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How Branch Closures Affect Access to Banking Services

KEY TAKEAWAYS

  • Since 2009, 11% of bank branches have consolidated or closed—a trend that has continued during the COVID-19 pandemic.
  • Data show that branch closures have been concentrated in areas of branch duplication, rather than those depending on a single branch.
  • The median distance to the nearest branch following a branch closure is .18 mile in urban areas and .64 mile in rural areas.
bank locked inside cage

By

Drew Dahl , Michelle Franke , James Fuchs
Monday, January 4, 2021

Although many banks have maintained branch operations in the wake of the COVID-19 pandemic, others have cut back significantly, if temporarily, or announced accelerated plans for permanent closures. This has heightened concerns about an ongoing consolidation of branches nationwide, which has reduced their number by 11% from a peak of 92,030 in 2009.Source of branch data is a combination of Competitive Analysis and Structure Source Instrument for Depository Institutions (CASSIDI) and Federal Deposit Insurance Corp. (FDIC) Summary of Deposit (SOD) data.

Branch closures increase the distance people must travel from where they live, shop, work or otherwise prefer to engage in financial transactions. Those affected sometimes have to go without or must drive long distances to access them. Businesses may be forced to close during the workday to make deposits or withdraw cash in distant cities.See Federal Reserve Board, and Simon and Jones. The elderly, people with mobility issues and those without access to transportation may be particularly inconvenienced.

Below, we examine the impacts of branch closures from the perspective of distance. Distance and inconvenience are not necessarily synonymous, but physical distance does provide an observable metric that offers insight into the impacts of branch consolidation on bank customers.

Our findings indicate that closures have been concentrated in areas with branch duplication, rather than in places that depend on a single branch. In most cases, this creates relatively modest increases in the distances individuals must travel to access equivalent banking services.

Branch Closures

Between July 2013 and June 2018, 5,931 full-service, brick-and-mortar branches that were not main offices (headquarters) closed. Below we compare these branches with “existing” branches that remained open in the same years.Comparisons represent a simplified presentation of empirical findings (i.e., stylized fact), rather than a rigorous statistical analysis. They must be qualified accordingly. Data across the five years are pooled into a single sample of 321,715 observations. (See the table below.)

Characteristics of Closed Bank Branches
  Closed Branches Existing Branches Difference
Rural
Percentage minorities in county 14.9% 13% 1.9 percentage points
Mean household income in county $40,775 $42,886 -$2,111
Number of branches 463 32,113 N/A
Urban
Percentage minorities in county 29.5% 29.3% 0.2 percentage points
Mean household income in county $59,102 $59,815 -$713
Number of branches 5,468 283,671 N/A
SOURCES: Demographic information is from the U.S. Census Bureau. Information for bank branches is a combination of Competitive Analysis and Structure Source Instrument for Depository Institutions (CASSIDI) and Federal Deposit Insurance Corp. (FDIC) Summary of Deposit (SOD) data.
NOTES: Values are means. The sample consists of full-service, brick-and-mortar branches that are not main offices (headquarters). Credit unions are excluded. Observations pooled for years 2013-18.

The full-service, brick-and-mortar categorization of branches excludes:

  • Bank headquarters
  • Retail branches in supermarkets or department stores
  • Limited-service branches
  • Drive-through facilities
  • Branches operated by other depository intermediaries, such as thrift institutions or credit unions
  • Offices operated by other nondepository institutions

A branch is defined as urban if it is in a metropolitan statistical area (MSA) with a core population of more than 50,000. A bank is considered rural if it’s outside an MSA and outside a micropolitan area with a cluster of 10,000 to 50,000 people.Banks in micropolitan areas are excluded.

Turning first to the incidence of closures, many more occurred in urban areas (5,468) than in rural areas (463). Differences were less pronounced—but still evident—when expressed on a relative basis; closures represented 1.9% of branches in urban areas and 1.4% of those in rural areas.

In urban areas, only marginal differences were evident in the income and minority composition of counties that experienced closures and those that did not. In rural areas, on the other hand, counties with closed branches had higher minority percentages (15% versus 13% for open branches) and lower median household incomes ($41,000 versus $43,000 for open branches).A related study found more pronounced differences with respect to family income ($49,000 versus $57,000) and percentages of African Americans (24% versus 8%). See Federal Reserve Board.

Distance between Closed and Nearby Branches

The table below shows the linear distance, in miles, between a closed branch and the nearest full-service bank branch that remained open. Nearest branches include those operated by any bank—not just the bank that closed a branch.

They include main offices as well as branches. They exclude related facilities—retail branches, limited-service branches and others—at which only limited services could be obtained. They also exclude credit unions, thrifts and other nondepository providers of financial services. From this perspective, our comparisons represent an extreme measure of distance.

Distance (in Miles) from Closed Branches to Nearest Open Branch
  Percentile
  5% 25% 50% (Median) 75% 95%
Rural 0.02 0.11 0.64 5.56 15.5
Urban 0.01 0.07 0.18 0.57 3.01
SOURCE: Authors’ calculations.
NOTES: Distance is measured in miles. Closed branches are full-service, brick-and-mortar facilities that are not main offices (headquarters). Nearest branches include main offices. Credit unions, thrifts and other nondepository institutions are excluded.

In rural markets, the median distance to the nearest branch from one that closed is 0.64 mile; in urban markets, the median distance is 0.18 mile. This is consistent with a distribution of branch closures clustered at relatively short distances; even in rural areas, an average of fewer than 40 rural closures per year extended distances to the nearest branch by more than two-thirds of a mile.This is calculated by annualizing the 463 rural closures (2013 to 2018) after eliminating the number of those below the median distance of 0.64 mile. This underscores a trend that some analysts expect will persist.

The median distances identified can be compared with those in another study, which focused on closures in “deeply affected” counties where distances were often more than 10 miles away—a metric typically used in the delineation of “banking deserts.”See Federal Reserve Board. The study examined distance in the context of 44 counties in the U.S. that had 10 or fewer branches in 2012 and lost at least 50% of those branches by 2017. In these counties, individuals without consistent access to transportation faced driving times to the nearest branches of 20 minutes each way. Small-business owners were forced to close during workdays to drive long distances to make deposits or withdraw cash.

However, our results show such hardships imposed by extreme distances are atypical; even in rural areas, only 5% of closures leave customers at a distance of more than about 15 miles from another branch. This is consistent with limited impacts of distance identified in another study showing that less than 0.07% of people nationwide live in banking deserts characterized by low incomes and large minority populations.

Conclusions

Our analysis of branch banking is relevant to ongoing discussions of potential merger and acquisition strategies, as well as policy changes that can strengthen access to financial services in communities affected by closures.

It suggests these objectives may be approached more tractably with the understanding that recent closures have increased median distances to the nearest branches by less than two-thirds of a mile in rural areas and less than a quarter-mile in urban areas. Inconveniences associated with extreme increases in distance may be impactful but are not necessarily widespread.


Drew Dahl is an economist, Michelle Franke is a policy analyst and James Fuchs is a vice president at the Federal Reserve Bank of St. Louis.

References

  • Board of Governors of the Federal Reserve System. “Perspectives from Main Street: Bank Branch Access in Rural Communities.” November 2019.
  • Dahl, Drew; and Franke, Michelle. “‘Banking Deserts’ Become a Concern as Branches Dry Up.” Regional Economist, Second Quarter 2017.
  • McCaffrey, Orla. “People Aren’t Visiting Branches. Banks Are Wondering How Many They Actually Need.” The Wall Street Journal, June 7, 2020.
  • Simon, Ruth; and Jones, Coulter. “Goodbye, George Bailey: Decline of Rural Lending Crimps Small-town Business.” The Wall Street Journal, Dec. 25, 2017.
  • Tranfaglia, Anna. “Shrinking Networks: A Spatial Analysis of Bank Branch Closures.” Working paper, Federal Reserve Bank of Philadelphia, 2018.

Endnotes

  1. Source of branch data is a combination of Competitive Analysis and Structure Source Instrument for Depository Institutions (CASSIDI) and Federal Deposit Insurance Corp. (FDIC) Summary of Deposit (SOD) data.
  2. See Federal Reserve Board, and Simon and Jones.
  3. Comparisons represent a simplified presentation of empirical findings (i.e., stylized fact), rather than a rigorous statistical analysis. They must be qualified accordingly.
  4. Banks in micropolitan areas are excluded.
  5. A related study found more pronounced differences with respect to family income ($49,000 versus $57,000) and percentages of African Americans (24% versus
    8%). See Federal Reserve Board.
  6. This is calculated by annualizing the 463 rural closures (2013 to 2018) after eliminating the number of those below the median distance of 0.64 mile.
  7. See Federal Reserve Board. The study examined distance in the context of 44 counties in the U.S. that had 10 or fewer branches in 2012 and lost at least 50% of those branches by 2017.
ABOUT THE AUTHORS
Drew Dahl 

Drew Dahl is an economist at the Federal Reserve Bank of St. Louis.

Michelle Franke 

Michelle Franke is a policy analyst at the Federal Reserve Bank of St. Louis.

James Fuchs 

James Fuchs is a vice president at the Federal Reserve Bank of St. Louis. He joined the St. Louis Fed in 2009.