A Study of Cross-Market Branch Banking in Illinois: A Multiple Regression Quadratic Assignment Procedure Approach

A Study of Cross-Market Branch Banking in Illinois: A Multiple Regression Quadratic Assignment Procedure Approach

Bin Zhou (Department of Geography, Southern Illinois University Edwardsville, Edwardsville, IL, USA)
Copyright: © 2016 |Pages: 15
DOI: 10.4018/IJAGR.2016010101


This paper investigates the role of a host of geographical factors in shaping the cross-market branch banking network, using Illinois as a case study. The study adopts the multiple regression quadratic assignment procedure from social network analysis in non-parametric estimation. The research finds that cross-market branch banking is subject to distance decay. While the urban place hierarchy (including market size and population density) contributes positively to the role of places as control centers, its role in forming cross-market branch banking markets is more profound. The network centrality contributes positively to places' role as market centers, as does market concentration. Income level is positively associated with the role of control centers. Inward interstate banking tends to weaken the role of a place as a control center and market center. The information, art/entertainment, and government sectors play a positive role in attracting branch banking while the role of the retail is negative. The information industry is also a positive factor in forming control centers.
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Why Do Banks Branch?

Financial intermediaries, banks included, collect funds from savers and reallocate them to fund users. Financial intermediation involves gathering customer information and monitoring loan performance. These activities carry real costs and risks. A portion of the transaction cost is associated with distance and location (Brevoort & Wolken, 2009). Retail banking customers (individuals and small and medium-sized firms) are attached to specific locations. Thus, banking market information is location-specific and retail banking services are local in nature (Hannan & Prager, 2001) contributing to geographic fragmentation and location-based sub-markets.

To bridge fragmented markets, banking institutions with a branch office structure emerge as a solution. Placing offices in various locations enables banks to tailor their services to local conditions. At the same time, branch offices are overseen by the head office to ensure institutional integrity. Multi-location and multi-market banking also allows banking institutions to grow in size, providing benefits such as sharing bank reserves, economies of scale, and geographical diversification in portfolios and customer base (Carlson & Mitchener, 2006; Wheelock, 1992). Studies confirm that the branch banking system promotes competition and weeds out weaker banks, which helps make the banking system as a whole less prone to banking crisis than the unit banking system (Carlson & Mitchener, 2006; Wheelock 1992).

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