Benefiting from their mega-mergers, Bank of America and Chemical Bank have catapulted into the first and second slots of the American Banker's 1992 ranking of correspondent banks. Their rise illustrates, on yet another level, how the industry's consolidation has reshaped key financial markets.
Hanover Had Been a Leader
When the ranking was last published. in 1989, Manufacturers Hanover Trust Co. was the country's fourth-largest correspondent, and merger partner Chemical was 14th. Meanwhile, Bank of America was No. 5, and merger partner Security Pacific National Bank was No. 8.
But now, Bank of America tops the rankings, with an average of $2.9 billion in demand deposits owed to other financial institutions as of June 30. Chemical follows, with $2.2 billion.
"It's a real different chemistry in the marketplace," said Laura Bonsett, a group manager at Chemical Bank who is responsible for operating service sales to financial institutions.
The rise of BankAmerica and Chemical is noteworthy in a business fraught with price competition.
Two fold Benefit
Most large money-center and regional banks rely on correspondent services to produce a big chunk of income, and at the same time defray operating costs by sharing their facilities and expenses with other institutions.
In the past, most institutions paid for correspondent services, such as check clearing, electronic funds transfer, arid securities processing, with interest earned off demand deposits. This is why the rankings measure demand deposits.
Increasingly, however, banks are paying for correspondent services with fees. Fees and interest on deposits are both very important to the largest correspondents.
Key Line for Security Pacific
For example, before the merger Security Pacific's second- or third-largest largest revenue stream - after retail banking - was correspondent banking, said William S. Thomas Jr. executive vice president of Bank of America's financial institutions group.
Mr. Thomas said that correspondent banking will remain one of the biggest sources of revenue at Bank of America after the merger, though he didn't yet know where it will rank.
Bank of America's biggest correspondent business is check clearing for other institutions. The bank processes about 15 million checks a day, or about one of every eight checks in the United States.
Mr. Thomas estimated that about 10% of Bank of America's check clearings were for other banks.
Fee Portion Rises
A Bank of America spokeswoman said that as of June, Bank of America was getting half of its correspondent revenues from fees and half from net interest income. Last year, the bank received 68% of its correspondent revenues from net interest income.
Ms. Bonsett said domestic correspondent services at Chemical will account for about 15% of the $700 million of revenues the bank's Geoserve operating services unit is expected to pull in this year.
She said that Chemical's biggest correspondent business is securities processing.
Mr. Thomas and Ms. Bonsett both acknowledged that severe price competition had beset their primary correspondent services. They added that the mergers would help their institutions achieve the economies of scale needed to remain competitive.
Risk of Lost Business
But the banks' mergers also carry some risk - namely, that banks may move some of their correspondent business away from the merged institutions to minimize exposure to a single correspondent.
A bank might not want to risk keeping the same level of deposits it kept in two separate banks before their merger, argued Charles H.S. Mallis, global marketing executive for Chase Manhattan Bank's, global institutional business. Chase was the fourth-largest correspondent in this year's survey.
Mr. Mallis said that Chase has used this reasoning to pitch its correspondent services to customers of merged institutions.
"I can assure you that we go to that customer and say, are you going to give everything to the merged bank?" Mr. Mallis said.
Demand Deposits Rise
But despite the risk of losing business, which Mr. Thomas and Ms. Bonsett both acknowledged, neither institution appears to have suffered yet. In fact, the combined demand deposits due banks at BankAmerica and Security Pacific rose 2.8% from June 1991 to June 1992.
Similarly, the combined demand deposits due banks at Chemical and Manufacturers Hanover rose 16% in the same period.
But Mr. Mallis predicted that the losses will start showing up in the next few months, after the systems of the combined banks are merged and respondent banks realize the full extent of their exposure.
Meanwhile, mergers and regulatory action appear to have had a dramatic impact on other players in the correspondent banking industry.
For example, the biggest gainer among the 100 largest correspondent banks was Team Bank, Dallas.
This gain represents a remarkable turnaround for Team Bank, which was formed by Texas banker Ronald Steinhart in February 1990 through the federally assisted reorganization of the failed Texas American Bancshares. Team Bank was acquired by Banc One Corp. early this month.
One regulatory change that was expected to have a big impact on correspondent banking. and now apparently will not, is a new Federal Reserve rule intended to limit interbank risk.
The new Regulation F will require banks to limit off-balance-sheet credit exposure to undercapitalized institutions. Such a move could be a huge blow to undercapitalized correspondents, since it would force many respondent banks to move their business.
But only one of the 200 largest correspondents - Merchants Bank, Kansas City, Mo. - was undercapitalized as of June, down from 12 that were undercapitalized in April, said David Cates, chairman of Ferguson & Co., a Washington-based bank rating and data firm.