Although focus on the national credit crisis has beenratcheted-up considerably over the past few weeks, banks have beenfeeling the heat for much longer, with fallout for those planningto acquire more insurance agencies.

Indeed, over the past year, the U.S. commercial banking industryhas seen performance and stock valuations fall. Balance sheets havebeen hammered and previously abundant capital is now in shortsupply. The number of bank failures is up and is threatening tosoar.

Against this backdrop, the role of banks in insurance might seeminconsequential, but the future of bank-insurance is at acrossroads. The answers to two distinct but related questions willdetermine the future.

o Will banks win the relevance challenge?

o And will banks regain their footing in the agency acquisitionmarket?

These two questions will be worked out quietly in the backgroundas the credit crisis grabs the headlines.

As to the first question, many banks are not yet winning therelevance challenge.

The current struggles in the credit markets reinforce the needfor banks to continue diversifying into non-interest income (NII)businesses. This need is further evident in the fact thattwo-thirds of banks that currently sell insurance do so primarilyto increase their NII. But are insurance sales making adifference?

Recent research by Michael White Associates shows mixed results.The 100 bank holding companies (BHCs) with the highest NIIconcentration in insurance have a mean concentration of 29.0percent. For these banks, 29 of every 100 NII dollars are producedby selling insurance. But for all BHCs that sell insurance, themean NII concentration is only 6.6 percent.

The issue is relevance. For a bank to have sustained success ininsurance, it will need to operate above its relevance threshold.There is no universal threshold, but within each bank, there is apoint at which the insurance business has the scale to compete forcapital, resources and attention–in other words, to berelevant.

A mean NII concentration of 29.0 percent for the top-100 banksproves that relevance is achievable. But an overall concentrationof only 6.6 percent suggests that most banks aren't there yet.Although two-thirds of BHCs now sell insurance, many aren't doingenough.

The recently completed American Bankers Insurance Association“Study of Banks In Insurance” found further evidence of theimportance of relevance.

Surveyed banks with at least $2.5 million in insurance brokerageincome are approximately 50 percent more likely to believe they aresuccessful in insurance than those below $2.5 million. Now, $2.5million is an arbitrary threshold, but these findings reinforce thecorrelation between relevance (that is, scale) and success.

Meanwhile, the appetite for agency deals remains strong, butcurrent resistance is stronger.

Between 2000 and 2003, the banking industry was by far the mostactive acquirer of insurance agencies. During this time, bankscompleted 295 agency acquisitions, or close to two of every fiveannounced deals.

But since 2003, banks have been less active in the agencyacquisition market, even as the market has expanded. By 2007, banksaccounted for only one of every five announced agency deals.

So have banks lost interest in acquiring insurance agencies?Apparently not. The ABIA study found 80 percent of banks that havealready acquired at least one agency intend to acquire more.Unfortunately, for some of these banks, their appetite for agencydeals has been met with a wave of resistance. There are fourfactors at work:

o First, the soft market has dulled enthusiasm. It's nocoincidence the drop in agency deals by banks began asproperty-casualty pricing began to fall. Banks like predictableearnings streams, but the pricing cycles of the insurance businessdon't cooperate with this penchant. Some banks have been toounnerved by the soft market to continue their pursuit ofagencies.

o Second, banks have lost their pricing advantage. As the marketsoftened, publicly-traded insurance brokers were forced to be moreacquisitive. Acquired growth was needed to supplement anemic,soft-market-suppressed organic growth. To compete for deals, thesepublic brokers were forced to match or exceed the higher pricesbanks were prepared to pay.

o Third, community banks have struggled to find suitabletargets. Many community banks have been thwarted in their agencyacquisition efforts by a lack of attractive candidates. Theinability to find a platform-quality agency, for sale at areasonable valuation, within the geographic footprint of the bank,has sent many would-be acquirers back to the drawing board.

o Fourth, the credit crisis is suppressing all acquisitionactivities for banks. Many banks are simply too distracted to dealwith anything “non-core”–such as insurance. Others are restrictedfrom completing deals of any kind due to a lack of acquisitioncapital. As a result, 2008 will produce the fewest bank-agencydeals in a decade.

How will this dissonance be reconciled? Will the ongoingappetite for agency deals eventually overcome the currentresistance?

It's too early to tell. But it's likely some hardening in thep-c market, combined with a little light at the end of the creditcrisis tunnel, could draw banks back into the agency acquisitionmarket.

The banks that sustain success in the insurance business will bethose that win the relevance challenge–and it's winnable. Manybanks now earn significant portions of their NII and net operatingrevenues from insurance sales.

The fastest path to relevance is through agency acquisitions.But the current resistance to agency deals has temporarily blockedthis path, leaving some banks stranded in the irrelevance zone, andleaving bank-insurance at a crossroads.

Is the bank-insurance business reaching a plateau, or is itpositioning for the next wave of growth?

Ultimately, the answer may lie in how successfully the bankingindustry can reestablish itself as a key player in the agencyacquisition market.