Do Bank Branches Matter Anymore?

  1. What tangible benefits do brick-and-mortar bank branches provide consumers in low- and moderate-income neighborhoods?
    • Bank branches in low- and moderate-income neighborhoods increase the supply of credit and decrease mortgage defaults. Research suggests that greater distance from a bank has implications that go beyond inconvenience. Unlike groceries, loan products are special in that pricing them properly in low- and moderate-income areas may require an intimate knowledge of the community and its people. The lending market in these neighborhoods can fail unless its lenders have local experience.
  2. Should policymakers provide a solution to the problem of the increasing distance between bank branch and consumers in low- to moderate-income neighborhoods?
    • Policymakers should not have to coerce banks to remain in declining neighborhoods. This would be unwise from a safety and soundness perspective if the area no longer has the population density to support profitable bank operations. But the authors say that if society cares about the lost opportunities of creditworthy low-income individuals, it is important to identify ways to overcome the financial disincentives banks may face in serving these distressed areas.
  3. How does a bank's physical presence help it develop valuable knowledge about credit risks and business opportunities by interacting with consumers and businesses as it delivers deposit and loan products?
    • Here's an example of how banks develop valuable knowledge: Take two mortgage applicants with credit problems. One prioritizes his expenses to be able to pay his mortgage first, while the other does not set priorities responsibly and sometimes splurges instead of paying the mortgage. Neither applicant can provide a down payment, and both have tainted credit scores, making it difficult for the lender to determine which one is creditworthy and therefore eligible for a lower-interest loan. If the lender charges the creditworthy applicant a lower interest rate, it will lose money if the other applicant gets the same mortgage and defaults. That is where bank–customer relationships, which can overcome these obstacles, come into play. Interactions with customers allow banks to gather soft information that is not captured in a credit score; having a physical presence in a neighborhood makes interactions possible.
  4. What are the advantages to lenders of new tools such as credit scores; arm's-length business models based on complex risk estimations; and other automated underwriting rules?
    • The new tools allow banks to lend wherever they want, without relying on the presence of branches, if credit bureaus provide information about applicants' past borrowing and repayment habits. This information is a good indicator of a borrower's future behavior. It may not be as good as getting to know a borrower, but it is cheaper than maintaining a branch; the saved expense compensates banks for the higher risk.
  5. Who benefits the most from neighborhood banking?
    • Those who benefit most are low-income borrowers with tainted credit histories, who find it difficult to obtain credit from banks that use automated underwriting criteria, such as credit scores. These borrowers benefit from any information that is not captured by credit scores but can be provided by a relationship with lenders. Low-income homebuyers who obtain their mortgages from banks with branches in their neighborhoods are less likely to default than homebuyers who use banks that have no neighborhood branches.