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I used to wonder why Midtown Manhattan had so many bank branches, especially the redundant branches a mere block or two away. How could that be the highest and

by leelin 11y ago

I used to wonder why Midtown Manhattan had so many bank branches, especially the redundant branches a mere block or two away. How could that be the highest and best use of prime commercial store frontage in a competitive market? I figured out in 2009, when I was working at a hedge fund trying to bid on the assets of bankrupt banks post financial crisis. Basically, every branch loses money to gain depositors. All the fees on monthly accounts, safety deposit boxes, ATMs, cashiers checks, etc. do not offset the cost of the office and employees. However, if the loss is small compared to the volume of deposit money the branch attracts, then the bank headquarters has "borrowed" money at a very low cost. I think a typical suburban Countrywide or Washington Mutual branch was losing about $100K/yr but had deposits of $20M; not bad at all considering Fed Funds had been around 5.25% until fall of 2007, and that having the capital was the life blood necessary to do all the profitable operations (originating mortgages, credit cards, student loans, EDIT: meet regulatory capital requirements, etc). In Midtown, those numbers might be multiplied many fold, so very few retail stores can compete and stay profitable.

devy 11y ago
Very informative for people from fields.
roymurdock 11y ago
This is fascinating - I had never thought about commercial banks making obfuscated investments in real estate by opening branches in hot markets before. Whatever money they lose on wages, construction, depreciation, amortization, overhead, etc. they make up on the appreciating underlying value of the land, increased brand presence (read: expensive advertising), and increased ability to secure federal funds due to higher assets as collateral on their balance sheet. This could make for an interesting leading indicator for a real estate cooldown, and even a recession if extrapolated out: When commercial banks start closing down commercial branches, we can conclude that either a) value generated by the appreciation of the real estate is slowing down or b) the value of the deposits in the area is not growing fast enough (people are not saving, with banks at least). Also, it's worrying to see the that the true value of a branch is that of an investment and an asset against which to secure cheap federal loans. That these unprofitable branches exist for these purposes implies a huge misdirection of resources and energy from sustainable demand creation to rent-seeking, speculation, and poor fiscal policy that incentivizes banks to prop up hot real estate markets in order to secure Fed funding. The Citibank branch that I use will be closing in January...
- WalterSear 11y ago
  San Francisco is littered with giant Wells Fargo locations with 30ft+ ceilings, and dozens of employees just hanging around, waiting for a customer to help. In the financial district, it feels like there's one on every block.
  - zeckalpha 11y ago
    > Wells Fargo & Company is ... headquartered in San Francisco, California. https://en.wikipedia.org/wiki/Wells_Fargo https://en.wikipedia.org/wiki/Wells_Fargo
    - WalterSear 11y ago
      And how does that explain why they have an oversized retail branch on every corner of the financial district?
- RockyMcNuts 11y ago
  No reason to obfuscate AFAIK. A bank can just as easily buy a building and rent it out at a profit instead of putting a money-losing branch there. I don't think banks are generally prohibited from investing in real estate, subject to other risk-based capital and liquidity requirements. If there's some loophole that results in an owned branch being treated differently from investment real estate, I'm not aware of it. In NYC anyway, banks typically rent branches. They don't want to be in the real estate and property management business, although they often end up in it involuntarily after foreclosures.
  - roymurdock 11y ago
    You're right - it's less about obfuscation, and more about figuring out the strange incentive structure behind many bank's decisions to open a ton of branches in hot real estate markets. I'm not sure how bank investments in real estate work, but as long as a branch is bringing in a steady flow of deposits it would be much more attractive than a standard real estate investment. Those deposits bolster the bank's reserve requirement [1] and the banks then earn interest (0.25%) on these reserves as of 2008.[2] In a world of zero and negative interest rates on short-term, safe debt, [3] I would imagine deposits would be an attractive revenue stream for a commercial bank with guaranteed upside and little downside, and that the major cost of leasing/buying the real estate to set up a branch would be negligible, especially if the land was increasing in value. So branches will be shut down when the land starts decreasing in value, or when the flow of deposits into the banks slows down due to a lower propensity to save (not likely in a recession), or due to people earning less disposable income in the first place (more likely in a recession + stagnant wage growth). Both are very bad signs for the economy. [1] https://en.wikipedia.org/wiki/Reserve_requirement https://en.wikipedia.org/wiki/Reserve_requirement [2] http://www.federalreserve.gov/monetarypolicy/reqresbalances.htm http://www.federalreserve.gov/monetarypolicy/reqresbalances.... [3] http://www.wsj.com/articles/u-s-treasury-bonds-pull-back-1444052528 http://www.wsj.com/articles/u-s-treasury-bonds-pull-back-144...
RockyMcNuts 11y ago
Kind of makes you wonder why there are still so many branches when the bank can borrow for next to nothing and has billions in excess reserves parked at the Fed.
nostrademons 11y ago
I thought it was pretty well-known that you're the product of a bank, not the customer. I don't pay any fees to my bank (my balance is high enough that they waive them all), and they actually pay me some miniscule interest rate. But in return they get to use my savings to make loans on high-priced mortgages and credit cards, which earns them literally thousands in interest charges. Retail banking locations are a market-share grab. They want to make it as convenient as possible to put your savings in a bank, because then they have access to your deposits, which can be loaned out as a lucrative product. It's much like the Chrome Omnibox or Google Toolbar for Google, or the Facebook mobile app. These derive no revenue, but they make it as convenient as possible to use the company's products. That user attention can then be sold to advertisers for a nice profit. Ditto Hacker News as well - your comments here don't benefit YCombinator at all, and they have to spend money maintaining & moderating it. However, insightful comments on HN attract intellectual people interested in startups, which are YCombinator's prime customer demographic, and so your contributions here are effectively very cheap advertising for YCombinator.
- branchless 11y ago
  I'm like you, but realise that you are paying a fee by keeping your balance high enough in a low interest account to avoid other fees. I like to have cash at the ready but that doesn't matter to the bank. They get 1 or 2k for nothing.
- titzer 11y ago
  The real reason they want depositors is fractional reserve banking. If you deposit $1, they can go borrow $10 from the federal reserve, loan it out, and be making interest on $10 of created, loaned money.
  - branchless 11y ago
    The bank of england called with some bad news: http://bankunderground.co.uk/2015/06/30/banks-are-not-intermediaries-of-loanable-funds-and-why-this-matters/ http://bankunderground.co.uk/2015/06/30/banks-are-not-interm...
  - 11y ago
ALee 11y ago
The same applies to why there is a McDonald's on the Champs Elysse in Paris, in the heart of Beijing, New York City, etc. It's a loss for the location, but it's really just an investment vehicle where the land itself is not being used for traditional purposes.
- jsn117 11y ago
  and all retail establishments on major/famous streets
- angelbob 11y ago
  McDonalds is very open about investing in real estate. They own all their own locations. The restaurant is basically just to pay the rent on the land they own.
- mikeash 11y ago
  Paris, maybe, but I'd be surprised if McDonald's loses money in Beijing. Their prices are high for that market and yet somehow they're always very busy.
lhh 11y ago
This isn't really them "losing money" then, right? Generally, a bank's business model is to borrow money at X% (where X = interest paid to depositors) and lend at Y%, where Y > X, and where that interest revenue exceeds operating costs. I'd be surprised (and appalled) if they actually turned a profit just on fees.
cylinder 11y ago
You're not really making any sense. By your own account, they are making money by accepting deposits. They aren't losing money by having branches because they make money on deposits they wouldn't have had without branches. All you've really said is "banks make money off deposits"

by leelin 11y ago

devy 11y ago

Very informative for people from fields.

roymurdock 11y ago

This is fascinating - I had never thought about commercial banks making obfuscated investments in real estate by opening branches in hot markets before. Whatever money they lose on wages, construction, depreciation, amortization, overhead, etc. they make up on the appreciating underlying value of the land, increased brand presence (read: expensive advertising), and increased ability to secure federal funds due to higher assets as collateral on their balance sheet. This could make for an interesting leading indicator for a real estate cooldown, and even a recession if extrapolated out: When commercial banks start closing down commercial branches, we can conclude that either a) value generated by the appreciation of the real estate is slowing down or b) the value of the deposits in the area is not growing fast enough (people are not saving, with banks at least). Also, it's worrying to see the that the true value of a branch is that of an investment and an asset against which to secure cheap federal loans. That these unprofitable branches exist for these purposes implies a huge misdirection of resources and energy from sustainable demand creation to rent-seeking, speculation, and poor fiscal policy that incentivizes banks to prop up hot real estate markets in order to secure Fed funding. The Citibank branch that I use will be closing in January...

WalterSear 11y ago
San Francisco is littered with giant Wells Fargo locations with 30ft+ ceilings, and dozens of employees just hanging around, waiting for a customer to help. In the financial district, it feels like there's one on every block.
- zeckalpha 11y ago
  > Wells Fargo & Company is ... headquartered in San Francisco, California. https://en.wikipedia.org/wiki/Wells_Fargo https://en.wikipedia.org/wiki/Wells_Fargo
  - WalterSear 11y ago
    And how does that explain why they have an oversized retail branch on every corner of the financial district?
RockyMcNuts 11y ago
No reason to obfuscate AFAIK. A bank can just as easily buy a building and rent it out at a profit instead of putting a money-losing branch there. I don't think banks are generally prohibited from investing in real estate, subject to other risk-based capital and liquidity requirements. If there's some loophole that results in an owned branch being treated differently from investment real estate, I'm not aware of it. In NYC anyway, banks typically rent branches. They don't want to be in the real estate and property management business, although they often end up in it involuntarily after foreclosures.
- roymurdock 11y ago
  You're right - it's less about obfuscation, and more about figuring out the strange incentive structure behind many bank's decisions to open a ton of branches in hot real estate markets. I'm not sure how bank investments in real estate work, but as long as a branch is bringing in a steady flow of deposits it would be much more attractive than a standard real estate investment. Those deposits bolster the bank's reserve requirement [1] and the banks then earn interest (0.25%) on these reserves as of 2008.[2] In a world of zero and negative interest rates on short-term, safe debt, [3] I would imagine deposits would be an attractive revenue stream for a commercial bank with guaranteed upside and little downside, and that the major cost of leasing/buying the real estate to set up a branch would be negligible, especially if the land was increasing in value. So branches will be shut down when the land starts decreasing in value, or when the flow of deposits into the banks slows down due to a lower propensity to save (not likely in a recession), or due to people earning less disposable income in the first place (more likely in a recession + stagnant wage growth). Both are very bad signs for the economy. [1] https://en.wikipedia.org/wiki/Reserve_requirement https://en.wikipedia.org/wiki/Reserve_requirement [2] http://www.federalreserve.gov/monetarypolicy/reqresbalances.htm http://www.federalreserve.gov/monetarypolicy/reqresbalances.... [3] http://www.wsj.com/articles/u-s-treasury-bonds-pull-back-1444052528 http://www.wsj.com/articles/u-s-treasury-bonds-pull-back-144...

RockyMcNuts 11y ago

Kind of makes you wonder why there are still so many branches when the bank can borrow for next to nothing and has billions in excess reserves parked at the Fed.

nostrademons 11y ago

I thought it was pretty well-known that you're the product of a bank, not the customer. I don't pay any fees to my bank (my balance is high enough that they waive them all), and they actually pay me some miniscule interest rate. But in return they get to use my savings to make loans on high-priced mortgages and credit cards, which earns them literally thousands in interest charges. Retail banking locations are a market-share grab. They want to make it as convenient as possible to put your savings in a bank, because then they have access to your deposits, which can be loaned out as a lucrative product. It's much like the Chrome Omnibox or Google Toolbar for Google, or the Facebook mobile app. These derive no revenue, but they make it as convenient as possible to use the company's products. That user attention can then be sold to advertisers for a nice profit. Ditto Hacker News as well - your comments here don't benefit YCombinator at all, and they have to spend money maintaining & moderating it. However, insightful comments on HN attract intellectual people interested in startups, which are YCombinator's prime customer demographic, and so your contributions here are effectively very cheap advertising for YCombinator.

branchless 11y ago
I'm like you, but realise that you are paying a fee by keeping your balance high enough in a low interest account to avoid other fees. I like to have cash at the ready but that doesn't matter to the bank. They get 1 or 2k for nothing.
titzer 11y ago
The real reason they want depositors is fractional reserve banking. If you deposit $1, they can go borrow $10 from the federal reserve, loan it out, and be making interest on $10 of created, loaned money.
- branchless 11y ago
  The bank of england called with some bad news: http://bankunderground.co.uk/2015/06/30/banks-are-not-intermediaries-of-loanable-funds-and-why-this-matters/ http://bankunderground.co.uk/2015/06/30/banks-are-not-interm...
- 11y ago

ALee 11y ago

The same applies to why there is a McDonald's on the Champs Elysse in Paris, in the heart of Beijing, New York City, etc. It's a loss for the location, but it's really just an investment vehicle where the land itself is not being used for traditional purposes.

jsn117 11y ago
and all retail establishments on major/famous streets
angelbob 11y ago
McDonalds is very open about investing in real estate. They own all their own locations. The restaurant is basically just to pay the rent on the land they own.
mikeash 11y ago
Paris, maybe, but I'd be surprised if McDonald's loses money in Beijing. Their prices are high for that market and yet somehow they're always very busy.

lhh 11y ago

This isn't really them "losing money" then, right? Generally, a bank's business model is to borrow money at X% (where X = interest paid to depositors) and lend at Y%, where Y > X, and where that interest revenue exceeds operating costs. I'd be surprised (and appalled) if they actually turned a profit just on fees.

cylinder 11y ago

You're not really making any sense. By your own account, they are making money by accepting deposits. They aren't losing money by having branches because they make money on deposits they wouldn't have had without branches. All you've really said is "banks make money off deposits"