ABANDON SHIP: How Banks Closed Their Doors As US Economy Reopened

Banks continue to close their branches – and in a manner that contradicts top banking executives’ proclaimed commitment to closing racial economic divides.

Large banks used the first year of the pandemic as an opportunity to radically accelerate branch closures, a cost-cutting initiative that primarily benefited bank shareholders while forcing customers into digital banking systems whether they liked it or not. Closure rates doubled in the first 15 months after COVID-19 reached the US, as NCRC reported last winter.

If the pandemic’s effects on in-person commerce were the true driver of the banks’ withdrawal from brick-and-mortar services, one would expect to see this trend slow in the 2021-22 figures. The wide availability of vaccines and commensurately widespread easing of government restrictions and social isolation meant people once again wanted to go to places to do things. If this reopening weren’t enough to change bank behavior, surely the prominent pledges many large banks made to racial equity following the murder of George Floyd should have also encouraged those firms to stabilize or even restore branch locations. The link between face-to-face banking relationships and broader economic equity issues is well established.

Instead, however, industry-wide closure rates from July 2021 through June 2022 maintained the same levels as NCRC identified in the prior year. Roughly 200 bank branches closed each month, according to annual branch data collected by the Federal Deposit Insurance Corporation (FDIC).

The Numbers

The FDIC collects data each June on all of the bank branches in operation across the US. In our earlier report, The Great Consolidation Of Banks And Acceleration Of Branch Closures Across America, we found that since the start of the pandemic in March of 2020 banks had greatly accelerated the pace of branch closures across American communities. After averaging 99 closures per month before that time, the industry literally doubled its efforts to reduce in-person service: 201 bank branches closed each month from March 2020 through June 2021. This meant that of the 7,500 brick-and-mortar banks that shuttered from 2017 to 2021, well over half were eliminated in the immediate aftermath of the pandemic.

We also noted the worrisome geography of the industry’s retreat. Low- to moderate-income (LMI) and minority neighborhoods were hit hard. One-third of the branches closed from 2017 to 2021 were in a low- to moderate-income and/or a majority-minority neighborhood where access to branches is crucial to ending inequities in access to financial services. Even if individual bank closures were done equitably, the lack of branch access in these communities guarantees that such closures will have a disparate impact on minority and LMI neighborhoods.

The world changed a lot in the following year. The pace of bank branch closures did not.

A further 2,457 branches closed in the most recent 12-month snapshot from the FDIC. From 2020 to 2021 3.8% of branches were closed, from 2021 to 2022 another 3.2% were lost.

Why Should We Care If Banks Close Branches In The Smartphone Age?

Bank branch closures matter because banks act as the gatekeepers to commerce. When a community loses its last branch, it essentially puts a billboard on its main street that says the town is now closed for business. The resulting cycle of hyper-localized harms is simple: Bank staff stop spending salaries nearby and stop contributing to the leadership of local communities. Perhaps worse, the networks those professionals formed wither away, killing off a compelling draw for firms to bring new jobs. Local businesses leave but new firms may not replace them.

Small businesses still rely on local bank branches – and as we noted in our report, Relationships Matter. While consumers can still reach out to an out-of-town bank or go online to find a high-yield savings account, those options will never drive business activity. Local bank staff have to find business or else they will risk losing their jobs. And local business owners or struggling homeowners stand a far better chance of obtaining flexibility in a crisis if they can go sit down with the same human beings who they’ve known for years than if their only recourse is an algorithmic online portal or an 800 number that dumps them into a tortuous robotic phone tree. Rural communities often suffer the most when branches close. In those places other lending options don’t exist, and when branches close small business lending dries up.

Moreover, if a bank closes all of its branches in an area, it no longer has an obligation to serve the needs of that community when they are examined under the Community Reinvestment Act (CRA). A CRA commitment may compel a bank to think creatively to meet banking needs, such as deploying deeper underwriting to support a community development loan or looking for relationships with area community development financial institutions. Ultimately, a decline in-community reinvestment activities follows from the loss of bank branches. NCRC has several key recommendations for how CRA should be modernized to support community investment as banks continue to scale back on their physical locations.

The impact of these closures is complex and varies based on several factors. As we noted in the past, for most banks the link between mortgage lending and branch locations has declined over time. However, branch locations are still critical resources for small businesses. But bank consumers see uneven impact from closures as well. The FDIC found that in 2021 there remained a substantial variation in the percent of unbanked households by race and income. Not only were lower income families much less likely to have a bank account, even wealthy Black and Hispanic people were not as likely to have a bank account as White non-Hispanic consumers.

Bank Branch Closures Perpetuate Racial Wealth Gaps

The mass nationwide protests for racial justice sparked by George Floyd’s murder prompted many banks to announce commitments to restore the economies of black communities. They grasped that economic justice contributes to equality, not just financially, but in ways that reverberate through our society in less-obvious ways, as NCRC has documented in pioneering work on CRA’s links to redlining and public health outcomes, climate change remediation and gentrification.

The many-fold threat bank branch closures pose to local economic activity in general are even more pronounced in the communities that bankers promised to aid in that turbulent summer. But bank branch closure data suggests that harmful trends will continue – thus calling into question the sincerity of those industry promises.

Caption: At every income level there is a large gap in the percentage of unbanked households by race.

While the overall percentage of unbanked Americans has steadily declined from 8.2 % in 2011 to 4.5% in 2021, Black and Hispanic households are over four and five times as likely to be unbanked, respectively, compared with White non-Hispanic. Even for those households making more than $75,000 a year a Black family is five times more likely to be unbanked than their White counterparts.

When branches close we know that local businesses suffer. Less certain is the connection between unbanked people and bank branches. As bank branch locations have shuttered at a breakneck pace since the pandemic the percentage of households that are unbanked has fallen off sharply as well.

2021 saw a continuation in the decline of unbanked households that started in 2011. This coincides with several other changes, as online banking and mobile banking have become the primary way people interact with their bank. Does this mean that a local branch is less important to households or are households being forced to use these tools in cases where a branch would be more useful? Has the rise of fintech firms played a role, as new market actors aggressively seek out consumers that might not necessarily care about the lack of branches? When we look at the rapid changes occurring to bank branches it is important to consider their role in modern banking as well as the specific groups that might be disproportionately left out of this new, smaller, branch network future.

It is difficult to predict the future of bank branches in the US. Branch closures have been at historically high levels since the pandemic began, a pattern that seems unlikely to change soon. Contrarily, bank mergers and acquisitions have slowed, reducing the intensity of one key driver of branch closures. We may see more branches being kept open. Or this could be just a pause as banks realign their branch networks post-pandemic.

In addition, this is the first year that we have looked at branches compared with the 2020 census boundaries. Every decade the US Census Bureau evaluates population growth and adds additional census tracts. Census tract boundaries matter. This realignment has the greatest impact in urban areas as populations shift rapidly. When this happens, it can redefine if a neighborhood is considered low-or-moderate income or majority minority. Using these new tracts in 2022 appears at a glance to show sharp increases in the number of branches located in majority minority tracts (as well as middle- and upper-income ones).

But looks can be deceiving. Our initial observation is that this doesn’t appear to indicate a great increase in new branches, but rather that as the new tracts were created a large number of branches were included in census tracts that are majority minority but not low or moderate in income. Further research would be needed to understand this pattern better. Are these branches located in wealthy ethnic enclaves? Or are they in rapidly gentrifying communities where Black and Latino residents are threatened by displacement?

Furthering our understanding of what is happening to physical branch locations is critical to better understand how to spur economic investment in LMI and minority communities. As banks continue to close branches at historic levels, communities must rethink how banks and banking are shaping the investment landscape. Can this shift in banking help bring more investment to communities that have historically had less access to the banking world? Or will its impacts break down along traditional lines of race and class to create a new form of digital banking segregation?

Featured image:  "Apocalyptic desert" via Dall-e