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<text> <title> (Jul. 30, 1990) Global Finance:Bareknuckle Banking </title> <history> TIME--The Weekly Newsmagazine--1990 July 30, 1990 Mr. Germany The American Economy </history> <link 00053> <link -0001> <article> <source>Time Magazine</source> <hdr> BUSINESS, Page 48 Bareknuckle Banking </hdr> <body> As worries about American institutions grow, the free-for-all of global finance is becoming more fierce By Michael S. Serrill--Reported by Barry Hillenbrand/Tokyo, Thomas McCarroll/New York and Adam Zagorin/Brussels The 1980s were a time of feast and fear for the world's international banking system: an era of globalization and vigorous overseas expansion but also of sharp competitive thrust. Asian banks and increasing numbers of European ones hung OPEN FOR BUSINESS signs abroad, joining the U.S. multinationals that had dominated global finance for decades. Suddenly the Japanese, drawing on their huge national savings pool and enormous trading surpluses, appeared to be the new Masters of the Banking Universe, carving out richer slices of international market share with startling rapidity. The global banking business became an international free-for-all. The boom-and-bust '80s may be history, but the banking rough-and-tumble is now more pronounced than ever. In the U.S. the battered industry is selling assets to recapitalize itself after the debacles of Third World debt, the decay in value of high-risk junk bonds used for corporate buyouts and the collapse of the real estate market in several sections of the country. The mighty Japanese, now far and away the world's biggest banking players, are also being squeezed. Japanese banks face rising interest rates that boost their costs at home and new international capital-reserve requirements that curb their lending abroad. In Europe, considered the premier expansion market in the 1990s, the European Community's July 1 deregulation of financial flows across most members' borders is expected to accelerate the merger movement in the Continent's highly protected banking industry. West German banks are also preoccupied with the beckoning market of East Germany. Predicts Mary Carryer, senior vice president of international trade services at San Francisco's Wells Fargo bank: "The world is going to shake out to a few large banks with worldwide coverage. By the time the dust settles, those of us who aren't one of those banks will have to form alliances." If it is an anxious time to be a banker, nowhere is the level of nervousness higher than in the U.S. Depressed earnings at many of the country's largest lenders have raised questions about the health of the entire industry. Citicorp, the biggest U.S. banking company, announced last week that its profits for the second quarter fell 37%, to $248 million, from the same period a year ago. Citicorp attributed much of the decline to increased losses on real estate lending, particularly to developers in the troubled Northeast. Chase Manhattan, the No. 2 banking concern, reported second-quarter profits of $52 million, a 62% plunge from the same period a year ago. Such results come at a time when the American public is reeling from a savings and loan crisis that the White House predicts will cost taxpayers $500 billion over the next 40 years. While no one expects a run of major bank failures, some experts fear that a U.S. economic downturn could push many overextended lenders toward the brink of collapse. Overseas, says James McDermott of Keefe, Bruyette & Woods, one of Wall Street's leading analysts of the industry, American bankers "are retreating from the global marketplace with their tails between their legs." Their foreign ventures proved so traumatic, McDermott adds, that "they're going to be at home licking their wounds for a long time." In the course of the U.S. retreat, dozens of foreign branches have closed, and entire regions of the globe have been abandoned. Chemical Bank, the sixth largest in the U.S., earned 50% of its revenues abroad 10 years ago. Now the proportion is 17%, and Chemical has cut the number of countries where it has marketing offices from 30 to nine. Bankers Trust, First Chicago, Manufacturers Hanover Trust and other U.S. multinationals known as money-center banks have sliced their foreign presence just as dramatically. Chase Manhattan, which has been operating overseas for more than 100 years, has closed or sold offices in 22 (of 55) countries. Among the U.S. money-center banks, Citicorp is one of the few still trying to expand its international network. The bottom line is that America is an ebbing power in the banking world, with its mightiest institutions surpassed by behemoths in Japan and Europe. U.S. banks have simply been out muscled abroad by their bigger, better-capitalized foreign competitors, like Sumitomo and Fuji of Japan, the Deutsche and Dresdner banks of Germany and such other rivals as Credit Lyonnais of France, Midland of Britain and Union Bank of Switzerland. A glance at a list of the world's largest banks gives a clear view of the winners and losers in the bruising battle. Of the world's 20 top banks, 14 are Japanese, led by giant Dai-Ichi Kangyo (assets: $413 billion). Five are European, topped by France's Credit Agricole (assets: $243 billion). Only one, Citicorp ($231 billion), is American. In fact, of the 50 largest banks in the world, only three are American: Citicorp, Chase Manhattan and BankAmerica. "U.S. banks are pygmies in a world of giants," says Lowell Bryan, a banking analyst at the consulting firm of McKinsey & Co. in New York City. "Although we have the largest financial economy, we have the smallest banks." By most measurements--assets, capital, return on shareholders' equity--major Japanese and European institutions look healthier than their American counterparts. Yet foreign lenders also have their worries. The combined profits of Japan's 13 largest banks fell 11.6%, to $7.3 billion, in the fiscal year ended March 31, marking the first such decline in 10 years. The drop reflected the higher interest rates that banks must pay to woo deposits and hefty write-offs of bad loans to Mexico, the Philippines and other developing countries. But no analyst regards such setbacks as serious. The Japanese will almost surely continue to be the dominant bankers to the world. From 1980 to 1989 Japanese bank deposits, measured in yen, more than doubled. When measured in dollars, which fell in value against the yen during the decade, the deposits more than tripled, skyrocketing from $1 billion to $3.8 billion. Japanese money is invested everywhere, from Tokyo skyscrapers to RJR Nabisco junk bonds to shares in Britain's newly privatized water companies. The scope of the Japanese surge abroad has been breathtaking. In 1984 Japanese banks held a little more than 20% of international banking assets, meaning the sum of all outstanding loans. Today the share is almost 40%. "There is hardly a major deal put together anywhere in the world that does not include Japanese banks," says J. Brain Waterhouse, a British securities analyst in Hong Kong. "It used to be that 1 out of 4 banks involved in deals were Japanese. Now it seems to be that 1 out of 2 are Japanese." In the U.S., Japanese banks have chewed up market share by buying local banks, particularly on the West Coast. Mitsubishi Bank bought the Bank of California in 1984, while the Bank of Tokyo acquired the Union Bank of Los Angeles in 1988. The Japanese own four of California's 10 largest banks. Starting from near zero five years ago, Japanese banks account for at least 10% of all commercial loans made in the U.S. Japanese banks are currently intensifying their focus on the European Community. Some 60 Japanese banks have European bases in London, and more will probably follow. Mini-headquarters are also being established on the Continent. Dai-Ichi Kangyo and Fuji Bank have offices in Munich; Sumitomo Bank, Sanwa Bank and the Bank of Tokyo are in Lisbon; and others have set up shop in Paris, Barcelona and Milan. The Japanese are likely to concentrate their activities in merchant banking and the bond markets. European banks are facing the rest of the world with some caution. The unified 12-nation European Community market of 1992 is expected to mean the closing of many European banks long coddled by national laws that kept out foreign competition. "A huge number of institutions, perhaps as many as half, will disappear or merge as the domestic market is rationalized," says Christopher Toole, an analyst with Country NatWest Bank in London. Adds Robert Poldermans of the accounting firm Arthur D. Little: "Europe has too many midsize banks and not enough giants, too many local customers and not enough Europeans." The past 20 months have brought a flurry of more than 30 mergers and takeovers involving European banks and insurance companies across the Continent. The aim has been to create institutions that will be big enough to expand Europe-wide and survive the competitive heat when larger institutions from other countries arrive in force. In Denmark, for example, where more than 150 banks serve just 5 million people, a series of unions has taken place since 1988. The most significant: the merging of Den Danske Bank, Copenhagen Handelsbank and Provinsbanken to create Scandinavia's largest lender, with assets of $36 billion. The biggest marriage on the Continent took place in April with the joining of two longtime Dutch rivals, Algemene Bank Nederland (ABN) and Amsterdam-Rotterdam Bank (Amro). The pair forms Europe's sixth largest bank and the 19th biggest in the world, with combined assets of $184 billion and 55,700 employees. "A merger is necessary to operate worldwide and in the Netherlands," says Roelof Nelissen, Amro's chairman. France's Credit Agricole, the world's 10th largest bank, has also declared its intention to expand Europe-wide but is taking its time. The bank last year bought a 13% share in Nuovo Banco Ambrosiano of Italy and is said to be scouting elsewhere. Other French banks are more hesitant. Both Credit Commercial and venerable Societe Generale have decided not to extend retail-banking networks outside their home territory. "The practice of offering universal banking services seems to us to be limited to the national territory," says Societe Generale chairman Marc Vienot. Abroad, "we plan to find niches." One example: Societe Generale's recent purchase of the investment-management firm Touche Remnat of Britain, which will give the French bank a toehold in London, the Continent's premier financial center. Italy, which has some of Europe's most inefficient but potentially wealthy financial institutions, is likely to undergo the greatest change. For now, the Italians are thoroughly--very thoroughly--served by their bankers: the country has some 1,200 separate banking companies with 13,500 branches--but it also has one of the Continent's highest savings rates. The mostly government-controlled network employs 310,000 people, many of them holding down virtual sinecures. While most West European banks are thinking about bulking up in their home markets, West Germany's powerful financial institutions are bursting their old bounds. By far the most aggressive institution is West Germany's Deutsche Bank, which has swallowed financial institutions in Britain, Austria, Spain, Portugal and Italy. But the hottest banking action in Europe is within Germany itself, as West German banks vie to take over the deposits of their East German neighbors. Deutsche Bank, the leader of the drive, is opening 100 new branches in the East to cash in on this month's currency union between East and West. Dresdner Bank, which once had 162 branches in the East, is hard at work re-establishing them. And Commerzbank has set up prefabricated bank branches on East Berlin street corners. Elsewhere in Eastern Europe, where countries like Hungary and Poland are burdened with billions in foreign debt, bankers from abroad are more cautious about stepping in. German and Austrian banks are expected to increase lending once East bloc economies are further along the path to free markets. But the amounts will be relatively small--much smaller, ironically, than the billions in loans offered by the West when the East bloc was run by totalitarian regimes. Speaking in Zurich, A.W. Clausen, the former World Bank president and recently retired chairman of BankAmerica, warned against pouring money into the East: "Too much capital too fast can cause far more harm than good." Global banking is inevitable. Says Thompson Swayne, who oversees Chase Manhattan operations in Europe, Africa and the Middle East: "As companies and markets go global, countries become less important and companies become more important. As they go global, their financing goes with them." But where the financing comes from, and who reaps the rewards, are exactly what the bareknuckle banking competition is all about. </body> </article> </text>