Branch network overlap and bank cost efficiency

Banks operate branch networks that span multiple geographic markets. Building on theories of economies of scale, this paper examines how overlap in banks’ branch networks across markets affects cost efficiency. Using a panel of 866 U.S. bank holding companies from 1986 to 2024, we measure branch network overlap based on the similarity of banks’ branch presence across metropolitan statistical areas (MSAs). Fixed-effects estimates show that banks with greater branch network overlap exhibit significantly higher cost efficiency. Complementary instrumental-variable and robustness analyses yield qualitatively similar results. Mechanism analyses suggest that overlapping branch networks enhance cost efficiency primarily through the exploitation of economies of scale facilitated by spatial proximity. The paper contributes to the literature by extending scale economy theories to the context of banking studies and by introducing a new multi-bank measure of branch network overlap. From a managerial and policy perspective, the results inform decisions on branch expansion, consolidation, and the assessment of geographic competition in banking markets.