Enmity Toward Big Banks Hurts the Nation

The story of the world economy since World War II is one of industry discovering the tremendous opportunities of doing business overseas and the even greater risk of ignoring international markets. But only in the 1980s did financial markets begin to link up and start to resemble the global production, sourcing, and trade of tangible goods.

Innovations in technology - telecommunications, personal computers, PCs working with data base technology - blazed the paths for global financial markets. If technology paved the way, then movements by governments toward deregulation lifted longstanding barriers.

But before that, the economies themselves had to open up. Fixed exchange rates and currency controls prevented a global financial market from functioning. As recently as 1979, Japan and the United Kingdom had foreign exchange controls.

Market deregulation began when financial centers such as London opened access to new competitors, both foreign and domestic. The "Big Bang" opened markets, but not so successfully for banks. Nevertheless, it was the right thing to do. That is what competition allows.

Japan is being urged to assume a financial role commensurate with its economic power. It, too, gradually is opening up its financial markets. In spite of selling more than $100 billion in assets in the fourth quarter last year, Japanese banks still had 35% of all international bank assets versus only 5% in 1975.

For the United States and other nations, an open and competitive financial system is critical to economic competitiveness.

Competition is heating up around the world, and for the United States this has two important implications.

First, the traditional adversarial relationship between our public and private sectors must give way to a nurturing partnership built on greater understanding and cooperation. Second, U.S. financial institutions must be able partners of their corporate customers in building strong bridges to world markets.

Other industrialized nations have a better working understanding than we do of the importance of these partnerships.

Foreign banks competing with U.S. banks have a number of advantages - a broader range of powers, more favorable tax regimens, tie-ins with industrial giants in their home countries. But what really accounts for the competitive might of a Deutsche Bank, Credit Lyonnais, or Industrial Bank of Japan are their tremendous power and market share in their homelands.

The United Kingdom is dominated by four clearing banks; the top five banks in Germany have 30% of total deposits; and the top five in France have 65%.

Good Governmental Relations

But more important than enjoying dominant market share is the relationship these banks enjor with their governments - a recognition that companies, even large ones, and banks, even large ones, do valuable service in economic development.

By comparison, the U.S. banking system is unbelievably fragmented. The top five banks have only 15% of total deposits because of a legacy of laws that confined banks to a state, a county, or even a single branch.

An adversarial relationship between large banks and government - and between big business and government - is in our populist heritage. This must change.

The wave of mergers of U.S. banks is, in part, a response to the competitive challenge, global and regional. The logic behind the recently announced megamergers is that fewer, larger banks should be stronger and more efficient. They should earn better returns and attract the capital the industry needs.

Size Is Just One Criterion

Most banks that merge will be content to solidify their home bases and stay there. Others will use solid footing in their home markets as a base for expansion into contiguous markets.

Size is only one criterion of success, and banks will choose from a variety of strategies. There will always be local banks - whether 9,000, 10,000, or 11,000; they meet a need.

Regional banks will respond to increased competitive pressure by consolidating across distribution systems to leverage a fixed-cost base. This is essential because they will be competing not only with local financial entities but also with such industrial giants as General Electric, Ford, and General Motors.

U.S. Bank's Limited World Role

But very few U.S. banks will have truly global networks and the associated products. Maintaining offices around the world is an expensive proposition. Building a new network if you don't already have one is even costlier. So most banks will confine themselves to a few financial capitals such as London, Frankfurt, and Tokyo.

Banks choosing to serve global markets while staying closer to home will opt for product-driven strategies.

In short, fewer banks will be doing fewer things but will do them better and more profitably. Banks have learned what many corporations that deal with consumers already knew. Profitability comes from learning to heed what our customers are telling us: "Do it my way, or I'll find someone else."

But while U.S. banks are doing a lot to become more effective partners of U.S. industry, they can't do everything required without a change in public attitudes and public policy.

Big banks, like big corporations, are often seen as enemies, not allies, of the public good. Lawmakers have been more interested in checking the power of the private sector than in harnessing it. This may always have been foolish, but with the stiff competition in global markets, it becomes a fatal mistake.

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