If I tally up all the retail businesses with in a mile of my house one category stands out. Retail banking offices are an invasive weed on the local landscape; a persistent weed. Presumably rational business men over the last year have built quite a few new branch offices in my town. Demand for banking services certainly hasn’t increased. Our economy and demographics is very stable and looks likely to stay that way. The reasons for this blight must lie elsewhere.
But where? Here’s my guess. There is tremendous pressure on firms to grow, and to take risks to enable that growth. The rules of the game are, oddly, structured so that on average these bets don’t work out very well. For the investor this is a statistical curiosity, a lot of risky bets plus some diversification creates higher return. For the firm’s employees and neighbors it’s an offputting realization.

In the days when banking was closely regulated business banks expanded by building new branches, and enticing customers to open accounts. The classic enticement was a toaster.

When society discarded the regulations against bank consolidation the route to growth was acquisition. Growing companies by acquisition is risky; it creates a slew of coordination problems to be solved. If your lucky you get some economies of scale. Modern IT has made banking pretty efficient. Bank acquisition was one way that IT efficiency spread through the system. So I’ll buy that there was some cost and efficiency drivers for the rollup of banking over the last few years.

I gather that’s pretty much played it’s self out. The banks that were available to be acquired have become a scarce commodity. No doubt this has created demand for more. Some of the new branches are tiny banks building additional branches, and I think they are dressing up for acquisition.
Banks are now returning to their traditional growth strategy; i.e. opening new branches. I doubt there are powerful technological drivers for this; but there are regulatory ones. Citibank, which recently announced plans to build numerous new offices around the Boston area, can do that because of regulatory change and when you combine it with the scarcity of banks available for acquisition it’s their cheapest route to growth.

Apparently all the largest banks are playing this game, which goes by the name de novo branching (note that link is 2003). What’s a bit disturbing is the realization that mot of these giants are not yet on the ground in my town; so it seems not unlikely we are going to get a lot more banks real soon now. Their investors demand that they grow; they don’t care that my town is way over banked;