April 14, 2020

When a bank branch closes, rural communities suffer in varied ways, Fed research suggests.

Late last year, the Federal Reserve published a report on the effect of bank branch closures for rural consumers and small businesses. It found that between 2012 and 2017, urban and rural counties both had a decline of 7 percent in the number of bank branches.

Yet some counties analyzed by Fed researchers experienced more serious effects, having had 10 or fewer branches in 2012 and losing at least half of them by 2017. Of those counties, 89 percent were rural, and they tended to be poorer, had residents with less education, and included a higher share of people of color compared with other rural counties, the report said (see the map).

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More than merely reading the data

To understand the effect of branch closures, staff from Federal Reserve Banks spoke with consumers, business owners, and government officials nationwide to learn how the changes the data revealed were affecting people and communities. A team from the Atlanta Fed’s community and economic development (CED) group and Supervision, Regulation, and Credit (SRC) Division met with residents of Madison County, Florida, which had seen more than a 50 percent reduction in branches in the five years preceding 2017.

The effort to talk directly with communities affected by closure was driven in part by the Federal Reserve Bank of Atlanta’s commitment to understanding the range of economic experiences across its district.

The Atlanta Fed’s Sixth District includes Alabama, Florida, Georgia, and parts of Louisiana, Mississippi, and Tennessee, and bank branch closures have had a powerful impact. Across the district, 46 percent of rural counties lost full-service brick-and-mortar and retail bank branches from 2012 to 2017, compared with 41 percent of rural counties across the United States as a whole, according to Atlanta Fed calculation.

“As we think about this as a national issue, the Southeast is seeing a disproportionate effect,” said Nisha Sutaria, a research analyst in the Atlanta Fed’s CED group. 

Madison County, located on Florida’s central northern border, is served by a national bank, a community bank, and a regional bank as well as nonbank financial service providers. Its unemployment and poverty rates exceeded both state and national levels from 2013 to 2017. The discussion group of local residents included small business, nonprofit, city government, education, and real estate representatives. They said the community has been in economic decline for several years (see the chart).

The conversations with Reserve Bank representatives, held across the country, found that bank branch closures appear to have “a community-level effect that goes beyond the effects on particular individuals,” according to the Fed report. Indeed, the Atlanta Fed team found that community banks are considered important anchors in rural areas.

“Banks in the community are seen as more than just providers of financial services,” said Sameera Fazili, CED engagement director at the Atlanta Fed. “There was this notion that people who work at the bank were important members of local boards and part of the civic and social infrastructure. It was a training ground for people to go into other businesses,” she added.

The Fed report noted that people in the Florida community lost some convenience after a branch closure, with some of them opting to drive to the closest large city that had more banking options. Some residents noted that the local financial service providers that remained did not offer some of the services they preferred.

Branch closures’ effects ripple outward

“The discussion also revealed challenges for rural areas tied to demographic shifts, housing availability, lack of infrastructure, and other life issues that aren’t directly related to banking,” said Patrick Pontius, a CED principal adviser at the Atlanta Fed. “If you want to be or stay [in a rural community], it takes some real effort. People are making it work because they really want to be there or they don’t have any choices” because of a lack of resources.

Problems with technological connectivity stood out as another hurdle for the Florida county, a hurdle that can impede people’s ability to conduct their banking online. “One participant made a point that about $50 million was needed to bring broadband into the area,” said Marion Williams, a staff director in the Atlanta Fed’s SRC division. “That’s a significant amount” for a sparsely populated rural area, he added. Broadband can help bring direct access to education, health care, entertainment, and other services—including access to online banking—for rural residents who might otherwise be forced to travel long distances.

Other feedback from the discussion session highlighted the difficulties for small businesses that can result when a local bank branch closes. Small businesses value relationships with a local bank and felt loan approvals were harder to gain after a bank branch closure, the Fed report stated.

Teaming up to soften the blow

Although the report did not delve into solutions, a partnership between Regions Bank and Hope Credit Union, which both serve markets in the Southeast, provides an example of the creative problem-solving that can help communities mitigate some of the impacts of bank branch closures.

Several years ago, Regions Bank looked for a way to soften what could have been the blow to some Mississippi communities where it had decided to close branches. It found help by teaming up with Hope, a community development financial institution that seeks to aid economically distressed areas. Regions Bank donated the branches it was closing to Jackson, Mississippi–based Hope Credit Union, establishing a strategic relationship that is still paying dividends.

“We view this as mutually beneficial for both organizations,” said Jon Davies, the Regions Bank compliance executive and Community Reinvestment Act manager who negotiated the branch donations. “It allows Hope to expand and allows us to be able to exit markets where our product set and structure don’t fit well.”

With the Regions branches it acquired, Hope expanded its presence in five rural Mississippi communities and sections of bigger markets such as Montgomery, Alabama; Memphis, Tennessee; Little Rock, Arkansas; and Jackson, Mississippi. The transfers ensured that in the areas Regions left—four in which it was the only bank open for business—consumers would continue to have access to financial services such as checking and savings accounts and consumer, mortgage, and business loans.

“It is a solution that could be achieved, by this and other banking partnerships, in other communities that are at risk of losing such access,” Davies said.  

photo of Karen Jacobs
Karen Jacobs

Staff writer for Economy Matters