A new Federal Reserve Board study contradicts the growing belief that branches are becoming expensive relics, saying that they remain vital to a bank's future.

Fed economist Stephen A. Rhoades wrote in the staff study that consumers pick a bank based on its branches: no neighborhood branch, no business.

Banks throw away this advantage they hold over nonbanks, which generally lack neighborhood offices, whenever they close down a branch, he wrote.

Mr. Rhoades said he understood why banks want to replace branches with automated teller machines and computer banking. These services are much less expensive to deliver.

But he urged bankers to resist massive branch closings until they can convert their customers to electronic banking. Right now, customers just are not comfortable enough with electronic banking to give up their local branch, he said.

Mr. Rhoades found that banks today operate 25% more branches, 56,397, than in 1980 although the number of banks has fallen nearly 27% during that period.

Bankers continued opening branches even as the industry became less profitable in the 1980s, Mr. Rhoades found. They even opened new offices during the depth of the banking crisis in 1989, he said.

The economist dismissed the fivefold rise in ATM transactions from 1980 to 1994, saying customers use the machines to get cash rather than to do banking.

Mr. Rhoades devoted much of his 29-page study to reporting the latest facts on bank mergers.

He said the 6,347 mergers from 1980 to 1994 had involved $1.2 trillion of acquired assets. The appetite for acquisitions was most ferocious in the mid-1980s when large banks gobbled up hundreds of smaller competitors.

Banks today are still hungry for mergers, he said. But they are looking at fewer, although larger, targets. This change explains why the average size of the acquired bank jumped from $54 million in 1980 to $251 million in 1994, he said.

Banks didn't show a preference for in-market versus out-of-market mergers, splitting their deals almost evenly between the two categories.

The mergers have left fewer competitors in many markets, he wrote. The top 10 banks controlled 27% of all U.S. deposits, and the top 100 institutions had 65% of the deposit market in 1994.

Mr. Rhoades said he expects the merger trend to continue during the next few years as interstate banking kicks in. Similar merger spurts have ensued whenever lawmakers have made it easier for banks to expand, he said.

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