Bank branch closures hurt rural America the most

Americans in rural parts of the country have been hit hard by bank closures as they lose access to services for which they struggle to find substitutes, raising their costs and contributing to their economic malaise, according to a newly released study.

Researchers at the Federal Reserve said in a new study (pdf) that, as post-crisis banking industry consolidation brings branch closures, "some consumer segments appear to have been left without sufficient, convenient, and low-cost access to the financial services they need to manage their financial lives."

People hit the hardest by the trendwhich has seen 51 percent of America's 3,114 counties lose bank branches-are those on low incomes and lacking reliable transportation, as well as small business owners and seniors.

One of the ways people adapt to bank closures is by using online financial services. The authors note, however, that the shift to digital channels is slow for certain groups: seniors, the poor, the less educated, and those who live in rural areas.

But even people who have moved to online banking to meet some of their financial needs-mainly for basic functions like checking balancesreported that they rely on branches for deposit and withdrawal transactions and for resolving problems. The authors found that the closing of local banks could mean loss of civic leadership and the impact of the trend "appears to involve a communitylevel effect that goes beyond the effects on particular individuals."

"The loss of banks creates direct costs in terms of residents' access to financial services, but there are also large indirect costs," Richmond Fed president Thomas Barkin told Axios.

"They invest in their communities, educate others about finances, create incentives for other businesses and signal a community's vibrancy," Barkin added. The Fed also found that small business owners would likely face credit constraints due to branch closures. Most small businesses borrow from local banks and, researchers said, loan costs grow as the distance between a business and the branch of its lender increases.

Noting the importance of access to comprehensive financial services for families and businesses to thrive, the Fed called for all stakeholders to take part in dialogue "to identify potential partnerships, strategies, and policy changes that can strengthen access to financial services in these deeply affected communities."

"Access to a robust suite of financial services is critical for families and businesses so they can successfully

manage their financial lives, and build a cushion of wealth that can provide stability and support economic opportunity and mobility over the long term," the Fed said.

Despite the benefit of local bank branches for communities, the trend for closures is likely to continue.

"It's obviously not going to go to zero, but I would expect it to continue," said James Barth, a finance professor at Auburn University, according to S&P Global Market Intelligence.

"Banks are deciding you don't need as many branches. You need them in strategic locations where you can have the biggest bang for your buck."

Part of the thrust behind the Fed's study is that consumer and community groups have, in recent years, raised concerns about the effects that bank branch closures and financial industry consolidation are having on access to financial services in low-income communities and those that were already underbanked.

The Fed, besides setting monetary policy, also does research into the economic and financial health of communities across America and examined bank branch trends and how consumers and small businesses in affected areas use bank branches to satisfy their financial needs. For parts of the study, researchers also relied on information gathered at community listening sessions.

One of the key takeaways from these listening sessions was that besides facing the hardship of reduced access to certain financial services after a bank branch closure, some community members said that even before the branch disappeared, the services were inadequate. Several people described how bank employees told them outright that "the bank did not lend in their community."

The Fed also noted a substantial drop in the number of bank headquarters located in rural markets, with more than 100 banking markets going from hosting the headquarters of at least one bank to containing no bank's headquarters. The researchers pointed out that nearly all of the markets with no bank headquarters were rural.

Community stakeholders said that this development could have a negative impact on local markets as "banks are more attuned to the needs of the communities in which they are headquartered."