Does Geography Matter?

Abstract

This study investigates the role of geography in shaping the average bank office size in Illinois banking. “Geography” here refers to a host of socioeconomic, demographic, and local community characteristics at the bank market level. The study finds that larger bank markets, higher levels of market concentration, higher percentages of whites within the total population, and less physical fragmentation within a geographical bank market contribute to larger average bank office sizes. The use of technology, represented by higher percentages of physical capital and premises in the total assets, is found to reduce the bank office size. This tendency is further reinforced by a lack of economies of scale at the bank office level. At the same time, the study finds that the greater adoption of internet banking is associated with larger bank offices. These findings provide indirect evidence that market structure has an impact on the adoption of alternative banking technologies. A study of bank office size has practical implications in providing insights into the future branch strategy, as well as the inadequate nature of measures of market power currently used in antitrust regulation.