To paraphrase Mark Twain, reports of the demise of the banking industry are premature, says Gregory A. Root, president of Thomson Bank Watch Inc.
"Can we do without a banking system? No," Mr. Root says. "Does that mean banks won't change? Of course not."
Even if, at the end of the day, the role of banks changes dramatically and mergers leave fewer around, there will still be a need for banks to provide finance.
"Do we need 10,000 or 12,000 banks in the United States?" Mr. Root asks. "No. But there's still no substitute for consumer lending or another payment system comparable to what banks provide."
As head of a credit rating agency that rates more banks worldwide than any competitor, the 42-year-old executive is well placed to track banking.
As the former executive vice president in charge of BankWatch when it was still a unit of Keefe, Bruyette & Woods Inc., he helped start the unit's international coverage and became president when BankWatch was acquired by American Banker's parent company, Thomson Corp., in 1989. BankWatch operates within a different Thomson business unit from American Banker.
Stint at Standard & Poor's
Before joining Keefe in 1979, Mr. Root worked for four years at Standard & Poor's as a vice president in the bank rating group.
Unlike other rating agencies, New York based-BankWatch sticks to banks and does not rate corporate issues.
At latest count, BankWatch rated more than 600 banks, investment banks, and thrifts around the world, covering more than 40 countries and including 200 banks in the United States.
More ratings are in the works, especially in Eastern Europe and the Middle East. And over the next few years, the total number will probably go up to more than 750.
The sharp increase in international coverage by BankWatch is mainly due to the rapid growth of so-called emerging, or developing, markets and the evolution of banking in Europe and Asia.
In Europe, for example, BankWatch has recently added 25 institutions, including British building societies, or savings banks, and regional banks in Italy and Luxembourg.
30 Latin Banks Added
Meanwhile, BankWatch has put 30 Latin American banks on its list.
Two years ago, BankWatch didn't rate any Latin American banks. By the end of this year that number will grow to 60. The latest to be included in the list: Chile's Banco O'Higgins and Ecuador's Banco del Pacifico. Elsewhere in Latin America, BankWatch is completing ratings on banks in Venezuela, Columbia, and Peru.
Venezuelan banks, hard hit by a major crisis, are among the toughest challenges BankWatch has faced in recent years.
BankWatch has roughly 1,400 subscribers, most of them in the United States. Demand for its ratings comes from roughly three distinct groups:
* Corporations, government agencies, and regulatory bureaus.
* Commercial banks.
* Other financial institutions, including pension funds and money management firms.
Demand for Data Rising
As business dealings with banks in developing countries have increased and many of them have turned to international bond markets for funding, demand for information on their creditworthiness has also increased.
"What we provide is basically a function of what our clients are looking for," says Mr. Root.
"And more and more of our clients are looking for information on these banks."
To cope with the rapid increase in the number of banks the agency rates outside the United States, BankWatch relies on either its own offices in New York, London, Hong Kong, and Tokyo or on local partnerships in Latin America.
In a major step to boost its Asian coverage, BankWatch recently took control of Capital Information Services, a Hong Kong-based rating agency that tracks 250 banks across Asia.
Rating Banks Seen as Tricky
Like executives at other credit rating agencies, Mr. Root acknowledges that setting a specific rating can be tricky. He adds it requires factoring in issues such as political risk and local regulatory competence.
"Ratings can be very subjective," Mr. Root admits. "You have to understand the country, the financial system, the position of a particular bank in the market and who owns it."
Getting information out of foreign banks can be tough, too. And it gets tougher the further you move down the line in a country. Banks in Latin America and Asia, Mr. Root points out, are particularly reluctant to divulge information about their business activities.
"Banks in those countries aren't used to opening their books, and it takes a lot of confidence building," Mr. Root says.
But then again, he adds, "fifteen years ago, U.S. banks weren't particularly open."
Importance of Ratings
And ratings are likely to grow even more important in the future. For one thing, they are becoming mandatory in many countries, even for local capital market issues.
For another, the rapid growth in trading means more and more banks will need to know something about the creditworthiness of their counterparties.
Looking near-term, Mr. Root doesn't see "a lot of huge new problems" for the banking industry worldwide. "There will be structural changesm but well-managed banks will adapt," he says. Overall, "we're pretty positive about banks."
