Correspondent banking balances have declined sharply at most U.S. banks, according to American Banker's latest annual survey of the top 200 banks in the business.

A handful of regionals did post increases, but they were by far the exception.

The survey covered the four quarters through last June 30.

Bankers said the decline in average correspondent balances, or deposits, at the nation's five top correspondent banks stemmed partially from rising interest rates and improved liquidity, which made it less attractive for correspondents to make deposits with them.

With interest rates rising, banks are less keen to deposit money at other banks except in exchange or as a reward for other services.

"Banks' liquidity needs have diminished in the last few years, so it's not that important to have instant cash around," said Donald R. Monks, executive vice president for funds transfer and correspondent banking at Bank of New York Co.

"While interest rates have been rising, banks' appetite for allowing money to sit in deposit at other banks has also diminished - because there are other, more useful ways to place that money."

Mr. Monk also noted that "the investment community doesn't tend to look favorably on a bank that has a lot of correspondent balances, or low-margin interbank bank loans."

Mergers and acquisitions in the banking industry have prompted some banks to consolidate accounts at one institution rather than maintain them at several. That consolidation also triggered a decline in average balances at some banks.

But bankers add that to a larger extent, the decline in balances reflects a growing shift to fee-based correspondent services and in no way indicates that correspondent banking activity as a whole has declined.

"In today's market, I would suggest that adding fees to balances would be a much clearer measure," says Laura Bonsett, vice president and group manager for the banking and money management group at Chemical Banking Corp.'s Geoserve unit.

"We still have a significant commitment to this market, and we haven't seen any business runoff in the underlying revenues this business provides Chemical."

Banks have customarily left low-paying balances at other banks in exchange for a wide range of "correspondent" services provided from those institutions. Those services cover everything from securities processing and custody to more traditional check clearing, escrow and agency accounts, cash management, and treasury and payment-related services.

Bankers say that despite the drop in balances, banks have continued to develop correspondent banking operations around the world. Chemical is actively building up its securities-related correspondent banking services and developing electronic clearing and transfer services. Bank of New York has been investing heavily in worldwide funds transfers, much of it trade related.

And with international trade and payments growing rapidly, banks are canvassing the world for new correspondents and offering a broader range of services to their existing correspondents.

Still, average balances are a reflection of one way the business of correspondent banking is going. According to American Banker's survey, average balances dropped substantially at the five biggest players for the 12 months ended June 30.

They fell 28% at Bank of America, to $1.8 billion; 13.5% at Citibank, to $1.7 billion; 12.3% at Chase Manhattan Bank, to $1.5 billion; 41.6% at Chemical Bank, to $1.35 billion; and 12.1% at Bankers Trust Co., to $979 million.

In contrast, they rose 55.3% at Barnett Bank of Jacksonville to $249 million; 79% at First Union National Bank of Florida, to $187 million; and 60.6% at European American Bank, to $158 million.

At the top 200 banks, the average correspondent balance fell 10.4%, to $31.3 billion. Those banks account for 93% of all correspondent balances.

Combined correspondent balances at bank subsidiaries of multibank holding companies showed that the top 50 banking companies in the field had an 11% drop in correspondent balances, to $27.3 billion. The 50 banking companies account for 80% of the market.

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