Unless you have been asleep or out of the country, you have noticed the bizarre spread of branch banks everywhere. At the start of the Great Recession five years ago when banks were in trouble and our government bailed them out to protect the United States financial system from failure, the big banks were considered too big to fail but needed help. So the government loaned them money to protect the big banks and the banking system.
Historically banks existed to hold deposits, transfer funds, make loans, collect interest and fees, and to pay interest to depositors and dividends to stockholders. Somehow after the Great Recession all this changed. Banks still hold deposits, transfer funds, collect interest and fees, but pay very little interest on deposits (1/4 of 1% or a $2.50/year for a $1,000 deposit) and provide very few loans.
So what are they doing with all the money they are borrowing from our government? Some are using it to make trades on the Stock Exchange while others are using the money to build branch offices. Yes, they are building branch offices. Not just one or two, but a branch office seems to pop up every mile on major roads. But why build branch offices, when customers can make deposits using their phone, withdraw money at an ATM and do most of their banking electronically?
The growth of drugstores, fast foods and gas stations, is understandable, these all pertain to items that are tangible you can hold them in your hand or in your car. But other than cash, money is not tangible, and there is no real reason to even go to a bank except to deal with a problem or arrange a loan.
So why so many branch banks? One theory is that banks are using the money they borrowed from our government at less than 1% interest rate to invest in their own real estate investments. They are using the money not to make loans to regular businesses, that’s too risky. But instead of making loans they invest in real estate for their own gain, essentially backed by our tax dollars. Yes, banks can legally invest in real estate if it is used for the operation of their business. They cannot buy an investment property like an office building or shopping center. But they can own their bank buildings. One of the regulations for the ownership of real estate by banks states, “A national bank association may purchase, hold and convey real estate for the following purposes, and no others; First. Such as shall be necessary for its accommodation in the transaction of its business.”
So banks are not making real estate loans because they are considered “too risky”, yet at the same time they are investing in real estate, through the ownership of multiple branches. Marketing experts might say this is to build brand recognition and customer loyality. We’re not so sure. The bank where I have my personal account has been Coral Gables Federal, then First Union, then Wachovia and is now Wells Fargo and I haven’t once thought of moving because of the name change. As long as my money is insured, what does the name on the door matter? Call us…we can’t explain everything, but we can provide some insight into real estate issues.
By Thomas J Dixon