DECEMBER 2004

Impact of Large Bank Mergers
on Branch Networks

As reported in the October issue of Spotlight, the recent increase in large bank interstate merger activity is characterized by geographic market expansion. The post-merger institutions can serve customers across many states under one charter, thereby streamlining operations. One of the services affected by this streamlining is bank branching. Beverly Hirtle and Christopher Metli of the Federal Reserve Bank of New York have examined the evolution of U.S. bank branch networks and the impact of recent bank merger activity on the distribution of branches.

The proliferation of automated teller machines, Internet banks, and centralized call centers brought about by regulatory and technological changes in the 1990s "...appeared to reduce the role of the traditional bank branch in the delivery of retail banking services." However, Hirtle and Metli show that as deregulation contributed to a decline in the number U.S. banks and thrifts via consolidation (12,500 in 1994 versus 9,000 at year-end 2003), by allowing insurance and securities products to be offered through branches it also contributed to an increase in the number of bank and thrift branches. In contrast to the emphasis on online banking and customer service via call centers of the late 1990s, Hirtle and Metli report that the large bank mergers of 2004 reflected the renewed interest in the "?bricks-and-mortar' method of delivering banking services."

The combination of fewer banks and more branches translates into "...greater consolidation of branches and deposits in the nation's larger bank and thrift organizations." Hirtle and Metli define "midsized branch networks" as 100 to 500 branches; "large branch networks" as more than 500 branches; and the "very largest networks" as those with more than 1,000 branches. From 1994 to mid-2003, midsized and large branch networks' share of U.S. deposits increased from 53 percent to 61 percent and share of branches increased from 46 to 51 percent. The very largest networks' number of branches more than doubled over the same period—from 9,200 branches in 1994 to 20,000 in June of 2003—and represented almost 25 percent of all U.S. bank branches in mid-2003. As of mid-2003, 12 institutions operated branches in at least 20 percent of the U.S. The merger activity of 2004 continued the trend. For example, the Bank of America/FleetBoston merger produced over 5,500 bank branches that cover 29 states.

Hirtle and Metli's review of the literature finds that traditional users of bank services at bricks-and-mortar branches are consumers and small businesses. Surveys suggest that these customers value convenience based on: branch location, "geographic reach" (the number of states in which they can find a branch of their institution), and "local branch density" (having access to many branches of their institution within a defined area). Hirtle and Metli conclude that "[t]hese findings suggest that many customers value the scope and scale of large branch networks." At the same time, "...the increasing scale of the midsized and large branch networks suggests that [banking] institutions intend to remain active providers of retail banking services."