banks to thrive together was correspondent banking. The money-center banks would send out people who could help the respondents handle complex investment, operational, and lending problems, and they would provide theater tickets when the respondent's people came to the big city. It worked. The community banks got the services they needed to prosper, and the larger banks got the free balances they could use to fund their lending and investing operations. But correspondent banking has shriveled. With banks forced to maintain reserves at the Fed whether they are members or not, the balances that nonmembers used to keep at correspondents to meet their state-imposed reserve requirements have disappeared. On top of this, many larger banks have found that providing correspondent services is just not worthwhile anymore. But this does not mean that the smaller banks must atrophy and die. For a while, some observers felt that the community banks could no longer get the complex services they needed to remain viable. But those who shop around find that the skills they need to provide - as good a menu of services as the larger banks offer - are still available. And sometimes the community bank can buy them for a less than it costs the larger competitors to produce them internally. Several examples offer proof of this. Take, for instance, the First Bankers Trust Company of Quincy, Ill. About 15 years ago, it started its own employee stock ownership plan, as a means of rewarding loyal employees and also raising capital. Then, recognizing that a community bank needs a niche and noncredit income to survive, Don Gnuse, CEO of this $150 million-asset bank, started to offer its expertise in employee stock ownership plans to other community banks and thrifts by serving as a trustee for their ESOPs. What came next? As trustee for other ESOPs, First Bankers could sell operational services, and it could also make money lending to other bank and thrift ESOPs for which it was not a trustee. (Gnuse explains that you should not be both a trustee and a lender to the same ESOP). What's next? As First Bankers Trust contacted thrifts converting to stock ownership regarding their ESOPs, they found these same thrifts needed a transfer agent/registrar and dividend-paying agent. So not only did Gnuse get ESOP trustee clients, he also got clients for his bank's transfer agent/registrar and dividend-paying services - a service that it can offer for a lower fee, because of lower overhead, than major banks or investment bankers can. You can bet they will be right there when the thought of an ESOP comes up in a thrift that is converting. So here is a community bank, First Bankers Trust, which has respondents in 26 states and is adding a respondent in a new state every six weeks. With the fax and the phone allowing communication with attorneys everywhere - a requirement of ESOP trusteeship - Gnuse feels that the 100 banks and thrifts he now serves are only the beginning. What makes this significant is not just that one bank is doing well in a new niche, providing correspondent services that large banks now seldom offer, but that the respondent banks are able to get these services - and can, in turn, offer ESOPs to their business customers. They thereby have the same proficiency that larger banks do in this area. There are other examples of what a correspondent community bank can obtain in the way of complex services to supplement the operational, investment, and credit help that many community banks get from investment houses and large banks. Eric Siber, director of marketing at Natwest Financial Markets Group, Jersey City, talks about how Natwest provides investment, foreign exchange, interest rate hedging, and asset/liability management programs for community banks. He explains how they offer rate hedges to community banks, so they, in turn, can make fixed-rate loans to businesses in a volatile rate environment. This is something larger investment houses do not provide, according to Siber. In sum, correspondent banking services are not dead. They are just diverse and not as easy to find. But they are there, and by using them small banks can keep business that might otherwise go to bigger rivals. Mr. Nadler is a contributing editor of the American Banker and professor of finance at Rutgers University Graduate School of Management.

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