| Bylined Articles
The Community Bank's Bank
Focused correspondent banking that works.
By Peter J. Sposito
When the concept of a bank that serves only community banks was formed more than 25 years ago in Minnesota, it was in response to the ongoing decline in service and the high fees of the large correspondent banks. Such a bank, called a "Banker's Bank," struck a chord in the industry. Community banks were attracted to a wholesale financial institution that worked with , rather than against, them. As the industry evolved toward a barbell shape of few major "mega-banks" on one side and the community banks on the other, these smaller institutions had an important ally in the bankers' bank. Today, there are 19 bankers' banks operating in 48 states providing services to more than 5200 community banks. Aggregate assets of the Nation's bankers' banks as of 9/30/01 amount to over $4 billion not including the $11 billion of off balance sheet fed funds balances.
That this concept grew over the past 25 years should come as no surprise. Why wouldn't a community bank prefer to do business with a bank that is owned by others like them? As a wholesale bank, the bankers' bank's only business is correspondent services. By its very nature and charter, they cannot compete for a community bank's customers and they offer an array of services that community banks can use to help them become more profitable and operate more efficiently.
The service aspect accounts for much of its popularity among community bankers. But the mega-banks, now commonly called "LCFIs (large complex financial institutions) have also fueled the desire of community bankers to seek alternatives for their correspondent servicing needs. Here are some observations that we have made during the three years that the Bankers' Bank Northeast has served clients in New England and New York and based on our experience as community bankers:
There are fewer correspondent choices.
There was a time not so many years ago that a community bank would place their fed funds with one bank, safekeeping with another, and their coin and currency with a third. More than likely, those three banks have become one due to mergers, takeovers, and acquisitions. Banks like First National Bank of Boston, Shawmut, New England Merchants, Industrial National, Hartford National, CBT have become Fleet. Chemical, Chase, Manufacturers Hanover and J.P. Morgan have become JPMorganChase.
Like the general public, the new environment has forced many community bankers to deal with one bank and play by its rules (and pay its fees). Because there are so few options and they are so large, these LCFIs tend to pay little attention to their correspondent banking divisions. A bankers' bank concentrates 100% of its effort on correspondent services.
There are fewer services offered by the large banks.
For those large, commercial correspondent banks that are still around, the bottom line is more important than ever. If a correspondent service is found to be unprofitable, it will more than likely be re-priced above the market, sold off or discontinued. As a result, the community banks are often left without an alternative.
Bankers' banks are continually developing proprietary programs and/or working with third-party vendors to offer innovative services that are attractive to community banks. For most services, higher aggregate volumes mean that bankers' banks can offer higher investment rates and/or lower fees.
The LCFI's are a competitor to the community banks.
Community banks that do well have found their niche in the marketplace. While smaller and having only a few branches, they can compete effectively against their larger rivals. Technology has made it possible for them to offer the same services, whether it is on-line banking or merchant card processing. By stressing the service aspect and its importance to the community, they are competing successfully. Because bankers' banks are owned by community banks, they work with these banks to help them grow.
Bankers' banks have expanded their marketing activities.
Services include fed funds investments, liquidity lines, safekeeping, investment advisory consulting, letters of credit, check processing, merchant processing, loan participations and international payment services. Not every bank needs every correspondent service. But community banks benefit from a menu of options based on their individual needs. Bankers' banks add another dimension to community banks with its mix of quality products and services.
Regulators understand the value of bankers' banks.
Bankers' banks are unique for another reason. Their charter allows for their exclusion from reserve requirements and they are recognized as assisting community banks to remain in strict compliance with Regulation F. The comprehensive examination of bankers' banks by varying combinations of the Federal Reserve, the FDIC, the OCC and a long list of state regulators indicates the importance of the concept to community banks throughout the Nation. Regulatory authorities recognize the work done by bankers' banks to not only comply directly but also to assist its client banks to consistently meet regulatory directives.
The Bankers' Bank concept arrived only recently in the Northeast:
Because of the strong competitive correspondent banking climate in the Northeast, it was only in September 1998 that a bankers' bank was formed here. New England and New York based correspondents competed vigorously and were recognized as the best and largest throughout the country until the mergers of the largest correspondents banks. With the advent of the bankers' bank, community banks will continue to benefit from a competitive climate.
A client bank says it best.
Bob Terravecchia, CPA, President and Treasurer of Weymouth Co-operative Bank says this: "Our Bankers' Bank has under-promised and over-delivered. That rarely happens nowadays. Top to bottom, it's been a great relationship."
The general public also has come to realize the contributions of a bankers' bank: the Arkansas Bankers' Bank won the 2001 Business of the Year award in their state.
Peter J. Sposito is the President & CEO of the Bankers' Bank Northeast, which provides correspondent banking services and products to community banks in New England and New York. Established in 1998, the Bankers' Bank Northeast, which is FDIC insured and a member of the Federal Reserve System, currently works with more than 80 community banks.