Passage of the Gramm-Leach-Bliley Act of 1999 brings to mind an adage: "What you fear most never happens. Something else does."

Community banks dreaded the new competition that the freedom to offer insurance and investment banking services might bring from larger banks.

The scenario has long been seen in bank operations. Officers of large banks would tell me: "Sure, the people in a local community will stick with their local bank and make it difficult for us to gain inroads. But then a customer will need something special such as international payments. He will have to come to us. And once we are providing this service, we can chip away at his relationship with the local bank and slowly draw away the entire account."

Community bankers who have faced this predicament mourn the death of the Glass-Steagall Act because it made their strong rivals stronger still.

This customer erosion probably will not happen in investment banking services. But insurance is different.

Community bankers watch with trepidation as heavyweight banking companies gobble up insurance agencies and use the insurance relationship as a wedge to win banking business.

This is where community banks have to fight back.

In my Dec. 14 column I shared the ideas of Paul Goldman, CEO of Paul Arnold Associates in Livingston, N.J., on how banks can buy insurance agencies and become a direct link between their banking customers and the underwriters for their insurance business.

But Mr. Goldman informs me that some bankers who have contacted him do not want to make such an investment. They want an easier way to offer insurance so that they can continue calling themselves "full-service" operations.

Mr. Goldman adds that community banks can keep up with the Joneses without the commitment of human or financial resources that buying an agency would involve. He writes:

"Arrangements can be made by community banks with established, reputable local or regional insurance agencies that have the human resources in place to do the job efficiently and professionally. They also maintain the licenses necessary to operate in accordance with statutory requirements and have contractual relationships with insurance companies in place to provide for the insurance needs of the bank's clients.

A bank "need only commit the time and money to having one of its representatives licensed in accordance with state requirements. That allows it to be able to legally conduct conversations with clients regarding insurance, and information can then be relayed via phone, fax, e-mail, or modem to the agency.

"The community bank can and should be able to provide insurance to its clients, but it doesn't have to do it at the expense of human or financial resources. The alternative is clear, the road legal and ethical, and it provides the means by which the goal can be accomplished easily."

It is certainly worth looking into. Mr. Nadler, an American Banker contributing editor, is professor of finance at Rutgers University Graduate School of Management.

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