Bankers' Banks: Correspondent Service without Competition
Frisbee, Pamela, American Banker
As competition in the financial industry has intensified, the correspondent relationship enjoyed by independent banks in the past has started to deteriorate. Independent banks, facing a changing atmosphere, are being encouraged to look to other institutions for the services they normally obtain from correspondent banks. Liberalization of state laws concerning bank holding companies and statewide branch banking has permitted consolidations, increasing the number of relatively large institutions. The number of states permitting either statewide or limited branching rose from 33 in 1960 to 43 in 1983, while the number of unit banking states declined from 18 to 8 during the same period.
This trend has sounded an alarm among the smaller independent banks. Large institutions historically have provided correspondent services to independent banks. With the changes in banking laws, however, these large banks have, in many cases, acquired a competing institution across the street from their respondent banks. Some of the small independents are questioning whether or not their correspondent has their best interest at heart, especially in cases where the correspondent has acquired a direct competitor. Can the correspondent bank be expected to continue to provide top-notch information and services at a reasonable cost to a competitor? The respondent banks are skeptical and find themselves looking for a new correspondent bank.
Usually, many alternative correspondent relationships could be established, but establishing such a new relationship is time-consuming and expensive. Therefore, many independent banks have begun to look to an alternative source to provide the services they formerly obtained from a correspondent bank.
These services, which typically require huge capital outlays or considerable management expertise, generally are not economically feasible for the smaller independent banks to provide themselves. A new type of financial institution known as a bankers' bank may provide one answer. Typically, bankers' banks are owned and established by a syndicate of relatively small banks, none of which owns more than 5% of the institution. Bankers' banks are designed to provide the services the independent banks need or want, but, unlike a correspondent bank, they pose no competitive threat to the independent because they provide financial services only to banks, not to the public at large, hence the name bankers' bank. Background
The first dedicated bankers' bank was formed in 1975 by a group of independent banks in Minnesota. The Minnesota concept was based on a similar bank in Omaha, Neb. Packers National Bank in Omaha, the prototype for the Independent State Bank of Minnesota, has as its shareholders a group of independent bankers rather than independent banks. It provides both retail and correspondent services.
The executive council of the Minnesota bankers' bank decided that a purely correspondent bank with a new charter would suit their needs better -- providing them both flexibility and control -- than if they purchased an existing bank offering retail and correspondent services. The executive council successfully sponsored a bill in the Minnesota legislature that allowed banks to invest in the new institution. Although national and Federal Reserve member banks were declared ineligible, the Independent State Bank of Minnesota opened in December 1975.
The institution has been successful in attracting independent banks as shareholders. Currently its shareholders include over 240 independent banks. It has established an interstate network to perform data processing, profit analysis, compliance instruction, advertising, and other services for its more than 473 customers, all relatively small independent banks. Banks do not have to be shareholders to obtain services from a bankers' bank.
To date, 26 states (see table 1), including three Sixth District States, have authorized the establishment of state-chartered bankers' banks either by specific state law or "wild card" statute. …