The prevailing wisdom is that bankers are retrenching from international business. But the prevailing wisdom may be wrong.

From Shanghai to Mexico City, banks are pushing into new markets, establishing offices, and setting up ventures with local players.

In Eastern Europe, Bankers Trust New York Corp. is setting up joint ventures in Hungary and Poland; Austria's Creditanstalt has established operations in Moscow and Slovenia, and Credit Lyonnais plans to open a branch in St. Petersburg, the former Leningrad.

Latin America Opportunity

Latin American countries, cut off from foreign funding for nearly a decade, are coming back into world capital markets.

Banks are opening branches in mainland China for the first time since before World War II and eyeing new markets like Indonesia and India.

While few of these banks are concentrating on traditional sovereign lending, they are without doubt optimistic-about everything from fee-based transaction business to advisory work.

Indeed, privatizations, deregulation, and financial innovation are accelerating everywhere.

An Historic Moment

"We meet at a turning point in history," U.S. Treasury Secretary Nicholas F. Brady told the chairmen of the world's 107 biggest banks last month at the International Monetary Conference in Toronto. "Politically and economically, the countries of the world have experienced more change in the last year and a half than at any time since the end of the Second World War."

Most bankers share that view.

"Our industry has confronted immense changes in its operating environment in recent years," said William Purves, chairman of the Hongkong and Shanghai Banking Corp.

"Globalization, deregulation, securitization, consolidation, new technology: it i as if we have come to inhabit a shifting landscape of trends and concepts, within which we must struggle to preserve our expertise, our integrity, even our identity as bankers," Mr. Purves said.

Creating Capitalist Banks

In countries where the entire former political and economic system has collapsed, such as Russia and Ukraine, banks are being slowly and painfully created to fill the void left by disappearance of the old state-run banking system.

"Deregulation, intensified competition, automation, an increasingly global banking environment, and the collapse of the planned economies of Eastern Europe have all created new options and opportunities," said John B. McCoy, chairman and chief executive of Banc One Corp.

As opportunities increase, bankers are reassessing their roles. Clearly, old-fashioned cross-border lending is out for many.

Badly burned by cross-border lending in the 1980s, big banks in Europe, Japan, and the United States say lending to emerging markets in Latin America or the Commonwealth of Independent States is not in the cards.

"One of the reasons banks are not using their own balance sheets is because they don't want to get into debt situations," said Thomas Labrecque, chairman of Chase Manhattan Corp.

"Debt is always something to be careful of."

European and Japanese bankers are showing similar caution, notably in Eastern Europe and Russia.

"There is no scope for finance other than government-guaranteed export finance until we see a satisfactory solution to the problem of old [Soviet] debt," said Hilmar Kopper, chairman of Germany's Deutsche Bank. That, he warned, "won't be an easy task."

Instead, many big international banks are finding themselves a new role as financial intermediaries.

New Banking Roles

That includes underwriting and selling securities - from short-term commercial paper to long-term bonds -- arranging mergers and acquisitions, structuring project finance packages involving large amounts of equity, trading securities and foreign currency, and arranging swaps and options.

With the exception of large-scale loan syndications to creditworthy multinational concerns, big banks say they are steering clear of straightforward commercial lending.

"One ought to do what one does well," said Mr. Labrecque. "You have to pick your strategy because you're not going to be all things to all people."

As big banks focus on large international corporate deals, securities dealing, and trading, smaller regional banks in the United States, Germany, and other countries like Mexico and Turkey are stepping up retail and commercial banking services to local markets.

Bankers say this trend means that, by the end of this century, only a handful of institutions like Citibank, Credit Lyonnais, Hongkong and Shanghai Banking, and the three big Swiss banks will be truly global banks, operating across markets worldwide.

Other banks, which once held similar hopes, have been focused to scale back their ambitions as problem loans have increased and capital has grown scarce.

Probably the biggest losers in the race to build global banks have been Japanese institutions.

Like many of their U.S. counterparts who pulled out of international banking in order to develop markets at home, Japanese banks are scaling back on international lending and striving to improve capital and profits.

"Japanese banks are big enough, and there is no need to be bigger," said Yoh Kurosawa, president of the Industrial Bank of Japan Ltd. "The major question for us is the quality of the deal."

Still, as barriers continue to fall, capital markets explode in Buenos Aires, Santiago, Chile, and Bangkok, Thailand, and investment pours into places like southern China and Brazil, the lure of moving into emerging markets is proving irresistible for many.

One reason banks are so eager to get into emerging markets in newly opened countries is the enormous potential for developing new business and the high profits to be earned.

Unlike more mature markets, where market integration and deregulation have slashed the cost of money to borrowers, lending margins, fees, and commissions are still high in the developing world, where banking services come at a premium.

"The outlook for business profitability is enhanced by the limited degree of competition from domestic or foreign firms that still exists in many developing countries," said Citicorp vice chairman H. Onno Ruding. "The consequence of this situation is that higher profit margins can be obtained."

Limited Competition's Lure

"Imperfect markets with limited competition are always attractive, provided one has the necessary local knowledge and one has entered them at an early stage," Mr. Ruding said.

Others expressed similar views but added a warning.

"The post-1992 European economic community, coupled with the collapse of the Soviet Union and its emerging economies, will offer American banks enticing investment and lending opportunities," said Mr. McCoy of Banc One. But the opportunities come with new risks.

U.S. banks are getting hit by loan losses on commercial real estate lending in Britain; British banks are losing money on securities trading in India; and banks from countries like France and Austria have lost money on complicated corporate deals structured in the United States.

Overabundant Risk

"An abundance of opportunity can bring an overabundance of risk," said Mr. McCoy. "The most important difference between bankers in the 1980s and bankers in the '90s will be their ability to manage opportunity."

Nor are the risks limited to straightforward lending.

"Competitive pressures within the banking industry and from nonbanks, in particular, have greatly increased," said Wilfried Guth, a member of the supervisory board of Deutsche Bank. "While margins for conventional commercial bank business have diminished in this process, the banks assumed new types of risk with innovative financial products in order to retain their traditional customer base and to boost fee income."

As banks race to get their feet in the doors of new markets and as they start arranging profitable off-balance-sheet transactions such as swaps, options, and futures, bankers and regulators are becoming increasingly concerned. The speed at which these complex and little-understood financial instruments are proliferating is unnerving.

"There is growing uncertainty about whether banks and regulators fully understand the systematic risks these burgeoning instruments carry with them and whether we have appropriate mechanisms in place to deal with them," said Allan R. Taylor, chairman and chief executive of Royal Bank of Canada.

Just as banks are scrambling to increase such business because it does not require them to set aside large amounts of capital, so, too, are regulators racing to keep pace with the risks by drawing up capital guidelines for derivatives and other off-balance-sheet activity.

They are also moving closer to coordinating international supervision of banks in order to tighten international banking loopholes such as those that let Luxembourg-based Bank of Credit and Commerce International steal billions of dollars from unsuspecting depositors worldwide.

As market integrate and competition increases, the cost of borrowing is falling in many countries and evening out around the word.

A direct result is that banks are slashing operating costs in an effort to be lowest-cost lenders. And one of the fastest ways to cut costs, most bankers believe, is by merging with other banks.

"Virtually all observers of the global banking scene agree on the inevitability of consolidation and expect a growing wave of bank mergers worldwide to achieve this shrinkage," wrote Salomon Brothers analyst John Leonard. "In an overcrowded and marginally profitable global banking market, most observers agree on at least one conclusion: Mergers must take place to reduce capacity."

Some of the fastest consolidation has occurred in the United States.

By some estimates, up to one-fourth of all U.S. banks will disappear by the end of this decade, and more than 250,000 people working in U.S. banking will lose their jobs. Similar trends are under way elsewhere.

Submerging Bank Identities

In Denmark, three bans -- Den Danske Bank, Copenhagen Handelsbank, and Provinsbank -- have merged into one. And a merger of three other -- Privatbanken, SDS Bank, and Adelsbanken -- has created another banking giant.

Holland's Algemene Bank Nederland and Amsterdam-Rotterdam Bank have merged, as have Austria's Zentralsparkasse under Kommerzialbank and Oesterreichische Laenderbank -- to form Bank Austria.

Meanwhile, Spain's Banco Exterior de Espana, Instituto Oficial de Credito and Caja Postal post office savings bank have merged into the giant Corporacion Bancaria de Espana In Britain, HSBC Holdings PLC, parent of Hongkong and Shanghai Banking, is merging with Midland Bank PLC after winning a bitter takeover battle with Britain's Lloyds Bank PLC.

More than one-third of the 135 Arab banks operating outside Arab countries could soon disappear in the face of competition from big Western banks, Adnan el Hendi, secretary-general of the Union of Arab Banks, predicted recently.

Not all mergers will work, and some are going to take a lot more time to sort out than others. But whatever the outcomes, one thing is certain: A lot fewer banks will be around in future.

And the ones that survive are going to be a lot more specialized and focused on doing business where they have a competitive advantages.

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