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This is fascinating - I had never thought about commercial banks making obfuscated investments in real estate by opening branches in hot markets before. Whatev

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...
  - yxhuvud 11y ago
    Branches can also be shut down when the use of physical cash in society tapers off. This is already happening here in Sweden - bank offices here is increasingly only used for managing accounts and lending money.

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...
- yxhuvud 11y ago
  Branches can also be shut down when the use of physical cash in society tapers off. This is already happening here in Sweden - bank offices here is increasingly only used for managing accounts and lending money.