Branch Banking vs Unit Banking

Diffen › Finance › Personal Finance

Unit banking refers to a bank that is a single, usually small bank that provides financial services to its local community. A unit bank is independent and does not have any connecting banks — branches — in other areas. Branch banking refers to a bank that is connected to one or more other banks in an area or outside of it; to its customers, this bank provides all the usual financial services but is backed and ultimately controlled by a larger financial institution. For example, a large banking corporation, such as Chase in the U.S., owns Chase bank branches in over 20 states. Historically, many states have restricted or even prohibited branch banking to promote more localized unit banking, and independent unit banks remain relatively common. However, in 1994 most of these restrictions were repealed, giving rise to the branch banking that is common in the U.S. today.

Comparison chart

Branch Banking versus Unit Banking comparison chart
	Branch Banking	Unit Banking
About	A bank that is connected to one or more other banks in an area or outside of it. Provides all the usual financial services but is backed and ultimately controlled by a larger financial institution.	Single, usually small bank that provides financial services to its local community. Does not have other bank branches elsewhere.
Stability	Typically very resilient, able to withstand local recessions (e.g., a bad harvest season in a farming community) thanks to the backing of other branches.	Extremely prone to failure when local economy struggles.
Operational Freedom	Less	More
Legal History	Restricted or prohibited for most of U.S. history. Allowed in all 50 states following the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994.	Preferred form of banking for most of U.S. history, despite its tendency to fail. Proponents were wary of branch banking's concentration of power and money.
Loans and advances	Loans and advances are based on merit, irrespective of the status .	Loans and advances can be influenced by authority and power.
Financial resources	Larger financial resources in each branch.	Larger financial resources in one branch
Decision-making	Delay in Decision-making as they have to depend on the head office.	Time is saved as Decision-making is in the same branch.
Funds	Funds are transferred from one branch to another.Underutilisation of funds by a branch would lead to regional imbalances	Funds are allocated in one branch and no support of other branches.During financial crisis,unit bank has to close down.hence lead to regional imbalances or no balance growth
Cost of supervision	High	Less
Concentration of power in the hand of few people	Yes	No
Specialisation	Division of labour is possible and hence specialisation possible	Specialisation not possible due to lack of trained staff and knowledge
Competition	High competiton with the branches	Less competition within the bank
Profits	Shared by the bank with its branches	Used for the development of the bank
Specialised knowledge of the local borrowers	Not possible and hence bad debits are high	Possible and less risk of bad debts
Distribution of Capital	Proper distribution of capital and power.	No proper distribution of capital and power.
Rate of interest	Rate of interest is uniformed and specified by the head office or based on instructions from RBI.	Rate of interest is not uniformed as the bank has own policies and rates.
Deposits and assets	Deposits and assets are diversified,scattered and hence risk is spead at various places.	Deposits and assets are nt diversified and are at one place,hence risk is not spread.

Services and Stability

Unit banks and branch banks offer the same financial services. However, branch banks are more capable of continuing to provide services during a financial crisis, as the well-diversified parent institutions that own them are not so easily affected by events that may negatively affect a local economy (e.g., a drought in an agricultural community). Unit banks, which loan and borrow from the same groups of people, are more prone to failure in a financial crisis, so much so that some economists believe the Great Depression was made worse by the widespread existence of unit banking.^[1]

In Marcus Nadler and Jules Bogen's The Banking Crisis: The End of an Epoch, unit banking is said to "suffer from many fundamental defects" — namely that "No country boasts enough talented banking management to supply several thousand individual institutions with able direction." Moreover, regulating many independent banks "is in practice an impossible task for the regulatory authorities," meaning mismanagement easily goes unnoticed in unit banking.

Operational Freedom

Being independent of a larger financial institution, unit banks have greater freedom to make decisions for themselves. Decisions made by a branch bank are subject to the rules handed down by a central authority.

Legal and Economic History

A look at the history of branch banking laws in the U.S. from Nadler and Bogen's book The Banking Crisis.

Though unit banking was known to cause economic problems by as early as the 1920s, the McFadden Act of 1927 specifically banned interstate branch banking. Unit banking was a topic of discussion again during the development of the 1933 Banking Act, but legal restrictions on branch banking ultimately remained. Proponents of unit banking continued to fear the concentration of wealth and power that comes with branch banking.

When large banks tried to find loopholes that would allow interstate branches, additional restrictions were passed in the Bank Holding Company Act of 1956. While most states eased branch banking restrictions over time, many restrictions remained in place until 1994, when the Riegle-Neal Interstate Banking and Branching Efficiency Act was passed.^[2] This legislation allowed branch banking practices in all 50 states.