The United States has a decades-old tradition of encouraging banks to keep their branches open in low- and moderate-income areas. Under the Community Reinvestment Act, banks are not only encouraged to maintain branch presence in such locations, but they are also expected to meet the credit, investment, and banking services needs of the low- and moderate-income areas around those branches.
However, as populations and economic activity decline in some areas, banks face a special problem. Even if every bank is acting responsibly under the CRA and trying to treat communities consistently by maintaining the same branch density (number of branches per capita), the number of branches will inevitably decline in sync with the decline in population and profitable business opportunities. This means that the access to banking services may degrade for some members of the community as they have to travel greater distances to find a bank branch.
While this is surely inconvenient, our research suggests that greater distance from a bank has implications that go beyond mere inconvenience. Unlike cars or 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 without a lender with local experience; that is, some creditworthy people may not be able to get credit even if they travel to the next bank branch miles away. Thus, brick-and-mortar branches provide tangible benefits to consumers, especially in low- and moderate-income neighborhoods. A physical bank presence leads to at least two measurable benefits: It makes it possible for creditworthy borrowers living there to obtain loans, and it leads to lower rates of default among them.
While the commentary does not make a convincing argument that federal regulators need to add more CRA regulations to insure thatnbranch density is even across all geographic areas, it does make the argument that it is in an institutions best interest to cross sell to their own customers
For additional information please read the entire commentary: http://www.clevelandfed.org/research/commentary/2011/2011-13.cfm
