Branch Closures and Spatial Competition in Retail Banking
Abstract
Across retail markets, firms are retreating from physical locations, generating cost savings from closures but leaving consumers who value proximity with fewer alternatives and longer travel distances. Mergers may exacerbate this trade-off because of the additional closures generated by the overlapping structure of the combined location networks. I study this trade-off in U.S. retail banking. I combine branch-level deposits, bank balance sheets, and census-tract demographics to estimate a model of retail deposit demand and dynamic branch closures by banks. In the model, banks choose which branches to close permanently by evaluating the future profitability of their entire branch network, which depends on branch-level deposit intake and operating costs. Through the demand for deposits, the model captures heterogeneity in households’ valuation of proximity and measures how the consequences of branch closures vary across households. I find that proximity matters more for households in older neighborhoods, and closures are more likely for branches that are small, recently acquired or located near offices of the same bank. Counterfactuals show that mergers can accelerate network contraction, reducing depositor access and surplus. Policies aimed at protecting branches from closing can raise depositor surplus, but the costs of maintaining additional branches exceed consumer gains.