suburban, or rural). The examination is restricted to "brick and mortar" offices, which traditionally have been the most important delivery system that banking institutions use to provide products and services to households and business customers.(2) In these offices, customers can conduct a host of deposit, borrowing, and other financial transactions through tellers, loan officers, and other customer service representatives.
Although much discussion about the possible effects of structural changes in banking on branching activity has taken place, only limited information has been available for a systematic analysis of this issue. This analysis relies on a new, specially constructed database that combines information on banking office locations, mergers and consolidations, failures of commercial banks and savings associations, and neighborhood economic and demographic characteristics. The Federal Reserve's National Information Center database, supplemented with data supplied by the Office of Thrift Supervision, was used to track mergers, acquisitions, and failures over time. Information from the Census of Population and Housing for 1970, 1980, and 1990 and Bureau of the Census estimates for the intervening years were used to assign economic and demographic characteristics to the geographic area containing each banking office. Appendix A provides details on the construction of the database used in this article.
These structural and distributional changes have raised some public concerns. One concern is that consolidation will tend to reduce the number of banking offices and possibly the availability of services. Another is that banks and savings associations may be closing offices and reorienting their office networks to the benefit of more affluent customers at the expense of lower-income communities. Legislators and regulators have addressed these varied concerns through laws and regulations intended to help ensure that all segments of the public have access to banking services. The analysis in this article focuses on the structural and distributional changes in the banking industry in light of these concerns.
General Trends in Distribution
According to the data, the number of banking institutions declined between 1975 and 1995. …