Foreign Banks' Share Expected to Rise
Survey respondents indicate that foreign-owned institutions will continue to gain market share of U.S. banking assets, from 23% today to about 30% in 2000. European and Japanese banks each are expected to gain about three share points. [Europeans' share is expected to rise to 9% and the Japanese share to 15%, while U.S. banks' share is expected to fall to 70% from 77% - Editor.]
The predicted shift in market share is likely to be moderate in the near term for two reasons.
First, foreign institutions are currently dealing with increased challenges in their own markets. For example, European banks are anticipating pan-European markets, which will create new opportunities and threats.
The second reason pertains to capital flows. Overseas capital will flow into [the United States] only if profit opportunities exceed those available elsewhere. Banking in the United States is currently not known for high profitability. The industry generated roughly an 8% return on equity last year, substantially less than its cost of capital. Consequently, international sources of capital might be diverted away from the United States if the country's "safe haven" advantage does not compensate.
... Foreign institutions, particularly European, also may adopt a wait-and-see attitude toward U.S. bank acquisitions, pending repeal of the Glass-Steagall Act....Many European institutions operate successfully as universal banks, offering in addition to traditional banking services full-service insurance and securities capabilities. Their knowledge of how to operate successfully as "uni-banks" provides them with essentially a 60-year head start on U.S. players who want to create a similar structure from scratch.
Global Shift for U.S. Banks
...More than 50% of respondents, except for the nonbankers, believe that U.S. banks will retrench in operating offices overseas. Large banks feel most strongly, with 80% agreeing. To offset the lack of a direct presence in foreign markets, strategic alliances will be formed to provide global services to clients. More than 85% of these respondents see alliances as a key component of global success.
Little progress is anticipated, however, in developing an international regulatory authority to govern financial markets. As a result, market anomalies will continue because of varying legal requirements worldwide, but a focus on better coordination of international regulation is likely due to the BCCI scandal. If additional international regulatory cooperation develops, it most likely will focus on increasing information exchange and developing uniformity in examination procedures.