Money losing branches

Banks won't build money losing branches in poor neighborhoods no matter how
hard the Federal government prods them. What is interesting is that
downsized bank executives are buying up branches deemed unprofitable by large
banks and creating 2-3 branch community banks. As Mr. Rosenthal tells us,
credit unions are also filling this niche in some communities.

I see this trend continuing to the point where there will be mega banks like
Chase that want to do business in the global market and cannot afford to
handle the banking needs of the average American -- a checking account,
savings account, home mortgage, car loan, a few CDs, etc.

I can personally attest to pulling money out of one bank when they decided to
charge me $7.50 a month for the pleasure of being their customer unless I
kept $5000 in one of my accounts at all time.

While this 'two-tier' banking system may have some long term negative impact,
I think many people, middle class and poor will be happy to have a small
local bank where they are welcomed as a customer instead of being regarded as
a low profit nuisance.

This more positive approach will challenge local banks to provide "service"
to their customers (remember that buzz word from " In pursuit of
excellence"?) in a way that is cost effective. For instance, local banks may
purchase some of the electronic banking infrastructure that large banks are
developing.

I agree that it is more productive to move forward and help communities build
good local banking solutions than it is to force big banks to maintain
branches in communities they don't want to serve; large banks have no
incentive to develop better systems for doing what they don't want to do.

Let's not forget, however, that Corporate America is not always right.
Detroit once thought cheap foreign cars would never compete with American
cars. Big business thought that universal health care was "socialized
medicine" in the '60's. Now they would love for someone to take employee
health care costs off their hands.


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Just a quick comment. Although we would like to believe that small local
banks will serve as adequate replacements for big bank branch closures,
I'm not optimistic. Big banks have many advantages that small banks will
have trouble replacing. 1) big banks can afford to do "no fee checking"
when CRA encourages them to reach out to low and moderate income
communitites; 2) they have experience running and financing targeted lending
programs. In South Bend, Indiana my research found that both Norwest
Bank and Society/Ameritrust implemented low and moderate income programs
they had previously used in Minneapolis and Cleveland respectively. 3)
Big banks are influenced more strongly by CRA because of the way it is
enforced through the denial of applications for mergers and acquisitions,
etc.

In terms of policy, I think that it is essential that we maintain a
strong CRA in an era of banking industry consolidation. Hoping that
community credit unions will fill all the gaps is at best a stop gap
solution. (Albeit, they may still sometimes be the only solution.)

Unfortunatly, we know from the work of John Caskey that usually it's not
a community credit union that moves in, rather it's a pawn shop
and/or check cashing outlet that charges outrageous fees.

Reynold Nesiba

PS: Why does every bank branch need to be profitable for a bank anyway?
We feel comfortable making phone companies and utility companies meet
(almost) everyone's basic needs regardless if running an individual line
is profitable in the short run or not. What's the quid pro quo for deposit
insurance and state and federal charters anyway?


On Wed, 6 Sep 1995 RacialJust@aol.com wrote:

> Banks won't build money losing branches in poor neighborhoods no matter how
> hard the Federal government prods them. What is interesting is that
> downsized bank executives are buying up branches deemed unprofitable by large
> banks and creating 2-3 branch community banks. As Mr. Rosenthal tells us,
> credit unions are also filling this niche in some communities.
>
> I see this trend continuing to the point where there will be mega banks like
> Chase that want to do business in the global market and cannot afford to
> handle the banking needs of the average American -- a checking account,
> savings account, home mortgage, car loan, a few CDs, etc.
>
> I can personally attest to pulling money out of one bank when they decided to
> charge me $7.50 a month for the pleasure of being their customer unless I
> kept $5000 in one of my accounts at all time.
>
> While this 'two-tier' banking system may have some long term negative impact,
> I think many people, middle class and poor will be happy to have a small
> local bank where they are welcomed as a customer instead of being regarded as
> a low profit nuisance.
>
> This more positive approach will challenge local banks to provide "service"
> to their customers (remember that buzz word from " In pursuit of
> excellence"?) in a way that is cost effective. For instance, local banks may
> purchase some of the electronic banking infrastructure that large banks are
> developing.
>
> I agree that it is more productive to move forward and help communities build
> good local banking solutions than it is to force big banks to maintain
> branches in communities they don't want to serve; large banks have no
> incentive to develop better systems for doing what they don't want to do.
>
> Let's not forget, however, that Corporate America is not always right.
> Detroit once thought cheap foreign cars would never compete with American
> cars. Big business thought that universal health care was "socialized
> medicine" in the '60's. Now they would love for someone to take employee
> health care costs off their hands.
>


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To: RacialJust (re: 95-09-07)
I was quite interested to read your comments about downsized bank executives
buying up branches deemed unprofitable; I've never heard of this in the
Northeast, or elsewhere for that matter, and I'd be interested in learning
about it, if anyone has any information.

I think it is important to the debate to recognize how politically charged
and conveniently malleable the notion of "money-losing branches" is. In my
experience, "money losing" actually means less profitable than other,
alternative uses of investment funds--it may not mean an absolute revenue
loss, but rather an opportunity cost.

I've also found it extremely hard to find a banker who could offer a
convincing explanation of how a branch loses money in a complex, multi-branch
system; they've told me or implied that internal transfers and accounting
systems within a bank can make a branch look "unprofitable" even if it may
not be so by other people's standards.

Having said that, there almost certainly are a fair number of money losing
branches, and I would generally agree that it is extremely difficult to
force banks to build branches perceived as money losers. I used to say it
was impossible; I'm not so sure anymore. It seems to me that Community
Reinvestment Act challenges in New York City have won some commitments by
major banks to open branches in the Bronx, which may not necessarily prove
profitable. Furthermore, Chase/Chemical spokespersons have promised to keep
some "money-losing branches" open for the foreseeable future, after the
merger. I'm skeptical of the long-term reliability of that promise, but it's
certainly interesting to hear this coming out of the mouths of (money center)
bankers.

When all is said and done, on practical grounds--as well as my commitment to
building a community owned system--I would not endorse the notion of banks
being forced to maintain truly unprofitable branches. Instead, our position
(National Federation of Community Development Credit Unions) and that of many
of our allies is that banks should be prodded into investing into a Community
Development Financial Institutions Fund that will help finance the start-up
of new institutions to serve the markets banks have abandoned

Cliff Rosenthal
Nat'l Fed of CDCUs.



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R. Nesiba wrote:

We feel comfortable making phone companies and utility companies meet
(almost) everyone's basic needs regardless if running an individual line
is profitable in the short run or not. What's the quid pro quo for deposit
insurance and state and federal charters anyway?

Remember that public utilities are MONOPOLIES. They get exclusive rights to
serve an area, in return for having to provide basic service. Anyone wanna
bet against those requirements falling away as we see more competition in
utility service?

David Wohl


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>>To: RacialJust (re: 95-09-07)
>>I was quite interested to read your comments about downsized bank
executives
>>buying up branches deemed unprofitable; I've never heard of this in the
>>Northeast, or elsewhere for that matter, and I'd be interested in learning
>>about it, if anyone has any information.

My information is based on three things -- a talk with someone in our
telecommunications department (I work for Fleet Bank) who told me about a
displaced bank president forming a new bank and buying back from Fleet
branches of his old bank in Maine. The man who told me this said that in
rural Maine a banker will encounter a townsperson who in October needs a
$1200 unsecuried loan to get through winter. Once winter is over, he starts
logging again and pays off the loan. He doesn't fit into the credit worthy
'profile", but on the other hand, his family has been in the town for 5
generations and he's good for the money. A banker living in the area
understands this, a big bank doesn't.

Where I live, (Central Mass) I've seen about 3-4 bank branches get closed and
then re-open as either additional branches of an established credit union or
branches or a local Central Mass bank that hasn't been swallowed up in
mergers.

There was also an article in the Wall Street Journal within the last few
months (can't remember the date, but it started on the front page) about laid
off bank executives forming their own banks in Illinois in the Chicago area.

Credit unions are doing well out here and I think a number of people have
turned from big banks to small banks for the convenience and better service.


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To RacialJust --

Thanks for the information re: branches being bought up. It's very helpful.

I don't know whether you have or can get the answer to this: I'm curious
whether it's the physical facility of the branch which is being bought or the
branch plus the deposits (I'd suspect the former).

The story of the Maine banker sounds exactly like many of the credit unions
we work with. I wouldn't want to romanticize rural "community banks"
(especially since I'm in the credit union business) but I would suspect that
the differences between the way credit unions and certain small banks
operated in rural areas was probably smaller in the good old days (and maybe
areas like Maine, today) than is generally the case today.

Cliff Rosenthal


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Its probable that just the branches are bought. However, it's probably not
hard to lure customers away from the big bank that just sold the branch


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In a message dated 95-09-10 22:20:53 EDT, you write:

>
>Its probable that just the branches are bought. However, it's probably not
>hard to lure customers away from the big bank that just sold the branch
>
>
>

Of course one cannot just buy a bank branch and open it as a new bank. The
new bank must have a charter, from the feds or the state, and a minimum level
of capital.


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>R. Nesiba wrote:
>
>We feel comfortable making phone companies and utility companies meet
>(almost) everyone's basic needs regardless if running an individual line is
>profitable in the short run or not. What's the quid pro quo for deposit
>insurance and state and federal charters anyway?
>
>Remember that public utilities are monopolies. They get exclusive rights to
>serve an area, in return for having to provide basic service. Anyone wanna
>bet against those requirements falling away as we see more competition in
>utility services?

While the monopoly argument is compelling, it overlooks the means and methods
by which the nation has chosen to regulate nearly every industry.

A strict quid pro quo in the regulation of the banking industry does not
exist, but if a bank opts to apply for and recieve deposit insurance, the
bank implicitly subjects itself to the jurisdiction of banking regulators. A
trade-off may be a better description than a quid pro quo. The bank gets a
vehicle by which the public will trust the bank with deposits, and the bank
has to follow a variety of laws and regulations.

Like most other regulatory bodies, the federal banking regulators enforce
laws that were designed to preserve safe and sound practices and protect the
public. If banks are made to do things that are unprofitable, then investors
will pull their investment dollars out of banks and will put it in a
different vehicle to earn a higher return. Having said that, hundreds of
community development organizations have proven nationwide that community
development investments can be prudent while earning a market (or above) rate
of return.

Banks can be an integral part of a community's development process. By using
many types of credit and cash flow enhancements, community banks nationwide
have found how to penetrate an enormous capital gap in the provision of
credit to low- and moderate income communities. In their role as a conduit
of community capital, banks can build profitable lending, investment and
service programs while meeting community credit needs. It is no accident
that the CRA asks all "regulated financial institutions" to do just that.


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On Fri, 8 Sep 1995, David R. Wohl wrote:

> R. Nesiba wrote:
>
> We feel comfortable making phone companies and utility companies meet
> (almost) everyone's basic needs regardless if running an individual line
> is profitable in the short run or not. What's the quid pro quo for deposit
> insurance and state and federal charters anyway?
>
Davis said......

> Remember that public utilities are MONOPOLIES. They get exclusive rights to
> serve an area, in return for having to provide basic service. Anyone wanna
> bet against those requirements falling away as we see more competition in
> utility service?
>
Reynold Replies.....

I'd say it's a safe bet that utility companies will always be required to
provide basic services in terms of electricity, telephone,water and sewer
in metro areas. In rural areas I don't see any reason to believe that at
least electiricty and phone will still be offered.

All I'm saying in my statement above is that banks are allowed to do
business because the people of the country or of a particular state ALLOW
them to have a charter to do business. In addition, Deposit insurance and
the full faith and credit of the federal credit backs up their depository
business. The least banks can do is meet the minimal requirements of
CRA in return. If they don't like that bargain then they can do without
the charter and enter some other form of business. In short, if you want
to do business in our area, then you need to play by our rules. If you
aren't going to CRA we'll just recall our charter. The utility model of
regulation for banks isn't a perfect fit, but it would do more for low
and moderate income and minority borrowers and neighborhoods than the
current system of regulation.

Reynold Nesiba


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