Despite highly publicized derivatives debacles in recent years, several leading correspondent bankers are finding a growing market for these financial products among their community bank customers.
Norwest Corp., LaSalle National Bank, and Boatmen's Bancshares have begun offering simple derivatives to their community bank customers as a way of offsetting interest rate swings.
Norwest, for example, sells derivatives to about 10% of the 2,200 respondent banks it has relationships with, said John Sampson, a Norwest senior vice president.
These correspondent bankers say their bank customers are avoiding controversial exotic derivatives to concentrate instead on products that provide simple interest rate protections.
"The term derivative covers a lot of ground," said John Sampson, senior vice president, Norwest, Minneapolis. "There are derivatives that can be compared to toxic waste and derivatives that are very vanilla, such as putting a cap on a loan."
Still, it isn't always an easy sell.
"Derivative is four-letter word to a lot of small banks," said Mark A. Hoppe, vice president, LaSalle National Bank, Chicago. "It can take a long time and a lot of work to convince community banks about derivatives."
Their reticence is understandable. The collapse of venerable Barings Bank as a result of illegal derivative trading and numerous lawsuits brought against derivative trading firms such as Bankers Trust gave the industry and the products a sour reputation.
Correspondent bankers, however, say that derivatives use among respondent banks is on the upswing, though exact figures aren't available. Mr. Hoppe said he estimates less than 10% of respondent community banks actively use derivatives to hedge against interest rate risk. But he said that many more banks are involved in the instruments, which were usually unknowingly acquired in outside purchases.
Added Mr. Hoppe, "As balance sheets get more flexible and traditional deposit sources in banks decline, I think the use of derivatives is going to increase."
Derivatives can help respondent banks either lock in favorable low interest rates on loans with correspondent banks or move into variable rates if that were more advantageous.
They also come in many forms. "Swaps," for example, allows a bank to switch floating rates or fixed rates for the opposite on loans. "Caps" put a ceiling on a loan's interest rates.
Correspondent banks will also offer derivatives for loans made by respondent banks to customers.
Despite the benefits, community banks aren't always gung-ho about derivatives.
"It's definitely a long-term educational process, just about everyone has an opinion on derivatives," said James W. Kratzer, a Boatmen's vice president.
