The number of bank branches in the United States has declined since the 2007-08 financial crisis, reversing a decade-long trend. The pattern appears to be widespread across both rural and urban counties. Economist Rajdeep Sengupta and Research Associate Jacob Dice examined the relationship between bank branches and local conditions over the last 20 years. Their analysis was published in July 2019 in the Economic Review.

Which factors have affected bank branches over the years?

The number of U.S. banks has declined since the mid-1980s. Before the financial crisis, much of this decline resulted from mergers and acquisitions. After the financial crisis, however, bank failures and a collapse in the entry of new banks also became prominent reasons.

Multiple factors likely influence banks’ branching decisions, but national factors appear to have gained prominence in recent years. For example, interest margins declined industrywide after the crisis, potentially driving banks to contract their branch networks to reduce expenses. In addition, regulation ramped up after the crisis, and several economists and policymakers have argued that this imposed a significant burden, especially on smaller community banks, and contributed to the overall decline in new bank charters. The lack of new bank formation may have led to fewer branches overall. In addition, developments in information technology have had an impact. Banks have invested billions of dollars in online financial technology services over the years, and an increasingly large fraction of banking transactions are now conducted online.

Despite the decline in bank branch numbers, geographical proximity to customers remains relevant to banking. Most depositors who use online banking services still make in-branch visits. In addition, local branches continue to be important to small business lending.  

What impact have local factors had since the financial crisis?

Assessing the relationship between bank branches and local factors requires information about branching and local conditions for a given geographical area over time. We defined counties as the geographical units of our analysis. We used annual data from the Federal Deposit Insurance Corp. to count the number of banks, branches, branch openings, and branch closings in each county in the 50 U.S. states and the District of Columbia. For each county, we considered local demographic, economic and competitive factors that are likely to influence bank branching.

Our analysis found a strong association between the number of branches in a county and that county’s population, income and employment. In addition, we found that the association between local factors and the total number of bank branches has not changed in a meaningful way since the crisis. However, we found that the relative influence of local competition on branch openings and closings strengthened after the crisis, while the influence of local population, income, and employment weakened.  

What is the outlook for bank branches?

The future path of bank branches will depend on local and national factors. While trends such as industry consolidation and online banking are likely irreversible, others such as bank performance and bank regulation are more likely to evolve. Improvements in bank profitability and the rollback in post-crisis regulation for small and medium-sized banks might slow or even reverse the current downward trend in branching nationwide. However, local conditions also influence whether a community sheds or retains its local branches, making changes in local policies all the more relevant.

Read the full Economic Review article.