Computers & Operations Research ()

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Computers & Operations Research

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Restructuring bank networks after mergers and acquisitions:

A capacitated delocation model for closing and resizing branches
Diego Ruiz-Hernndez a,n, David Delgado-Gmez b,1, Joaqun Lpez-Pascual c
a

University College for Financial Studies, Department of Quantitative Methods, Spain

Universidad Carlos III de Madrid, Department of Statistics, Spain
c
University College for Financial Studies, Department of Finance, Spain
b

art ic l e i nf o

Keywords:
Delocation
Bank network restructuring
Bank mergers
Capacitated facility location
Integer 0-1 programming

a b s t r a c t
During restructuring processes, due to mergers and acquisitions, banks frequently face the problem of
having redundant branches competing in the same market. In this work, we introduce a new Capacitated
Branch Restructuring Model which extends the available literature in delocation models. It considers both
closing down and long term operations' costs, and addresses the problem of resizing open branches in
order to maintain a constant service level. We consider, as well, the presence of competitors and allow
for ceding market share whenever the restructuring costs are prohibitively expensive.
We test our model in a real life scenario, obtaining a reduction of about 40% of the network size, and
annual savings over 45% in operation costs from the second year on. We nally perform a sensitivity
analysis on critical parameters. This analysis shows that the nal design of the network depends on
certain strategic decisions concerning the redundancy of the branches, as well as their proximity to the
demand nodes and to the competitor's branches. At the same time, this design is quite robust to changes
in the parameters associated with the adjustments on service capacity and with the market reaction.
& 2014 Elsevier Ltd. All rights reserved.

1. Introduction
The volume of Merger and Acquisition (M&A) transactions in
the banking sector has increased dramatically over the last couple
of decades [11]. Only in 2007, the number of M&A deals worldwide
was 28,729, reaching a value of 3784 billion US dollars. Out of
them, 9915 deals worth 1298 billion US dollars were completed in Europe. Between 2000 and 2008 the number of credit
institutions in the European Union decreased in about 22% [15].
Due to the nature of their services, banks tend to open more
branches than necessary for three main reasons: (a) capturing
market share; (b) as a part of a multi-market strategy; or (c) due to
a market overlapping strategy [12,16,17]. Consequently, merged
institutions frequently face the problem of having an oversized
branch network, with branches very close to each other. These
branches are redundant in the sense that they target the same set
of individuals. An illustrative example is the current situation in
the Spanish banking system, where approximately 30% of the
nearly 45 thousand existing branches concentrates about 70% of
the business. According to a recent estimation [14], a more
appropriate network size should be 35% smaller than the current
n

Corresponding author.
E-mail address: d.ruiz@cunef.edu (D. Ruiz-Hernndez).
1
Partially supported by grant MTM2010-16519 from the Ministry of Science
and Innovation, Spain.

gure. In a wider context, Davis [11] observes that the number of

branch closures of in-market mergers represents, in average, 23%
of the merged network size.
The closure of superuous branches generally results in important savings for the merged institution. As Davis points out 20
30% of branch costs are likely to be saved when overlapping units
are shuttered. On the other hand, as there exists a connection
between the number of branches closed and the loss of market
share, these savings are limited by the fact that it may be
necessary to resize the remaining branches in order to maintain
the same service level to reduce customer loss. It is therefore
necessary to nd an efcient way to decide on the number and
location of the branches to be closed and the capacity of the
branches that remain open.
The question of how many facilities to keep open and out of
them which ones to resize, is related to what Bahumic [3] named
as the delocation problem. However, Bhaumic only considers the
problem of closing facilities to reduce the service level in order to
accommodate to contractions in demand. On the same line,
ReVelle et al. [29] deal with the closure of facilities due to nancial
emergency, aiming to limit the proportion of the market shared to
competitors. Other references address simultaneously the opening
and closing down of facilities [26,32]. However, although network
restructuring is common after mergers and acquisitions, not much
attention has been paid in the literature to the delocation problem
when the service level has to be kept constant.

http://dx.doi.org/10.1016/j.cor.2014.04.011
0305-0548/& 2014 Elsevier Ltd. All rights reserved.

Please cite this article as: Ruiz-Hernndez D, et al. Restructuring bank networks after mergers and acquisitions: A capacitated
delocation model for closing and resizing branches. Computers and Operations Research (2014), http://dx.doi.org/10.1016/j.cor.2014.04.011i

D. Ruiz-Hernndez et al. / Computers & Operations Research ()

In this paper, we address the problem of restructuring (closing

and resizing) redundant capacitated bank branches. We propose
an integer 0-1 optimization model, referred to as the Capacitated
Branch Restructuring Model. It extends the available literature by
considering the case where the demand reacts to the closure of
neighboring branches, and the management wants to maintain a
constant service level. Additionally, it considers the issue of
capacity expansion whenever the size of the remaining branches
is not appropriate to meet local demand. The model is tested in a
real savings bank network.
The rest of the paper is organized as follows. In Section 2, we
review and discuss the literature on facilities delocation. In Section
3, we present the integer 01 optimization model for closing down
a subset of capacitated branches. In Section 4, we present the
results of applying our model to a real life case and perform
suitable sensitivity analysis. Finally, Section 5 concludes the paper
with a discussion of our ndings.

the school system consolidation problem, see Bruno and Anderson

[6], Diamond and Wright [13] and Church and Murray [7]; and the
bank network problem, see Min [24], Boufounou [4], Morrison and
O'Brien [27], Min and Melachrinoudis [25], and Miliotis et al. [23],
among others.
In our framework, the closure of branches is a reaction to the
existence of redundant ofces in the network. The model aims to
minimize the restructuring costs while maintaining a constant
service level, as measured by the number of individuals that can
be served by the network, by means of an appropriate modication of the remaining branches' service capacity. This is an
important difference with respect to the works discussed above
[3,26,29,32]. Extending the problem analyzed in [3], we include
information about the size of the demand in each node. In
addition, in the same line as [29] and extending the scope of
[3,26], we consider the presence of competitors, and our formulation aims to minimize the number of clients lost to other banks
due to branch closure.

2. Related literature
Over the last few years, location analysis has become an active
research area. A number of important research articles have been
published from a wide number of areas of knowledge, from
geography and economics, to management science and mathematics. Brandeau and Chiu [5] provide an overview of the major
location problems that have been addressed in the literature and
the main algorithms proposed for solving them. More recently,
Smith et al. [31] gave an excellent account of the evolution of the
discipline including an extensive bibliography.
The article by ReVelle et al. [29] is the earliest work that, to our
knowledge, focuses exclusively in closing facilities, addressing the
shrinkage of services when a rm is in a situation of nancial
emergency. They presented two alternative models. The rst one
addresses the problem of a rm that seeks to minimize the market
share that is ceded to its competitors, when certain branches are
to be closed down. The second model portrays the situation of a
rm with no competitors that intend to reduce its services for
economic reasons (e.g., due to an increase in costs or to a
reduction in local demand), minimizing the decay on its service
quality. The model is tested in a scenario with 55 nodes, 8 facilities
and 4 competitor's branches.
Along the same line, Bhaumic [3] studies a rm that needs to
reduce its network due to strategic reasons and the closure of
some facilities is expected to reduce both costs and service level.
He provides two alternative models. The rst one is a xed-charge
formulation that allows the reallocation of demand nodes among
the remaining facilities. The second formulation, referred to as the
pure delocation model, imposes the additional constraint that
only customers from demand nodes that were served by closed
facilities must be reallocated. Both models are compared in a
network with 19 nodes and 5 facilities.
Some other works have addressed the problem of simultaneously closing and opening facilities. Wang et al. [32] develop a
budget constrained location model. These authors propose a bank
branch restructuring problem in urban locations in which both the
opening and closing of branches are allowed. The restructuring is a
response to a change in the spatial distribution of the bank's
customers. Monteiro and Fontes [26] present a non-linear restructuring model, aimed to redesign a bank network in a regional
framework by closing, opening and/or relocating branches. The
aim is to achieve certain service level at a minimal cost. However,
these formulations do not address directly the issue of branch
redundancy.
Other related works are the multi-period restructuring problem, see Klincewicz et al. [20] and Melachrinoudis and Min [22];

3. The capacitated branch restructuring model

In the standard capacitated facility location problem (CFLP), the
objective is to nd a set of locations that minimize the sum of both
transportation costs and a xed charge for opening branches,
while satisfying certain capacity constraints (refer to Daskin [10],
Brandeau and Chiu [5], and references therein for further discussion on this topic).
The Capacitated Branch Restructuring Model (CBRM) builds on
the CFLP. It aims to nd the optimal subset of facilities to be kept
open, out of a collection of possibly redundant ones. Typically, a
bank takes into consideration three strategic lines for their network restructuring design. The rst one, henceforth referred to as
the redundancy constraint, consists of eliminating redundant
branches. With this aim, the bank establishes a minimal admissible distance between any two open branches. The second
strategic line, or accessibility constraint, relates the proximity to
the market. The banking institution xes a maximum distance that
any individual must walk in order to reach one of its branches.
Finally, with the aim of minimizing the market share captured by
its competitors after reducing the network's size, the bank establishes a vicinity constraint, dening a minimal distance between
any open branch and a competitor's facility. These strategic
constraints constitute the core of the CBRM. Additionally, the
CBRM also considers the changes in the capacity of the open
branches required to accommodate the demand, minimizing the
loss of dissatised patrons.
Based on the specic characteristics of the banking sector, we
distinguish two classes of patrons: clients, individuals with an
account registered in one of the branches; and customers, people
clients or not who at a given point in time visit certain branch,
demanding a punctual service. This is necessary as each of these
groups requires different types of services from the bank. Regarding the services that do not require the physical presence, we can
mention the management of savings, investments, or credit and
current accounts of its clients. These activities are performed
mostly during working hours before and after the branches'
opening times. These tasks are constrained by time and by the
number of employees, as there is a natural limit in the number of
transactions that can be performed by a person over a working
day. On the other hand, there are some services that can only be
provided with the physical presence of the individual in the
branch. Some examples of these are payment of fees and taxes,
withdrawals of large amounts of cash, or deposits. This kind of
transactions is constrained by the physical space of the branch,

Please cite this article as: Ruiz-Hernndez D, et al. Restructuring bank networks after mergers and acquisitions: A capacitated
delocation model for closing and resizing branches. Computers and Operations Research (2014), http://dx.doi.org/10.1016/j.cor.2014.04.011i

D. Ruiz-Hernndez et al. / Computers & Operations Research ()

as there is a limit on the number of individuals that can be held

simultaneously in a closed space.
This distinction makes it possible to differentiate between
virtual capacity (i.e., the number of clients that the branch is able
to serve) and physical capacity (i.e. the number of customers that
can be simultaneously held in the branches' service area). Notice
that the virtual capacity relates to the number of employees in the
branch and their capacity to attend their clients' needs. It must be
taken into consideration that bank clerks must not only attend
walk-in customers but to regularly manage the accounts of their
clients. This imposes a natural bound on the number of clients that
a branch can accommodate. On the other hand, the number of
customers that can be held in a branch at a given time is limited by
its physical size.2
In the following lines we present the modeling framework and
the mathematical formulation of the CBRM, followed by a detailed
discussion of the objective function and the constraints.
Consider a competitive market represented by discrete points
in a connected network. We distinguish between three different
kinds of nodes. The rst one represents demand nodes; the
second, the branches of the merged nancial institution; and the
last one, the competitor's branches. The demand nodes have
associated a parameter representing the number of potential
customers in that area. Each branch of the merged institution
has associated a set of parameters representing its service capacities (physical and virtual) and current service levels, as well as
the closing down and operation costs. We assume that the service
is homogeneous and that banking service prices are xed by a
competitive market.
The objective of CBRM is to minimize the sum of operation,
closing down and resizing costs. It considers, as well, the clientle
relocation costs, customer traveling penalties, and the costs of
losing clients and customers. The optimization problem is subject
to the accessibility, redundancy and vicinity constraints, discussed
above, together with a set of constraints regarding virtual and
physical capacities.
Before presenting the model formulation, we introduce the
notation corresponding to the sets, parameters and variables of
the model:Sets
I
J:
K:
I aj :

I ri :

I ck :

I fj :

set of branches of the merged institution;

set of demand nodes;
set of competitor's branches;
set of branches that are accessible to demand node j A J
a
within a distance daj; i.e. I aj fi A I : dij r dj g, where dij is
the distance between branch i and demand node j;
set of branches that are redundant to branch i A I , in the
sense that are located within a distance dri from i; i.e.
r
I ri fi0 A I : dii0 r di g, where dii0 is the distance between
branches i and i0 ;
set of branches that are within a distance dck from
c
c
competitor's branch k A K; i.e. I ck fi A I : dki r dk g,
where dcki is the distance between competitor's branch
k and branch i;
set of branches, accessible to demand node j A J , that are
farther away from j than the closest competitor's branch;
f
i.e. I fj fiA I aj : dij 4 dj g, where dfj is the distance from
node j A J to the closest competitor.

physical service capacity of branch i A I (i.e., maximum

number of customers that can be accommodated simultaneously in the branch's service area);
number of customers that can be accommodated by a
unit of the waiting area space (henceforth, we will refer
to this value as a customer batch);
maximum admissible number of customer batches to be
added in a physical capacity expansion of branch i A I ;
number of clients of branch i A I ;
virtual service capacity of branch i A I (i.e., maximum
number of clients that can be served by the branch);
discounted yearly operation costs of branch i A I ;
closing down cost of branch i A I ;
virtual capacity expansion cost of branch iA I ;
xed refurbishment cost of branch i A I ;
variable refurbishment cost of branch iA I (for each
additional customer batch);
cost of reallocating a client from branch i to branch i0 , for
all i; i0 A I ;
penalty for losing a client from branch i A I ;
penalty for losing a customer from node jA J ;
penalty for ceding a customer from node j A J ;
proportion of customers from node j A J lost to a
competitor after restructuring.

ai:

n:

ei:
bi:
bi:
oi:
ci:
gi:
fi:
qi:
r ii0 :
cl
i :
cu
j :
ccu
j :
pcj:

Binary variables
takes value 1 if branch iA I is kept open, and
0 otherwise;
takes value 1 if the virtual capacity of branch i A I needs
an expansion, and 0 otherwise;
takes value 1 if branch i A I needs physical expansion,
and 0 otherwise.

Wi:
Gi:
Ri:

Integer variables
number of clients from branch i A I reallocated to branch
i0 A I ;
number of clients from branch i A I lost due to branch
closures;
number of customers from node j A J lost due to branch
closures;
number of customers from node j A J ceded to a
competitor;
size of the physical expansion, in terms of additional
customer batches, performed on branch iA I to increase
its current physical capacity;
number of customers from node j that are expected to
attend branch i after restructuring, for all i A I and j A J .

Bii0 :
Lcl
i :
Lcu
j :
Ccu
j :
Ti:

Zji:

With these elements, the CBRM is stated as an integer 0-1

linear programming model as follows:
Minimize

a j:

number of potential customers at demand node j A J ;

2
Usually, it is considered a maximum of 1 to 2 customers per square meter, but
this varies depending on the type of service or facility.

oi W i ci 1  W i  g i Gi f i Ri qi T i 

iAI

iAI

r ii Bii dij Z ji
0

i A I i0 A I

iAI

Parameters

i A Ij A J

cl
cl
i Li

cu
cu cu
cu
j Lj c j C j

jAJ

jAJ

subject to
Wi Z1

i A I aj

8 jA J

W i W i0 r 1
i0 A I ri

2a

8iAI

2b

Please cite this article as: Ruiz-Hernndez D, et al. Restructuring bank networks after mergers and acquisitions: A capacitated
delocation model for closing and resizing branches. Computers and Operations Research (2014), http://dx.doi.org/10.1016/j.cor.2014.04.011i

D. Ruiz-Hernndez et al. / Computers & Operations Research ()

Wi Z1

8kAK

2c

Bii0 bi

8 iA I

3a

T i r ei Ri

8iAI

4c

expansion on the physical capacity can only be performed on an

open branch.
Notice that this is not an allocation in the strict sense of the
word, as it is not the bank who allocates its customers after
restructuring, but the customers themselves who choose a new
branch to patron after their usual branch has been closed. We
assume that, after restructuring, the customers will choose the
closest open branch and, therefore, the bank has to make the
changes necessary to accommodate this increased demand.
The formulation also considers a set of constraints, (5), that
model circumstances under which the rm can lose market share.
First, when a branch is closed, a number of dissatised clients will
migrate to another banking institution, (5a). To model this, we
assume that there is a proportion of relocated clients that will
decide to abandon the savings bank for another nancial institution. This proportion is represented by

Ri r W i

8iAI

4d

pii0 1 

5a

where 0 o o dii0 is a proportionality constant. Therefore, the

expected number of clients relocated from branch i to branch i0
that will abandon the savings bank is given by Bii0 pii0 and the total
number of lost clients from closed branch iA I after restructuring
is given by (5a).
Likewise, when a competitor's branch is closer to a certain node
than any open branch of the merged institution, a number of
customers might be lost to the competitor. Therefore, Eqs. (5b)
represent the number of customers from a given node that is lost
after restructuring.4
Expressions (6) and (7) are standard binary and integer
constraints.

i A I ck

i0 A I

Bi0 i r b i W i mi Gi

i0 A I

Gi r W i

8 iA I

Z ji C cu
j aj

j A J :i A I aj

Lcl
i Z

8jAJ

Z ji r a i W i nT i

i0 A I ;i0 a i

Bii0 pii0

c
Lcu
j Z pj Z ji

3b
3c

i A I aj

8 iA I

4a
8iAI

8iAI

8jAJ

4b

5b

i A I fj

Gi ; Ri ; W i A f0; 1g

8iAI

cl cu
Bii0 ; C cu
j ; Li ; Lj ; T i ; Z ji A N

6
8 i; i0 A I ; jA J

The objective function (1) consists of ve distinct blocks. The rst

summation represents the operation and closing down costs; the
second one modelizes the physical and virtual resizing costs; the third
and four sums account for the relocation costs and transportation
penalties of clients and customers, respectively. Finally, the last three
summations modelize the costs incurred for losing clients and
customers and for voluntarily ceding market share.
Strategic constraints (2) are core to our formulation and
represent the three main criteria to be fullled: (2a) accessibility,
the distance between a demand node and a branch should not be
larger than certain value; (2b) redundancy, the distance between
branches should not be smaller than a minimal admissible bound;
and (2c) vicinity, the distance to a competitor's branch should not
be larger than a given value.
Constrains in set (3) are associated with the virtual capacity of
the branch, i.e. the capability of giving service to its clients.
Eqs. (3a) state that the clientle of a closed branch must be
reallocated to a branch that remains open (we allow for the clientle
of an open branch to be reallocated to any other open branch). If the
virtual capacity of an open branch is exceeded by the ow of clients
displaced from closed branches, an expansion of its service capacity
will be required. This is established by Eqs. (3b), where
mi i0 A I :i0 a i bi0 represents the maximal virtual capacity expansion
for any branch i. Eqs. (3c) are upper bounds on the binary variables
Gi, preventing closed branches to be expanded.
The constraints in set (4) are related to the physical space that
the branch has available for accommodating its clients. Eqs. (4a)
establish that customers at a certain demand node must be
allocated to one accessible branch in their vicinity or voluntarily
ceded to a competitor.3 If the physical capacity of certain branch is
to be exceeded after restructuring, Eqs. (4b) state that a physical
refurbishment will be required. The size of such refurbishment
is limited by Eqs. (4c). Finally, constraints (4d) guarantee that an
3
In some cases, the investment required to refurbish certain branch will be
larger than the cost of ceding market share to the competitors. Consequently, the
bank may be willing to give away a number of customers rather than incurring the
costs of keeping open and resizing certain branch.

dii0

8 ia i0

4. Real case analysis

The CBRM was tested in a real life scenario where three saving
banks merged into one larger institution. The objective was to
reduce the number of redundant branches at a minimal cost, while
maintaining the same service level and minimizing the loss of
dissatised clients and customers. The parameters were calibrated
using real data, with magnitudes modied for condentiality
reasons.
The network consists of 22 branches, distributed in a city with
a population of approximately 55,000 inhabitants [18]. The population was assumed to be concentrated at the centroid of each of
the 41 census districts of the city [19]. There are 21 competitor's
branches [21]. The network's adjacencies map is presented in
Fig. 1, and the demand at each centroid is presented in Table 1.
This demand values represent the expected number of customers
simultaneously demanding services from their closest branch.
In this setting, the accessibility distance was set to 750 m; the
redundancy distance to 250 m; and the vicinity distance to 400 m.
The clientle of the branches, its virtual and physical capacity, and
the operation and closing down costs are presented in Table 2.
These costs were calibrated using the Statement of Financial
Position, the Statement of Cash Flows (both publicly available at
[8]), and private information from the bank.
Other parameters are xed virtual capacity expansion cost,
gi 15; xed physical expansion cost, fi 120; and refurbishment
4
Notice that the sum in the right hand side of constraints (5b) is taken over all
the elements in set I fj , which is the set of branches which are farther away from a
certain node than the closest competitor. Therefore, pcj can be interpreted as the
probability of losing a customer from node j, when the closest branch to that node
after restructuring belongs to the competitor. This constraint, together with the
associated set, has the same structure as the market capture constraint in ReVelle
[28] or Serra and ReVelle [30].

Please cite this article as: Ruiz-Hernndez D, et al. Restructuring bank networks after mergers and acquisitions: A capacitated
delocation model for closing and resizing branches. Computers and Operations Research (2014), http://dx.doi.org/10.1016/j.cor.2014.04.011i

D. Ruiz-Hernndez et al. / Computers & Operations Research ()

40.955

A
V
J

40.95

F
H
TD
P

Latitude

40.945
M
C

40.94

S
U

G
K
B

40.935
Q

40.93

Population Centroids
Branches
Competitors
4.125

4.12

4.115

4.11
Longitude

4.105

4.1

4.095

Fig. 1. Bank network, competitors and population centroids.

Table 1
Demand values.
Node

Demand

Node

Demand

Node

Demand

Node

Demand

1
2
3
4
5
6
7
8
9
10

6
6
4
4
5
10
5
6
6
9

11
12
13
14
15
16
17
18
19
20

5
7
7
6
6
7
11
10
6
7

21
22
23
24
25
26
27
28
29
30

5
11
8
9
10
5
6
15
16
8

31
32
33
34
35
36
37
38
39
40
41

11
11
15
7
7
8
9
7
14
13
8

cost for additional customer batch, qi 20. The clients' relocation

costs are given by r ii0 0:25dii0 . The size of a customer batch is
n 5, and the maximum admissible number of batches is ei 4.
The probability of losing a dissatised customer is pcj 0:2. The
penalty for losing a client per day is set to cl
i 50, and it
represents the net present value of foregone benets earned from
a client at perpetuity. The penalty of losing a customer per day is
cu
j 40, taken over a year horizon at perpetuity. Finally, the
penalty for a unit of demand ceded to the competitor is ccu
j 60,
which is equal to the penalty of losing a customer plus a markup.
This last parameter was given an arbitrarily large value as the
nancial institution was not willing to cede customers to the
competitors.
The solution to the problem was obtained using CPLEX Version
12.3 in a computer with an Intel Pentium Dual T3400 processor at
2.16 GHz and 2 GB RAM. It consists of closing down 9 branches and
physically expanding 7 out of the 13 open branches. Fig. 2 depicts
the branches that remained opened together with the demand
nodes. The radius of the circumferences represents the accessibility distance, da. It can be seen that all the demand nodes are
contained within the accessible area of at least one open branch.
Fig. 3 illustrates the redundancy areas in the restructured network.
It can be seen that none of the open branches is located within a
radius dr of any other branch. Finally, Fig. 4 displays the restructured network together with the corresponding capture areas. It is
observed that all the competitors' branches are contained within a
perimeter of radius dc of at least one open branch.
In the optimal solution, branches N, T and U were physically
expanded to accommodate 16 additional customers each;
branches G, O and P were expanded to accommodate 12 extra
customers each; and branch V capacity was increased in 6 customers. Moreover, the virtual service capacity of branches E, L, N, T,
U and V was increased. The number of customers lost to the
competitors was 49, whereas the number of dissatised clients
that abandoned the institution was only 3.
The total restructuring cost was 28,988 monetary units. When
compared against the yearly operation costs of the original network, the solution represents savings of about 23% during the rst
year, and 46% yearly from the second year on. The difference in
savings between the rst and subsequent years is due to the
restructuring expenses (closing down of redundant branches and

Table 2
Costs, clients and capacities by branch.

40.965

Number of
clients bi

Virtual
capacity b i

Operation
costs oi

Closing
costs ci

A
B
C
D
E
F
G
H
I
J
K
L
M
N
O
P
Q
R
S
T
C
V

921
1371
478
792
703
641
704
1120
1194
1040
560
497
1892
910
1607
1462
582
1519
2687
1025
366
837

1106
1646
574
951
844
770
845
1344
1433
1248
672
597
2271
1092
1929
1755
699
1823
3225
1230
440
1005

1516.71
2257.24
787.15
1304.15
1157.42
1055.94
1158.79
1843.09
1965.14
1711.44
921.55
818.69
3114.33
1497.51
2645.33
2406.71
958.57
2499.97
4422.59
1686.76
603.39
1378.2

260.43
484.95
132.32
315.5
250.59
181.99
256.31
372.04
408.44
397.4
228.66
199.65
735.74
296.85
624.94
404.21
230.94
483.54
897.83
372.26
126.73
268.17

40.96
40.955

J
40.95

H
T

Latitude

Branch Physical
capacity a i
16
18
16
21
11
11
16
13
16
16
18
18
24
19
26
21
14
21
19
20
17
16

40.945

L
N

40.94
U

40.935

40.93

O
R

40.925
40.92

4.13

4.12

4.11
Longitude

4.1

4.09

Fig. 2. Solution with 13 open branches and their accessible areas.

Please cite this article as: Ruiz-Hernndez D, et al. Restructuring bank networks after mergers and acquisitions: A capacitated
delocation model for closing and resizing branches. Computers and Operations Research (2014), http://dx.doi.org/10.1016/j.cor.2014.04.011i

D. Ruiz-Hernndez et al. / Computers & Operations Research ()

40.965
40.96
40.955

40.95

Latitude

T
P

40.945

L
N

40.94
U

40.935

40.93

40.925
40.92

4.13

4.12

4.11
Longitude

4.1

4.09

Fig. 3. Solution with 13 open branches and their redundancy areas.

40.965
40.96
40.955

40.95

Latitude

T
P

40.945

L
N

40.94
U

40.935

40.93

O
R

40.925
40.92

4.13

4.12

4.11
Longitude

4.1

4.09

Fig. 4. Solution with 13 open branches and their competitors.

changes in the capacities of the ones that remain open), which are
incurred only during the rst year.
4.1. Sensibility analysis
In this section, we conduct a sensibility analysis in order to
obtain a better understanding of the effect of each of the
parameters of the model on both the nal design of the network
and the total restructuring cost.
We rst perform the sensibility analysis for the distance
a
r
parameters d ; d and dc. Each of these parameters was given
three alternative values. The accessible distance was set equal to
its original value, 0.75, and to 1.00 and 1.25 (representing increases
of one and two thirds, respectively). The redundancy distance was
xed to its original value 720%, i.e. 0.2, 0.25 and 0.3. Finally, the

capture distance was given values 25% and 50% above its original
gure, namely, 0.4, 0.5 and 0.6. The results obtained using these
values are presented in Table 3, which includes the total restructuring costs, the closed branches and the number of lost customers
and clients.
We can see that, as the accessibility and vicinity distances
increase, the number of closed branches also increases and the
total restructuring costs decrease. This reduction is due to the fact
that, when the number of closed branches increases, the savings in
operation costs are larger than the sum of closing down, physical
and virtual expansion costs, plus any penalties incurred from
losing clients and/or customers. On the other hand, an increment
in the redundancy distance increases the total restructuring costs.
This is mainly due to the fact that a larger value of this parameter
forces the open branches to be more distant. As a consequence, the
distance between the original and the destination branch for the
relocated clients will be larger. Given that the probability of losing
a relocated client depends upon this distance, there is a considerable increase in the number of clients that abandon the nancial
institution. For smaller values of da and dc, or for larger values of dr,
some constraints become conictive and the problem will not
have a solution.
After analyzing the effect of variations in the distance parameters,
we investigate the sensibility of the model to changes in the
parameters related to the decision of ceding market share: the
penalty for ceding customers, ccu
j , and the physical expansion limit, e.
When the cost of a capacity expansion is large enough, or if
there exists a physical limit on its magnitude, the management
may be interested in ceding some market share. To assess this, we
allow variable Ccu
(which was forced to be null in the original
j
scenario) to take values different from 0, by considering a set of
alternative values for the expansion limit e and for the penalty ccu.
Table 4 shows the results for 25 different combinations of these
parameters, ranking from 0 to 16 and from 20 to 60, respectively. It
includes the total network restructuring costs, the closed
branches, the total number of ceded customers and the number
of branches that require a physical expansion. The sum of the
individual physical expansions is shown between brackets.
We can see that, as expected, when the penalty for ceding
customers is low, the bank is prone to ceding market share and the
number of expanded branches is small. As this value increases, the
bank will be interested in expanding a larger number of branches
in order to accommodate the demand. This decision causes an
increase in the total restructuring costs which is smaller than the
one that would have been incurred if the physical expansion had
not been done. On the other hand, when the physical limits are
less binding, i.e. the allowed number of additional batches per
branch is larger, the bank will concentrate the expansion effort in a
smaller number of branches. This translates into smaller restructuring costs due to two main factors: (i) the number of ceded
customers decreases; and (ii) a smaller number of physically
expanded branches bring savings in xed expansion costs. It is
important to notice that the changes in parameters ccu and e have
only a minor effect on the nal network conguration, affecting
mainly the physical expansion decisions.
We nally conduct the sensibility analysis to changes in the
penalties for losing clients or customers. Table 5 shows the effect
of variations on these two parameters. We consider values of 0, 25
and 50 for the penalty for losing clients, cl, and of 0, 20, and 40 for
the penalty for losing customers, cu. This table includes the
network restructuring costs, the closed branches, the number of
branches with physical and virtual expansions and the number of
clients and customers lost.
It can be seen that the increase in cl causes a reduction in the
number of closed branches and an increase in the restructuring
costs, due basically to the increased operation costs and to the

Please cite this article as: Ruiz-Hernndez D, et al. Restructuring bank networks after mergers and acquisitions: A capacitated
delocation model for closing and resizing branches. Computers and Operations Research (2014), http://dx.doi.org/10.1016/j.cor.2014.04.011i

D. Ruiz-Hernndez et al. / Computers & Operations Research ()

Table 3
Sensibility analysis for changes in distance parameters.
Redundancy distance, dr

Accessible distance, da
0.75

1.00

1.25

dc 0.40
0.20
Cost
Closed Branches
Lost Customers
Lost Clients

28,771.7
A,B,C,D,F,I,M,Q,S
44
3

26,314.5
A,B,C,G,H,I,M,P,Q,S,T
43
3

26,314.5
A,B,C,G,H,I,M,P,Q,S,T
43
3

0.25
Cost
Closed branches
Lost Customers
Lost clients

28,988.2
A,B,C,D,F,I,K,M,S
49
3

27,201.9
A,B,C,H,I,K,M,P,S,T
46
3

27,012.1
A,B,C,H,I,K,M,P,S,T
50
3

0.30
Cost
Closed branches
Lost Customers
Lost clients

35,425.6
A,B,C,D,F,G,K,L,M,S
44
130

32,922.4
A,B,C,G,H,I,K,M,P,S,T
48
130

32,922.4
A,B,C,G,H,I,K,M,P,S,T
48
130

dc 0.50
0.20
Cost
Closed branches
Lost Customers
Lost clients

28,046.3
A,C,D,F,G,I,M,O,Q,S
45
4

26,108.9
A,C,G,H,I,M,O,P,Q,S,T
47
4

25,108.2
A,B,C,G,H,I,M,P,Q,R,S,T
46
3

0.25
Cost
Closed branches
Lost Customers
Lost Clients

28,988.2
A,B,C,D,F,I,K,M,S
49
3

26,995.3
A,C,H,I,K,M,O,P,S,T
52
4

25,784.9
A,B,C,H,I,K,M,P,R,S,T
53
3

0.30
Cost
Closed branches
Lost Customers
Lost clients

34,681.2
A,C,D,F,G,I,K,M,O,S
48
131

32,680.5
A,C,G,H,I,K,M,O,P,S,T
46
131

31,714.0
A,B,C,G,H,I,K,M,P,R,S,T
51
130

dc 0.60
0.20
Cost
Closed branches
Lost Customers
Lost clients

27,358.1
A,C,D,F,G,I,J,M,O,Q,S
47
4

25,219.9
A,C,G,H,I,J,M,O,P,Q,S,T
50
4

24,218.0
A,B,C,G,H,I,J,M,P,Q,R,S,T
49
3

0.25
Cost
Closed branches
Lost Customers
Lost clients

28,300.0
A,B,C,D,F,I,J,K,M,S
51
3

26,107.2
A,C,H,I,J,K,M,O,P,S,T
56
4

24,941.3
A,B,C,H,I,J,K,M,P,R,S,T
51
3

0.30
Cost
Closed branches
Lost Customers
Lost clients

33,993.0
A,C,D,F,G,I,J,K,M,O,S
50
131

31,826.0
A,C,G,H,I,J,K,M,O,P,S,T
56
131

30,829.1
A,B,C,G,H,I,J,K,M,P,R,S,T
55
130

additional expenses incurred in the expansion of the branches'

virtual capacities. Finally, we see that larger values of cu increase
the total restructuring costs and decrease the number of ceded
customers. As in the previous case, we can see that changes in
these parameters (for values different from zero) do not affect the
nal network conguration.
Summarizing, Tables 4 and 5 show that the impact of the
non-strategic constraints is fundamentally limited to the

relocation of clients and customers, and to decisions regarding

variations in the service capacity of the restructured network.
On the other hand, Table 3 shows that the nal network design
depends considerably on the distance parameters and the
associated strategic constraints.
Computational issues: For the considered network, with 41
census districts, 22 branches and 21 competitors, the average time
required by the CPLEX 12.3 engine to solve 61 instances of the

Please cite this article as: Ruiz-Hernndez D, et al. Restructuring bank networks after mergers and acquisitions: A capacitated
delocation model for closing and resizing branches. Computers and Operations Research (2014), http://dx.doi.org/10.1016/j.cor.2014.04.011i

D. Ruiz-Hernndez et al. / Computers & Operations Research ()

Table 4
Sensibility analysis when ceding market share is allowed.
Maximum number of Batches, e

Penalty for ceding customer, ccu

20

30

40

50

60

Cost
Closed branches
Ceded customers
Phys Exp. (size)

28,158.8
A,B,D,F,I,K,N,P,S
113
0

29,266.6
A,B,D,F,I,K,N,P,S
109
0

30,356.7
A,B,D,F,I,K,N,P,S
109
0

31,446.6
A,B,D,F,I,K,N,P,S
109
0

32,536.7
A,B,D,F,I,K,N,P,S
109
0

Cost
Closed branches
Ceded customers
Phys Exp. (size)

28,158.8
A,B,D,F,I,K,N,P,S
113
0

28,748.5
A,B,D,F,I,K,N,P,S
27
5(17)

28,899.9
A,B,C,D,F,I,K,M,S
14
6(20)

28,976.4
A,B,C,D,F,I,K,M,S
2
7(22)

28,988.2
A,B,C,D,F,I,K,M,S
0
7(23)

Cost
Closed branches
Ceded customers
Phys Exp. (size)

28,158.8
A,B,D,F,I,K,N,P,S
113
0

28,614.7
A,B,C,D,F,I,K,M,S
11
5(20)

28,707.4
A,B,D,F,I,K,N,P,S
7
5(22)

28,746.5
A,B,D,F,I,K,N,P,S
2
5(22)

28,759.2
A,B,D,F,I,K,N,P,S
0
5(23)

12
Cost
Closed branches
Ceded customers
Phys Exp. (size)

28,158.8
A,B,D,F,I,K,N,P,S
113
0

28,567.5
A,B,D,F,I,K,N,P,S
9
4(21)

28,647.3
A,B,D,F,I,K,N,P,S
7
4(22)

28,693.7
A,B,D,F,I,K,N,P,S
2
4(22)

28,710.1
A,B,D,F,I,K,N,P,S
0
4(25)

16
Cost
Closed branches
Ceded customers
Phys Exp. (size)

28,158.8
A,B,D,F,I,K,N,P,S
113
0

28,567.5
A,B,D,F,I,K,N,P,S
9
4(21)

28,647.3
A,B,D,F,I,K,N,P,S
7
4(22)

28,693.7
A,B,D,F,I,K,N,P,S
2
4(22)

28,710.1
A,B,D,F,I,K,N,P,S
0
4(23)

Table 5
Sensitivity analysis for changes in penalties.
Penalty for losing customers, Penalty for losing clients, cl
cu
0
25

50

0
Cost
Closed Brchs.
Virt. Exp.
Lost clients
Phys. Exp.
Lost customers
20
Cost
Closed Brchs.
Virt. Exp.
Lost clients
Phys. Exp.
Lost customers
40
Cost
Closed Brchs.
Virt. Exp.
Lost clients
Phys. Exp.
Lost customers

26,218.3
A,B,C,F,I,K,M,N,S,
T
5
1381
8(26)
55

26,949.0
A,B,C,D,F,I,K,
M,S
6
3
7(23)
49

27,024.0
A,B,C,D,F,I,K,
M,S
6
3
7(23)
49

27,318.3
A,B,C,F,I,K,M,N,S,
T
5
1381
8(26)
55

27,933.2
A,B,C,D,F,I,K,
M,S
6
3
7(23)
49

28,008.2
A,B,C,D,F,I,K,
M,S
6
3
7(23)
49

28,245.8
A,B,C,F,I,N,P,Q,S,
T,U
6
2583
7(25)
37

28,913.2
A,B,C,D,F,I,K,
M,S
6
3
7(23)
49

28,988.2
A,B,C,D,F,I,K,
M,S
6
3
7(23)
49

Actual bank networks, as the one analyzed in this paper, are

typically of small size. A standard network in a medium sized city
will have, in average, less than fty branches. As we pointed out
earlier, the CBRM builds on the CFLP. The available hardware and
MIP solver technology is capable of nding exact solutions to CFLP
instances with up to 300 facilities and 300 demand nodes on
personal computers [1]. In the unusual cases where a bank
network will exceed 500 branches, larger instances of the CBRM
can be easily solved by standard branch and bound, local search
algorithms or any of the techniques available for the CFLP within a
reasonable time [2,9].

5. Conclusions

problem was 1.89 s, with standard deviation 0.63. All the solutions
were integer optimal, within the default CPLEX relative MIP gap
tolerance of 1e 04.

In this work, we have proposed the Capacitated Branch Restructuring Model. It addresses the problem of closing redundant
branches, while maintaining a constant service level. Despite our
work has been motivated by the banking sector, where branch
redundancy is a frequent problem, it can be easily adapted to other
business sectors.
Apart from closing branches, our formulation addresses the
problem of resizing open branches in order to accommodate
displaced demand from closed branches. It considers, as well,
the existence of competitors and seeks to minimize market loss by
maintaining branches within the vicinity of rival facilities. Moreover, the model allows for voluntarily ceding market share to the
competitors whenever the costs of a physical expansion are
too large.
Our approach was tested using a real life bank network
resulting from the merger of three saving banks into a larger
nancial institution. The model achieved savings over 45% yearly

Please cite this article as: Ruiz-Hernndez D, et al. Restructuring bank networks after mergers and acquisitions: A capacitated
delocation model for closing and resizing branches. Computers and Operations Research (2014), http://dx.doi.org/10.1016/j.cor.2014.04.011i

D. Ruiz-Hernndez et al. / Computers & Operations Research ()

from the second year on. The percentage of branches closed was of
about 40%, which is consistent with the value estimated by
Elordouy et al. [14].
A sensibility analysis showed that the restructuring problem
can be considered as a combination of two parts: a pure delocation
problem subject to the strategic constrains (redundancy, accessibility and vicinity); and a resizing problem subject to the nonstrategic constraints. As the delocation is mainly determined by
the strategic constraints, the resulting network design is quite
robust and almost unaffected by the assignment decisions. In
other words, the strategic constraints determine the branches that
will be closed, while the non-strategic ones dene the client and
customer assignment, together with the changes in service
capacity.
From a business point of view, the application of the CBRM will
empower a more efcient allocation of resources by taking
advantage of economies of location and scale. At the same time,
avoiding redundancy may help to improve client/customer services, as well as to eliminate inefciencies resulting from redundant branches targeting the same market.
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Please cite this article as: Ruiz-Hernndez D, et al. Restructuring bank networks after mergers and acquisitions: A capacitated
delocation model for closing and resizing branches. Computers and Operations Research (2014), http://dx.doi.org/10.1016/j.cor.2014.04.011i