Bank deregulation and branch network expansion in the U.S.
Oberfield et al., study the spatial expansion of banks in response to banking deregulation in the U.S. in the 1980s-90s using data on individual bank branches and deposits from 1981-2006. They develop a theoretical model of multi-branch banks sorting into heterogeneous locations, incorporating two key forms of sorting: 1) span-of-control sorting: more productive banks locate in larger, more expensive markets; and 2) mismatch sorting: banks locate in areas where deposits are abundant relative to loan demand to minimize wholesale funding.
Key findings:
- Prior to deregulation, large banks were heavily sorted into the densest counties and relied more on wholesale funding.
- After deregulation, large banks expanded geographically, especially into less dense markets with more abundant retail deposits. This allowed them to reduce reliance on expensive wholesale funding.
- Overall spatial sorting of banks weakened over time as large banks expanded to more marginal markets.
- The expansion patterns are consistent with both span-of-control sorting (large banks still preferred denser markets) and mismatch sorting (expanding to deposit-rich areas).
- The large geographic expansion of top banks into smaller locations implied access for consumers in small urban and rural areas to the technology and branch network of the top U.S. banks.
- In addition, according to this theory, top U.S. banks had no incentive to price discriminate against these new customers.
Banks in Space
Authors: Ezra Oberfield, Esteban Rossi-Hansberg, Nicholas Trachter, Derek Wenning
From: Princeton University, University of Chicago, FRB of Richmond
Bank branches and credit access for small firms
Niklas Amberg and Bo Becker examine the impact of large-scale bank branch closures in Sweden on lending to small and medium-sized enterprises (SMEs) and local economic outcomes. They use detailed data on bank branch locations and firm-level outcomes from 2001-2023, during which about two-thirds of bank branches closed and estimate the effects of these closures on local firm outcomes like loan volumes, employment, sales, and exit rates using two-stage least squares regressions.
Key findings:
- A 10% reduction in local bank branches leads to a 1.8% decline in loan volumes to local firms after 2 years.
- The credit supply effects are larger for small firms, young firms, and firms with fewer tangible assets.
- Short-term loans account for most of the decline in lending.
- Branch closures have significant negative effects on local firm employment (-1.3%), sales (-1.8%), and working capital (-1.3%) after 3 years.
- The probability of firm exit increases by 0.6 percentage points over 3 years following a 10% reduction in local branches.
The authors conclude that widespread branch closures due to the shift to digital banking may have significant negative effects on SME lending and local economic outcomes. This highlights potential downsides of technological disruption in banking.
Banking Without Branches
Authors: Niklas Amberg, Bo Becker
From: Sveriges Riksbank, Stockholm School of Economics
