At a recent gathering of senior bank and securities executives in London we asked how many were prepared for Europe adopting a single currency, the Euro.
Almost four out of five said they had not started preparations or were just beginning to get organized for the upcoming European monetary unit. Another 12% said that changes were in progress. That left barely one executive in 12 saying their organizations were prepared for Euro's initial impact.
Perhaps the results shouldn't come as a surprise. Political infighting between European countries over the currency has tended to obscure what can no longer be denied:
The Euro will be introduced, at least in a core group of countries, on time in 1999.
The cost of converting to a single currency will be huge -upwards of $25 billion for financial services alone.
The Euro will accelerate the major trends in banking and finance already under way. It will change the competitive landscape, especially in wholesale and capital markets.
Behind the mind-numbing technical detail of converting between five and 17 national currencies into one, there is no doubt that the implications for banks doing business in Europe are enormous.
Early on, many institutions in Europe erred in believing the Euro would involve little more than adding another currency to their systems.
Studies by Gemini Consulting indicate major retail banks will need to spend $200 million to $300 million each on converting operations to the single currency. Securities firms and insurers, depending on their size, will face similar charges.
For all banks combined, Gemini is conservatively estimating the cost of conversion to be $25 billion over the next five years. To gauge what this means: consider that the net profits of Europe's top twenty banks were just $16.9 billion in 1995.
Roughly half the costs will be tied to information technology, but there will also be sizable expenses for marketing, staff training, and a slew of other expenditures, including new stationery.
Educating customers will also be costly and time consuming. The German sparkassen -local banks- estimate that each of their 40 million customers will require 15 minutes of education over the next five years on EMU. That represents over 6,000 man years of effort by the sparkassen.
This puts the Euro in the same class as the "year-2000" technology issue, a massive extra charge for doing business that for many will yield no discernible benefits.
It gets worse. The Euro also will have an enormous impact on revenues as well. Lower fees for cash management and for cross-border payments will reduce bank revenues by $5 billion or more annually.
What amounts to a free lunch for corporate treasurers is grim news for bankers, many of whom will be forced to exit those businesses as margins shrink to meaningless levels even at the best run banks.
Also, the Euro's introduction will reduce the need for multiple correspondent banking relationships across Europe and will concentrate capital markets activities in fewer centers. Relatively illiquid and inefficient markets will lose out, notably to markets in Frankfurt and London. Ahead, Europe will look increasingly like the U.S. domestic market rather than a network of multiple markets. An unanswered question: For how long will Europe need some 23 futures exchanges and 32 stock exchanges when the U.S. manages with seven and eight?
Change, of course, spells opportunity. We believe that non-European financial institutions, including U.S. banks, stand to benefit more from the Euro than do locally based banks.
At present, the overwhelming bulk of profitability for most European banks comes from their national operations, plus support for their national corporations overseas. This will change.
Governments are likely to become less able and less willing to support their nationals in the financial sector.
Direct marketers and other specialists will push across national boundaries with lower-cost credit cards, mortgages, and insurance products, much as they have scaled state lines here.
Continuing to ignore the Euro's emergence isn't much of a bet. If wrong, those banks are out of business; if right they still face the onslaught of transnational competition.
A sounder approach is to develop longer-term strategies by analyzing the Euro's likely effects on different business lines. For instance, more privatization, less market regulation, and the rise of the Euro as a reserve currency will offset diminishing demands for cash management, foreign exchange, and derivatives.
Estimates of privatization alone have soared to $300 billion and more. The question becomes which bankers get the business and who issues the corporate debt?. Today corporate treasurers favor local banks for their knowledge of local markets and national monetary policies.
Soon even smaller companies will disintermediate their local banks and instead use institutions with pan-European distribution capabilities to tap the liquid Euro capital market.
In our view, investment banking will increasingly belong to institutions with pan-European strengths. The results could be dramatic. In 1993 nondomestic lead managers had only 8% of the business by value in Spain and 10% in France. Penetration in Italy was higher at 28%, but only in Britain did it reach a significant figure-44%.
The message is clear. Adroit bankers will use the conversion to the single currency as a business opportunity, not just a dry technical issue. The winners will be those who act now rather than waiting for the Euro to emerge.
