Reaching out for customers beyond their steel and stone Manhattan canyons, big U.S. banks are marketing foreign exchange to a growing number of regional banks across the country.
Typically, money-center banks either quote prices for spot sales or make purchases of large amounts of exotic currencies which regionals don't trade.
Or, they originate and structure forward, or derivatives-related transactions on behalf of regional banks seeking to help customers offset foreign exchange related risks.
Equally important, the moneycenters give regional banks up-to-the-minute information and a good idea of trends in the foreign exchange markets.
Traders at regional banks estimate Chase Manhattan Corp. has the broadest and most developed trading with regionals. But other banks, like Chemical Banking Corp., J.P. Morgan & Co., BankAmerica Corp. and to a lesser extent, PNC Corp. and Harris Bank and Trust, are also involved.
The big losers, traders say, are several specialized foreign exchange dealers who are increasingly getting cut out as middlemen.
"We spend a lot of time trying to help regional banks unload positions they take on with their customers," says James Borden, head of Chase Manhattan's foreign exchange trading division. "We have the capability to process large volumes and we want to see as much volume as possible."
Margaret Cording, managing director for foreign exchange at Chemical and bead of the bank's regional sales force, adds. "We're doing an increasing volume of business with regional banks."
As part of the drive to capture more business in this segment of the market, big U.S. banks say they are setting up special desks for trading with regionals and putting senior executives on the road to, hawk their services.
"We treat regionals the same way we treat our corporate customers," says Matthew Lifson, vice president at Chase and manager of the bank's regional trading desk.
Chase, for its part, fields a team of traders that work the phones daily for business. At the end of this year, Chase also plans to open an $85 million, 750-position dealing room in Manhattan with a desk specifically dedicated to regional banks.
Chemical, BankAmerica, and other banks are investing a similar amount, dedicating staff full time to pursue business with regionals. Like Chase, they see good potential for developing added revenues.
BankAmerica, which has foreign exchange relationships with some 20 U.S. regionals and 200 banks around the world, does several hundreds of millions of dollars in deals a month with U.S. banks. Last year, the bank set up a regional banking unit under Nigel Weston in Los Angeles.
This unit has since been moved to New York in order to work more closely with London and to service northeast regional banks. Foreign exchange with regional banks is also handled out of San Francisco and Chicago.
"We intend to make our presence felt in this business," says BankAmerica's John Richards, who manages both the New York and Los Angeles trading rooms.
The buildup in foreign exchange with regional banks comes as part of a broader expansion in foreign exchange trading at big banks. Over the last few years there has been massive growth in trading volume to trillions of dollars a day.
Chase for example, trades 130 different currencies and handles transactions of as little as $5,000 each for exotic currencies like Malaysian ringgits. For major currencies, like the deutsche mark, transaction sizes run as high as $130 million.
Chase has built foreign exchange relationships with nearly 100 U.S. regional and Canadian banks, up from barely a dozen three years ago.
Over the past three years, Chase officials report, the bank has also increased its monthly volume of foreign exchange transactions with regional banks to $4 billion from barely $40 million. Mr. Borden predicts volume will rise by another 50% over the next two years.
Officials at Chase and Chemical add that a similar effort is under way to develop foreign exchange business with regional banks in Asia and Europe. "It's a global business and there is close interaction and integration in our efforts [in foreign exchange]," says Ms. Cording.
The push by big U.S. banks into the hinterland underscores the rapid growth in international business at companies across the United States. It also reflects the hunt by money-centers for new sources of income.
For institutions like Chase, the advantages of developing foreign exchange business with regional banks are obvious. Most big banks have invested billions of dollars into processing technology and need to amortize their investments. The more volume they generate, the more they earn.
Chase, for example, handles half a trillion dollars worth of foreign exchange transactions through its processing centers around the world.
Handling foreign exchange management for regional banks or institutions like pension and investment funds - which are also rapidly growing foreign exchange customers - offers money center banks the chance to increase volume and better use investments.
Secondly, even if they don't make large profits on individual transactions, the steady stream of information gives them a far better idea of where the foreign exchange market is moving, permitting them to stake out their own positions and more accurately quote prices.
"What we're really selling is liquidity in spot transactions, forward contracts and options," says Ms. Cording.
"It gives us a sense of supply and demand," Mr. Borden says. He notes that the technology now in place to monitor orders minute by minute gives the bank a "microcosm of the market."
Regional banks also have a stake in developing foreign exchange relationships with moneycenter banks, since they would otherwise have to invest tens of millions of dollars to set up trading rooms of their own. This would involve hiring expensive experts to supply foreign exchange contracts.
"Basically, we need. a source to service our own accounts," explains Richard Dennis, vice president for foreign exchange at BancOne Arizona in Phoenix, which uses Chase, Chemical, BankAmerica and PNC Bank Corp. for its foreign exchange requirements. "We don't have an interbank trading desk and we don't make prices, so it's sort of like buying foreign exchange from a wholesaler and then retailing it out."
Chase is "kind of a giant supermarket for regionals," says Patricia Brigance, vice president and manager for corporate trading at First Fidelity Bank in Newark, N.J., which trades around $50 million daily on its own.
First Fidelity might easily turn to other regionals for amounts of $1 million, $2 million or $3 million but uses Chase for amounts of $50 million or more. The New Jersey regional also uses Chase to purchase exotic currencies like Taiwan dollars or Portuguese escudo, and to get option prices and forward hedging contracts. Just as important, Ms. Brigance said, is the daily stream Of foreign exchange market information which First Fidelity gets from Chase.
Still, one growing worry among regionals is whether or not they might be opening a Pandora's box by allowing money center banks to supply foreign exchange services to their customers. A chief concern. Will big banks use the relationship as an opportunity to snatch customers away?
Could it provide an opportunity for a New York bank to grab business? "Absolutely," says Dennis Shea, managing director and bank analyst at Morgan Stanley in New York. "But chances are that if the customer is big enough to require the size and sophistication of services of a money-center bank they'll use one anyway."
But, he adds: "A lot of the services regional banks provide, simply because of their geographical proximity to their customers, just can't been duplicated."
At BankAmerica, Mr. Richards admits the bank is clearly aiming "to grab the business at both ends," by developing relationships with regional banks at die same time it is out prospecting the terrain for more foreign exchange trading with corporations.
Practically, however, "it doesn't always work out," he adds. Grabbing customers away from regionals is a lot more difficult than it might seem.
"At the end of the day, it's easier to do a spot transaction [with a regional] than go through all the documentation and credit line considerations [regional banks have to do with their customers].
Mr. Borden strongly denies there is any possibility Chase could snatch customers away from the regional banks it does business with. For one thing, he points out, Chase usually doesn't know who the customer is.
For another, Chase simply doesn't have the geographic spread it would need to service customers of regional banks. "My sense is that we're actually helping regional banks do business in their own territory," he says.
Some analysts, too, say they are skeptical about just how much business a big bank is likely to pick up. "It's not uncommon for large institutions to provide products to smaller ones on a private label basis," remarks David Berry, a banking analyst with Keefe, Bruyette & Woods in New York. "I'm not sure I'd read this as a way for these guys to snag relationships."