Banking with other banks is big business, and always has been.

But the annual American Banker tally of the 200 largest banks in correspondent balances shows that the business of banking with other banks is going through substantial change, with some big banks reporting sizable declines in correspondent balances, some smaller banks posting sizable increases, and total correspondent balances dropping 1%, to an average of $ 36 billion for the year ending in June.

Each of the four biggest banks in correspondent balances posted sizable declines in correspondent balances. In previous years, this could be interpreted as bad news, that could hurt the banks' bottom lines.

The reason is that banks, like other companies and consumers, traditionally maintain minimum cash balances in demand-deposit accounts to pay for check sorting, funds transfer, securities processing and other operating services.

Balances Off, but ...

So declining correspondent balances could imply a decline in total correspondent revenues.

But the big banks say that, for them at least, that isn't the case. Take Bank of America, for example. The country's largest holder of demand deposits due to other banks, it saw its total of correspondent balances fall 13%, to $2.5 billion, for the year ending in June, compared to the previous year.

But William S. Thomas Jr., executive vice president of the bank's financial institutions business, said: "I think the [correspondent banking] contribution to the organization is increasing."

There are several reasons. For example, Mr. Thomas said that with banks enjoying a big spread between the interest they pay depositors and the interest they earn on deposits, the value to Bank of America of demand deposits by correspondent banks has increased.

Service Used as Entree

Likewise, more banks are paying for operating services with fees, rather than tying up valuable cash in demand deposits. And Bank of America uses correspondent services to get its foot in the door to sell other services, like derivatives trading. "I think the business has to be evaluated in terms of its overall contribution," Mr. Thomas said.

Chase Manhattan Bank, the fourth-largest holder of correspondent balances, saw its average demand deposits due other banks drop 14% to $1.7 billion.

But Charles H.S. Mallis, a global marketing executive for Chase's Infoserv operating services unit, said that total revenue from correspondent services has been growing.

Ahead of the Market

He pegs the overall rate of growth for cash management, trade, and payment services - the area in which he works - at between 3% and 4% per year. But he said Chase's revenues from sales of these services to banks are "growing substantially greater than the market as a whole," and that the growth stems partly from the increased use of fees to pay for operating services.

Chemical Banking Corp.'s New York flagship, the nation's second-largest bank in correspondent business, saw average demand deposits due other banks fall 7%, to $2.3 billion.

Even so, the bank's revenues from operating services to other banks now total about $80 million a year, and are growing at nearly 5% per year, officials said.

|Very Profitable'

Furthermore, the business is a "very profitable" one in which Chemical continues to invest, said Ken Montgomery, senior vice president of sales for the bank's Geoserve operating services unit.

But he said he has seen indications that some money-center banks, including some institutions among the 10 largest on the American Banker correspondent balances list, as well as some foreign banks and some "non-money center" banks, are "deemphasizing" correspondent services to focus on other, more lucrative businesses.

He declined to name any of the banks he thought might be deemphasizing their correspondent business.

And while the business of providing operating services to banks' is dominated by money-centers and big regional banks, some smaller institutions are also strong players, and are undergoing solid growth.

One example is the Independent Bankers Bank of Florida, in Orlando, which provides traditional correspondent services to 270 banks in its home state and Alabama.

The 92d-largest correspondent on the American Banker list, Independent Bankers saw its average correspondent balances grow 75%, to $86 million, in the year ending in June. Noel Busch, chief executive of the bank, said his institution has been helped by the consolidation of Florida banks into the hands of Barnett Banks Inc. and First Union Corp.

"It's allowed us to obtain new relationships in Dade, Brower, and other counties that hereto, fore were not so amenable to doing business with us," he said.

The reason? Many community banks would rather do business with a correspondent specialist than an acquisitive competitor, Mr. Busch said.

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