I recently visited with a gathering of members of the Boston chapter of Robert Morris Associates, the trade group for commercial lending officers.

The discussion was on the usual topics, such as credit scoring, Fed policy, and the like.

But when it came time for the group to put questions to me, a community banker asked a zinger:

"How do we compete against the mutual funds that can pay 5% for short- term savings deposits?"

Often the standard response to such questions is something like, "Have you looked at the efficiency of your operations to see why they can pay more for deposits or charge less for loans?"

But lately I've been thinking that such a response just doesn't cut it. With the advantages money funds have over banks-fewer restraints on lending and investing, little or new capital requirements, and no need to set aside reserves for liquidity or to meet Federal Reserve requirements-no bank can pay as high a rate on savings as a money fund can.

So any answer to how banks cope with rate competition has to consider the alternatives.

My suggestion was simply, "Accept the fact that you can't compete on rates, and go on with your business."

Of course, this means the loss of deposits of those who will move to take advantage of the 5% money fund rate.

But these are depositors who will be disloyal even if you match the rate. They will leave anyway as soon as someone offers 5.01%.

I compare such rate-surfing scenarios to a predicament many of my ex- students ask me about: what to do when they have been at one job for a while and someone offers them a better job, but only if they start immediately-without fair notice to their present employer.

My advice is invariably: "Don't do it, even if it costs you the better job. Because if you are disloyal to your present employer, the new people will be certain that you would also be disloyal to them if something even better came along. You would be tainted by this opinion of you throughout your entire career with them."

So what will you do if you don't match the higher rate and hot money does leave?

Will you be able to replace it more cheaply with other funds, or will you have to reduce your asset base to offset the loss? The latter is more likely.

But would reducing your assets be so terrible? As available funds rise, a bank makes the best loans and investments first and then adds the more marginal credits that will be the first to be terminated if the bank no longer has the money to finance everything presently in its portfolio.

Thus the loss of funds will not cost as much as you think if you look at the average return from all your loans and investments.

Finally there is the question of size itself.

I am always amused when people say the community bank cannot survive today simply because it can't grow as rapidly as its larger competitors.

What does size mean anyway?

What does survival involve?

Does a bank have to offer every kind of service to keep loyal depositors?

Small banks have survived by taking demand and time deposits and making personal loans, mortgage loans, and small-business loans. They have done this for almost two centuries. Why can't they do it now?

The Robert Morris Associates member should remember the old but wise prayer:

"Lord, give me the strength to change what can be changed, the serenity to endure what can't be changed, and the wisdom to know which is which."

Community banks have never based their survival and success on rate competition. Why should they have to do so now in a world where good service is appreciated more than ever and so many people are willing to sacrifice interest income to pay for it?

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