UNDERSTANDING BANKERS’ BANKS AND THEIR IMPORTANCE Many community bankers leading the charge for a solution look back to this time as not just one of turbulence, but as the time their industry rose to the occasion of reinventing the community banking system. The need was clear: level the competitive playing field with larger, national banks by providing community banks with correspondent services and customized banking solutions from within their own marketplace, preventing the poaching of customers from relationships steeped in conflicts of interest. Community banking leaders, in a few select states, came together to discuss potential solutions and a path forward. The groundswell started in Minnesota in the early 1970s with the plan of creating a correspondence bank formed as a co-op of sorts, owned by community banks, serving community banks and leaving the competition for customers to the banks themselves in their communities. The problem? Nothing like this existed at the time. It was a new concept in an industry that traditionally did not react well to change. As one of the founders of the first bankers’ banks in the U.S. said at the time, the steps – “get a charter, fix the rules, make history” – were lofty by anyone’s standards, yet crucial to the community banking industry, which was under attack. Making History The time from the forming of the first bankers’ bank to the bankers’ banks of today was one of small business startups – perhaps one of the reasons that community banks are so small business focused; they have all participated in forming something new from the ground up. The first few bankers’ banks not only had to sell the idea to each other and regulators, raise funds, form a banking charter and open their doors on day one with a banking staff of one or two, a rented space and in many cases a Xerox copier, a lot of red pens and ledger paper. To hear the stories from those startup visionaries, those early days were not for the faint of heart as raising capital, on-the-job progress, solving problems in real time and meeting with community banks for business were part of the day-to-day. As the first few bankers’ banks paved the way, more states looked to the business model and more bankers’ banks were chartered. This year and over the next few years, many of the first bankers’ banks are celebrating significant anniversaries, from the first bankers bank, now United Bankers Bank (UBB), to Midwest Independent Bankers’ Bank (MIB). These early bankers’ banks paved the way for others and were instrumental in change and evolving an entire industry. The “bankers’ bank” system emerged in the mid-1970s and 1980s as a response to community banks’ dissatisfaction with correspondent services from larger banks. The Origin Story For decades, leading up to 1975, community banks relied on correspondent services from larger banks. However, this relationship soured when new federal branching laws allowed those same larger banks to open branches in other states and directly compete for the business of the community banks that they were also serving. Within a noticeably short time, thousands of community banks were facing not just additional industry competition, but that competition came from banks that they themselves were beholden to for services that they needed to remain in business. Additionally, the question of whether these larger banks, which at the time were new to many rural communities across the U.S., provide the same “hometown” banking services that community banks had been providing for decades. Community banks often have a deep understanding of their local communities and can tailor their products to meet regional needs, fostering local economic growth. In many cases, community banks also function as a source of local expertise and risk mitigation, which provides a more stable foundation for the broader banking system. 27
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