Lower Income Neighborhoods Losing Bank Branches, But Need Them Most

The once-grand Ohio Savings branch has been empty for a year.
Given the rise of ATMs and online banking, it’s probably not a surprise that the number of brick-and-mortar bank branches has been declining nationwide. But a recent analysis from SNL Financial finds they’ve been closing faster in poor neighborhoods than rich ones. And, when they close, not only does it mean less access to credit, but higher default rates too. That’s one more setback for our region’s struggling neighborhoods as they try to rebound.

A former branch of Ohio Savings Bank on Cleveland’s east side is quickly becoming an eyesore in Lynne Alfred’s neighborhood.

Lynne Alfred stands in front of the former Ohio Savings branch.

“There’s litter and trash around. And, the paint is peeling,” said Alfred, who runs a shop down the street.

The branch closed a year ago —  a rent dispute the bank said. Its $23 million in deposits were transferred miles away to other locations.

With its red brick and white columns, the branch served as a kind of local landmark.

“It was a magnificent gateway to the Larchmere neighborhood,” Alfred said.

Alfred and her husband have lived in the area for years. She remembers when they needed a loan, they used to just walk to the branch.

“We’d sit down and talk about it and we’d fill out the paper work and that was it,” she said. “It was very easy, very friendly. We knew them and they knew us.”

The former bank was a kind of landmark in the area.

Emre Ergungor is a senior research economist with the Federal Reserve Bank of Cleveland. He said this kind of relationship reminds him of a movie shown a lot this time of year: It’s a Wonderful Life, with George Bailey and his Building and Loan Association.

Conventional wisdom these days is that online banking and credit scores make this kind of George Bailey-style relationship obsolete. But in research he’s done looking at branch closures in the Cleveland area, Ergungor finds that’s not always the case.

“Those kinds of relationships still matter in a small corner of the lending world and that’s where the low income individuals live,” Ergungor said.

Ergungor was surprised to learn how much losing a bank branch affects a lower income neighborhood like Larchmere, where half of all residents make less than $50,000 a year. Not only do locals find it harder to get loans, but loan defaults go up too.

“It’s a no-win situation,” he said.

Ergungor thinks this is because credit scores are no substitute for the judgment  of a local banker. A banker may know so-called soft information: like how a loan applicant’s employer is doing? Or, how they’ve handled unexpected expenses like emergency medical bills. That helps the bank make a better decision about who should get a loan. People can have the same credit score but completely different approaches to repaying their debts.

But here’s the thing. Even though it can be riskier for a bank to rely on credit scores alone, they often lose less money on defaults than it costs to keep a branch open.

“The only thing that goes through bank management’s mind is: can we make money on that branch?” said Bill Mahnic, who teaches banking and finance at Case Western Reserve University.

This group has been pressuring the bank to reopen for the last year.

Many in the Cleveland’s Larchmere neighborhood believe their business should have been enough to keep their bank open.

As their Ohio Savings branch was closing last year, one man collected 300 signatures protesting the move. That led to this group of fifteen or so community members who meet regularly in churches or libraries to figure out ways to bring a brick-and-mortar bank back to their neighborhood.

Alanna Ferguson

Some like Alanna Ferguson worry not just about access to credit, but about the elderly and disabled who can’t get to other branches. And, worse, she worries the shuttered bank signals that the community is on the decline.

“Perception is everything,” Ferguson said. “And, if people perceive that there’s no money in the community, or no real concern about home improvement or maintaining property, or doing financial transactions, then certainly it can give that kind of perception.”

And, perception can lead to reality.