The early history for correspondent services for community banks is a checkered one. But working with their state legislatures, community banks successfully pushed for new legislation allowing for the creation of a bank for banks, owned by banks, and directed by banks. The correspondent bank in the form of a "bankers bank" was born. The history of service is a proud one and the success of community banks is in no small part a result of the products and services provided under the bankers bank banner.
But bankers today face a new competitive reality. Now we are in the midst of a downturn unprecedented in banking with exceptional pressure on earnings and capital. At its core, community banking continues to resonate with the retail and small business consumer. Local decision-making and consistency of staff continue to attract customers who desire to be more than an account number. Small businesses, lost in the impersonal lending systems of the largest banks, still seek a good banker for their business. In order for community bankers to continue to capitalize on these strengths, they must have three key support elements: capacity, competent advisors and strong systems support.
Capacity is necessary to allow community bankers to grow with their customers. But now more than ever it must be scalable. The highly capable community bankers of today are now stepping up to larger lending projects in their markets; to do so requires available capacity from their correspondent banks. Likewise, community bankers in more slow-growing markets are seeking opportunities to invest in loan participations in order to improve the return on their earning assets. Both fast and slow growth markets are now looking at the participation market as a way of diversifying across types of loans and geography. The correspondent bank of today must be able to manage a "book" of such loans, both buying and selling in support of their customers. Similarly, the correspondent bank must be able to provide loan support directly to the bank or its holding company in order to support growth.
Competent advisors assist the community bank officers in framing and managing risk throughout the organization. The lending staff of the correspondent bank must have a broad skill set with particular experience in the underwriting and structuring of more complex credits. The correspondent bank should provide consulting assistance in critical subject areas such as strategic planning and executive compensation and branching; advisors should be skilled facilitators to assist the bank CEO with the presentation and discussion of data, both internally and with the Board of Directors. Investment banking advice should be a part of the product offering of a dedicated correspondent bank.
Strong systems support leverages the bank officers' time and product offerings. As the methods of payment at retail shift away from the traditional paper check and the Federal Reserve reorganizes to control costs, cash letter and clearing activities offered by the correspondent bank must be robust and reflect solid value, while eliminating the requirement for community bankers to invest time in analyzing and structuring a solution.
As small businesses grow more sophisticated and begin to source materials and sell goods internationally, so too their banks must grow with them. Therefore, correspondent banking should provide support for international transactions for both currency and credit. The provision of a stable, multi-platform private label credit card provides a much needed capability, if only viewed defensively.
Typically bankers have called upon their correspondents to provide the needed support in times of change. Now, with the continuing sub-prime crisis and the broader financial crisis and economic slowdown that has resulted, community banks face an even greater challenge. Correspondent banks that fail to keep pace with the needs of their constituencies are destined to become less relevant as community banking marches on. An older, more limited model for correspondent banking - to the extent that it demands allegiance, or ties up capital strictly as a function of charter location - runs the risk of weakening the very banks it promises to serve. The increasing number of bankers seeking stronger correspondent partners suggests that the new model is here to stay.