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December 1997

Federal Reserve Bank of Cleveland

Do More Banking Offices
Mean More Banking Services?
by William P. Osterberg and Sandy A. Sterk


easuring output in the nation’s
service industries has always been problematic, but in recent years, economists
have been focusing more intensely on
this issue. Their findings have important
implications for measures of national
output and inflation.
The banking industry provides an interesting example of the ambiguities and
difficulties involved in assessing changes
in the amount of services provided. Although technological innovation, deregulation, and industrywide consolidation
have presumably boosted banking efficiency, it is still unclear how we should
measure total banking services. An important related issue is whether these
changes have had a negative impact on
the availability of banking services in
urban and rural communities.
Because banking services have traditionally been provided through “brick and
mortar” branch offices, it is tempting to
draw inferences from changes in the
total number of banking offices—head
offices plus their branches. On the surface, this should allay concerns, because
the overall number of offices has risen
sharply in recent years. But there are
several reasons why it is unwise to
assume that this expansion implies an
increase in services.
First, much of the growth in banking
offices reflects a wave of thrift conversions, indicating a reorganization of the
industry rather than a net gain in offices.

ISSN 0428-1276

Second, the vehicles through which
banking services are delivered have
changed. A good example is the growth
of ATMs, which provide a narrower
range of services than the traditional
bank branch. Another is the rapid expansion of supermarket branches, which
may or may not provide the same spectrum and quality of services as the traditional branch office.1
The evidence on one particular banking
service usually associated with branch
offices—small business lending—reinforces our caution against simplistic
interpretations of the change in the number of banking offices. An examination
of state-by-state office growth rates and
small business lending indicates that the
evidence connecting the two is mixed.
States that experienced higher-thanaverage growth in total banking offices
had higher-than-average growth in small
business lending from 1993 to 1995, but
not from 1995 to 1996. On the other
hand, states with a slower pace of headoffice shrinkage experienced slower
growth in small business lending from
1993 to 1995, but faster growth from
1995 to 1996.

s Understanding the
Office Growth Numbers
Concerns about the shift in the number of
banks and banking offices can be traced
to the consolidation wave that began in
the early 1980s—a response to competitive pressures and regulatory changes
that eased the way for mergers and acqui-

It is tempting to look at the recent
growth in the number of banking offices as evidence that industry consolidation has not meant a deterioration
in banking services. However, much of
this expansion can be traced to thrift
conversions and the growth of supermarket branching. An examination of
state-by-state data reveals that higher
banking office growth does not necessarily imply higher growth in small
business lending, one banking service
of particular concern to smaller markets and poorer communities.

sitions (M&As). Many anticipated that
bank M&As would lead to massive
branch office closings and the withdrawal of deposits and/or lending activity
from smaller markets and poorer communities. Others emphasized that any
such changes would be guided by the
industry’s need to cut costs and improve
its competitive position.
Figure 1 shows the growth in the total
number of banking and thrift offices between 1988 and 1996. (Banking offices
include facilities that hold deposits, excluding consumer installment loan offices, computer centers, and other nondeposit installations, like ATMs.) Note
that as the number of banking offices
rose steadily, increasing from 63,167 in
June 1988 to 71,137 by mid-1996, the
number of thrift offices fell 55 percent,
from 22,743 to 10,241. This represents a

modest net decline of 4,532. It is likely
that the shrinkage in the number of head
offices reflects the consolidation associated with M&As. On the other hand, the
increase in total banking offices does not
necessarily mean that banking services
have improved.
Before discussing the rise in total banking offices in terms of the availability of
certain types of services, a few cautions
are in order. First, the data in figure 1 are
perhaps better interpreted as evidence of
consolidation within the depository institutions industry. The banking office
numbers include former thrifts and thus
do not necessarily represent a net increase in the availability of financial
services. Figure 2 uses data from the
Office of Thrift Supervision (OTS) to
estimate the cumulative contribution of
thrift acquisitions and conversions to
banking office growth.2 An alternative
estimate can be constructed from statistics provided by the Federal Deposit
Insurance Corporation (FDIC).3
The contribution of thrift conversions to
the change in the total number of banking offices would be clearer if we knew
how many thrifts went out of business
after their conversion. Unfortunately, the
concerns being voiced about office closings refer to the net change in banking
offices, while the available data on conversions are for gross changes. If we
were to ignore this distinction, we would
conclude that thrift office conversions
accounted for either 87 percent or 107
percent of the increase in banking offices
from 1990 to 1996, depending on the
method used to estimate the conversions.
Another approach would be to approximate the gross change in banking offices
using data on de novo offices (conversions of thrift offices plus offices of newly reorganized banks and new banks organized by existing banking companies).
This procedure would lead us to conclude that thrift conversions accounted
for 32.4 percent of the growth in banking
offices.4 Clearly, then, thrift conversions
made a significant contribution to the
growth in banking offices, regardless of
how we estimate the conversions or
measure office growth.5


a. Includes FDIC-insured commercial and savings banks and U.S. branches of
foreign banking offices in the United States and other areas. Savings bank offices
include all savings banks insured by the Bank Insurance Fund (BIF), as well as
those state-chartered banks insured by the Savings Association Insurance Fund
(SAIF) and regulated by the FDIC.
b. Includes SAIF-insured, OTS-regulated associations, which cover all federally
and state-chartered savings and loan associations and savings banks in the United
States and other areas.
NOTE: All data are for June 30.
SOURCES: FDIC, Summary of Deposits; and OTS, Branch Office Survey.


a. Estimate is calculated by dividing the number of thrift offices by the number
of thrift institutions as of June 30 of each year, then multiplying this average by
the total number of conversions and acquisitions of thrifts in the same year.
SOURCES: OTS; and authors’ calculations.


SOURCE: International Banking Technologies.

s Supermarket Branching
Using the total number of banking
offices to claim that the quantity of
banking services has not declined could
be misleading. Banking services are now
supplied by a variety of delivery systems, including ATMs, which grew an
astounding 92 percent between 1988 and
1996, for a total of 139,000 terminals.6
Although this trend has been driven by
both convenience and costs, ATMs are
currently incapable of serving the full
range of financial customers’ needs.
Because of this, we exclude ATMs from
our discussion.
Another heavily publicized indicator of
banking office change is the growth of
supermarket branches, which soared 40
percent from 1995 to 1996, for a total of
4,398 installations (see figure 3). Supermarket facilities accounted for 62 percent of the total increase in banking
offices from 1990 to 1996.
The evolution of supermarket branches
appears to be the result of competitive
pressure from nonbanks, which has
forced banks to reduce their costs. Instore branches can cut costs in a number
of ways. First, they can be set up for
roughly $200,000 to $300,000—about

one-fifth the cost of a traditional branch.
Second, their yearly operating expenses
are about half those of traditional
branches, despite the fact that in-store
facilities operate a longer week.7 Third,
only half the number of employees are
required. And finally, the equipment
used in supermarket branches can be
more easily removed and used elsewhere.8 Still, while lower unit costs
might make it simpler for these branches
to continue providing financial services
to the traditional branches’ former
customers, whether they are yet doing
so is unclear.9
The decision to locate supermarket
branches in low- to moderate-income
communities is often driven by the configuration of large supermarket chains.
Large banks generally sign deals with
large chains. Wells Fargo & Co., for
instance, announced in the summer of
1996 that it planned to open 450
branches in Safeway stores throughout
several western states, nearly doubling
its total in-store network.10 The realization that there are a limited number of
major supermarket chains has induced
banks to act quickly. Most unions between a supermarket and a bank tend to
be confined to one particular region,

with the bank placing all of its branches
in one chain. This one-to-one alliance
typically results in the biggest supermarkets joining up with the biggest banking
A key issue here is the effect that instore branches will have on local banking markets. Alliances between supermarket chains and large banks could
eventually overwhelm smaller depositories. As larger banking organizations
increase their in-store branches, their
deposit base will grow. Smaller regional
banks will then lose deposit shares to
larger competitors, causing their earnings to decline. If this earnings drop is
steep enough, smaller banks could be
forced to fold, which would eventually
place severe limits on the types of services offered in local communities.
At the same time as supermarket
branches are booming—an expansion
that is expected to continue—industry
commentary is hinting that the traditional
bank branch may well revive, albeit in a
somewhat different form. American
Banker’s 1996 Gallup poll reported that
nearly 50 percent of the banking consumers who responded deal face to face
with a teller approximately three times a
month.11 Payment Systems, Inc., of
Tampa, has found that banking customers who sometimes use personal computers for their banking needs still visit
branch offices for six of their 25 average
monthly transactions, while overall, U.S.
households do seven of their 13 transactions one on one.12 Thus, while financial
consumers do not appear inclined to
eliminate their face-to-face interactions
with branch representatives, it is uncertain what type of unit will prove to be the
most appropriate delivery vehicle for
each type of banking service. Something
similar to the traditional brick and mortar
branching system may retain a key role
in the depository institutions industry.

s Evidence from
Small Business Lending
Small business lending is one of the
services traditionally provided by banks
to smaller, poorer, or more isolated
communities. Recent research highlights the importance of both jobs creation by small businesses and M&As’

(Correlation coefficient of percent change)
1993 –1994

1994 –1995

1995 –1996

Banking offices and
small business loansa




Head offices and
small business loansa




1993 –1994

Banking offices
Head offices
Small business loansa
Total business loansb
Total loansc


1994 –1995

– 4.88

1995 –1996

– 4.59

a. Includes business loans with original amounts of $1 million or less, and is the amount outstanding (as of June 30) of loans secured by nonfarm, nonresidential properties in domestic offices and
commercial and industrial loans to U.S. addressees in domestic offices.
b. Includes loans secured by nonfarm, nonresidential properties in domestic offices and commercial
and industrial loans in domestic offices.
c. Includes total loans and leases, net of unearned income, in domestic offices.
NOTE: Loan data are for FDIC-insured U.S. commercial banks, state-chartered savings banks, and
U.S. branches of foreign banks.
SOURCES: FDIC, Summary of Deposits; Federal Financial Institutions Examination Council,
Consolidated Reports of Condition and Income; and authors’ calculations.

impact on small business lending. It is
tempting to assume that trends in banking office growth have implications for
these types of loans. However, the technology of small business lending has
been changing, with some banks centralizing such activity.
Upward trends in both the amount of
small business lending and the number
of banking offices might suggest that
the latter contributed to the former.
However, such a pattern could also simply reflect population growth or a general increase in business activity.
A more useful perspective comes from
looking at state-by-state correlations
between banking office growth and
small business lending. These year-toyear correlations allow us to answer the
question, “Did states that experienced
higher-than-average office growth also
see greater growth in small business
lending?” Table 1 details the correlations between these two factors. We distinguish between trends in head office

growth and trends in total office growth,
with the former more likely to reflect
banking consolidation and the latter
more relevant to concerns about small
business lending. However, such correlations tell us nothing about the mechanisms involved in small business lending, nor can they be used to infer a
causal relationship.
Line 1 of table 1 shows that states with
higher total office growth rates between
1993 and 1994 and also between 1994
and 1995 experienced greater growth in
small business lending. However, the
correlation was essentially zero between
1995 and 1996. On the other hand, line 2
shows that until 1995–96, states with
higher head-office growth (slower
shrinkage) had lower growth in small
business lending. Between 1995 and
1996, greater growth in head offices
implied greater growth in lending.13
These results must be interpreted in the
context of national trends in office
growth and small business lending. The

national growth rate for total banking
offices slowed in each year studied,
while the shrinkage rate of head offices
abated slightly in 1996 (see table 2).
Meanwhile, the growth rate of small
business lending fell from 1993 through
1996. The growth rates of total business
loans and total loans, on the other hand,
rose sharply from 1994 to 1995 and
then dropped from 1995 to 1996. It’s
possible that the changing correlations
between office growth and small business lending during the 1995–96 period
are connected to the sharp increase in
total lending from 1994 to 1995. For
example, suppose that states where total
lending ballooned were also those with
relatively high office growth rates. If
banks in these states had sought to reduce the size of their loan portfolios,
they might have done so by eliminating
offices while maintaining their progress
in small business lending.14
Are these trends in small business lending in any way related to thrift office
conversions or the growth of supermarket branching? Although state-level data
on thrift conversions are not available,
the growth of supermarket branching
has been concentrated in the western
states and in areas where at least some
banks are relatively active in increasing
their small business loan portfolios.
There appears to be little regional variation in the growth rates of small business
lending, however. In fact, in the regions
where supermarket branching has been
most widely publicized, neither the share
of small business lending relative to total
business lending, nor the movements in
that share, appear to differ from the
national average.

s Summary
Measuring the output of service industries like banking is fraught with difficulties. Because traditional banking
services have been supplied through
“brick and mortar” offices, it is tempting to assume that the recent growth in
the number of banking offices implies a
corresponding rise in the availability of
banking services. However, a careful
consideration of the data suggests two
reasons why such an assumption is not
well founded. First, the thrift office
numbers represent a decline in thrifts,

not an expansion of depository institution offices. Second, the vehicles
through which banking services are
provided have changed, as witnessed
by the explosive growth of ATMs and
supermarket branches. The newer vehicles may or may not provide the same
range of services as were available
from traditional bank branches.
Evidence connecting office growth
and small business lending is mixed.
State-level correlations between office
growth and small business lending show
some positive connection between 1993
and 1994 and between 1994 and 1995,
but virtually no link between 1995 and
1996. Thus, we find little support for using data on the growth in banking offices to draw inferences about how consolidation has affected banking services.

s Footnotes
1. For another look at the growth in banking
offices, see Robert B. Avery, Raphael W.
Bostic, Paul S. Calem, and Glenn B. Canner,
“Changes in the Distribution of Banking
Offices,” Board of Governors of the Federal
Reserve System, Federal Reserve Bulletin,
vol. 83, no. 9 (September 1997), pp. 707–25.
2. No direct data exist on the number of
banking offices that were formerly thrifts.
Figure 2 is an approximation calculated
from OTS data, which include the number of
OTS-regulated thrifts that were converted to
commercial banks or state-chartered savings
banks, and those thrifts that were acquired
by non-OTS-regulated institutions.
3. The FDIC releases data on deposits that
were acquired by members of either the BIF
or the SAIF, but were insured by the other
fund (Oakar deposits). It also provides information on institutions that converted to commercial banks or savings banks and are now
regulated by one of the bank regulatory agencies, usually the FDIC (Sasser institutions).
These data imply that 6,000 thrift offices
were converted to banking offices. Details on
how this estimate was calculated are available
from the authors.

4. This estimate is based on OTS data for
1990–95, when gross cumulative de novo
banking offices totaled 15,116. See Board of
Governors of the Federal Reserve System,
Annual Statistical Digest, 1990–95.

13. This result is consistent with an increasing number of small institutions facing
lending restrictions as the asset distribution
of the industry becomes skewed toward
larger banks.

5. One factor which might imply that thrift
conversions increased the availability of
banking services is that banking offices generally do more small business lending than
thrift offices.

14. On the other hand, the within-year correlations indicate that the number of offices
might still be a factor in generating small
business lending. States with higher ratios of
offices per loan (either business loans or total
loans) tend to have a greater share of their
loan portfolios in small business lending.
This is consistent with the view that small
business lending is concentrated in offices
with low lending volume. However, although
states with higher head-office-to-loan ratios
had higher small business loan ratios, the
correlations were not as large as with total
offices, implying that the connection
between total offices (and thus branches) and
small business lending was perhaps stronger
than the connection between small business
lending and the number of organizations.

6. From “EFT Network Data Book,” Bank
Network News, various issues.
7. See Daniel K. Orlow, Lawrence J.
Radecki, and John Wenninger, “Ongoing
Restructuring of Retail Banking,” Federal
Reserve Bank of New York, Research Paper
No. 9634, November 1996.
8. Ibid.
9. FDIC data on banking offices exclude
facilities like loan production centers, which
do not accept deposits. It would be useful to
know the substitutability between the products offered by competing types of branches.
If supermarket branches offered services that
were close substitutes for those offered by
traditional branch offices, but at lower cost,
then we would expect the latter to go out
of business.
10. See Christopher Rhoads, “The Supermarket Branch Takes Off,” American Banker,
vol. 161, no. 231 (December 4, 1996), p. 15a.
11. See Jeffrey Kutler, “Stories of the
Branch’s Demise Have Been Greatly Exaggerated,” American Banker, vol. 161, no. 248
(December 31, 1996), p. 1.
12. Ibid.

William P. Osterberg is an economist and
Sandy A. Sterk is an economic analyst at the
Federal Reserve Bank of Cleveland. The
authors thank Ben Craig, Joseph Haubrich,
and James Thomson for helpful comments
and suggestions.
The views stated herein are those of the
authors and not necessarily those of the Federal Reserve Bank of Cleveland or of the
Board of Governors of the Federal Reserve
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