Bank of America Corp. retained its crown this year as the nation's top correspondent bank holding company, while Bank One Corp. took the No. 2 spot from Chase Manhattan Corp., the longtime leader.

But with fewer small banks leavings their deposits with larger ones, correspondent balances at many banks declined, according to statistics compiled by Sheshunoff Information Services Inc. for American Banker.

The rankings, published annually, are based on deposits held at midyear. Chase occupied the top spot from 1994 to 1997, but Charlotte, N.C.-based Bank of America overtook it in the mid-1998 ranking. Its $5.05 billion was up 18.8% from midyear 1998.

Chicago-based Bank One moved into second place, from fourth in 1998, with balances of $3.9 billion.

The most impressive leap was that of First Union Corp., which more than doubled its correspondent balances, to $2 billion, and moved up six notches, to sixth place.

Composite figures were less impressive. Overall balances climbed just 1.4% at banks with at least $10 million in deposits from other banks, to $36.1 billion. The gain in the previous 12 months was nearly 18%.

Also, 27 of the top 50 correspondent banks lost deposit share in the latest tally; only 13 did so the in the previous one. Citigroup Inc.'s balances, for example, dropped by almost 22%, to $2 billion, while Bank of New York's fell by 26%, to $937 million.

The declines illustrate just how much correspondent banking has changed in recent years.

Historically, small banks would leave hefty balances in larger banks in exchange for services such as training, check clearing, coin and currency, and cash management. (In the early 1980s, large banks held more than $80 billion of other banks' deposits.)

Today, many banks are either getting those services elsewhere - the Federal Reserve clears more checks than any private-sector bank - or paying directly for correspondent services rather than placing deposits at the larger bank.

"Correspondent balances have kind of gone out of style," said James G. Lawrence, president of $1.2 billion-asset Merchants Bank of New York. "You can do better lending deposits out than having them sit somewhere."

Indeed, with competition for customers as fierce as ever, many small banks need their deposits to fund loans.

"Small banks aren't keeping a lot of balances because they don't have the balances to keep," said James McLaughlin, director of regulatory affairs at the American Bankers Association.

Rising interest rates and bank consolidation are other explanations for the flat growth of correspondent balances.

With interest rates rising, banks with excess deposits often put their money into government funds or other investments that have higher returns.

"As rates go up, [banks] become better managers of their money," said Bill Meyer, manager of correspondent banking at Wells Fargo & Co, San Francisco. Wells Fargo's deposits dipped 6%, to $3.3 billion, from midyear 1998 to 1999.

Plus, with the number of banks dwindling, it stands to reason that overall balances would decrease - especially if the buyer is also a large correspondent. "A lot of the banks we've acquired happened to be former customers of ours," Mr. Meyer said. For more information related to this article, see the following table in our Ranking the Banks section:

Top 75 Correspondent Bank Holding Companies (Q2 1999)

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