After sitting on the sidelines since the late '70s, regional banks are selectively reentering international banking, says Chemical CEO Walter V. Shipley.
Regional banks that pulled out of international baking in the late 1970s and early 1980s are coming bakc "on a selective and focused basis," according to Walter V. Shipley, chairman and chief executive of Chemical Banking Corp.
"We're seeingg the beginning of a renaissance of international banking," Mr. Shipley said.
In a recent keynote address before members of the Bankers Association for Foriegn Trade, Mr. Shipley stressed that the '90s will be very different from the '80s for banks with international operations.
The banker noted that several major developments, such as the North American Free Trade Agreement, new international trade accords under the General Agreement on Tariffs and Trade, as well as the end of the Latin debt crisis, are spurring international trade and finance.
Banks have new reasons to develop their international operations, he said.
In addition, U.S. customers are calling for greater international financial services, partially driven by the increased exporting of U.S. goods.
However, superregional and regional banks still have different ideas about how to expand their international operations.
While it was "evident that Nations Bank has a global strategy" and is moving to establish a subsidiary in Mexico as well as offices in Hong Kong and Taiwan, other banks like Banc One are taking a more restricted approach and focusing on specific ares like trade finance.
Bankers at the conference confirmed Mr. Shipley's observations, saying they also see a renewed interest among the international activity U.S. banks.
Foreign Exchange Services
Superregional and regional banks are expandingg related international operations, such as the provision of foreign exchange services.
Darin P. Narayana, an executive vice president at Norwest Bank in Minneapolis, noted that several leading regionals that had lefts the international trade group as part of a broader retrenchment have returned over the last 18 months.
They include: American National Bank and Trust, Bank of New York, First Fidelity Bank, First Union National Bank, Fleet Bank of Massachusetts, Hibernia Bank, LaSalle National Bank, and United Jersey Bank.
Mr. Shipley said political developments over the last few years are having a major impact on international banking and finance and have also altered the nature of the risks.
Economic reform in borrowing countries and more stable political and market-oriented leadership have vastly increased capital flows.
"The nature of these cross-border flows has also changed," Mr. Shipley said.
In the '70s, three-quarters of cross-border capital flows came from banks. Roughly, three-quarters of last year's flows came from institutions like pension funds and mutual funds.
Most of the funds, he also said, are coming in the form of capital market borrowings and equity. Of the $300 billion that has flowed into developing countries since 1990, nearly half, or around $130 billion, has been equity.
Last year alone, major emerging-market economies posted a net gain of around $180 billion in foreign debt and equity, according to estimates by the Washington-based Institute of International Finance.
More than Lending
The shift in capital flows to developing countries has forced banks to reassess their business strategies.
It has also compelled them to shift away from lending to relationship banking and capital-market-related activites, Mr. Shipley said.
However, the rapid increase in capital flows, coupled with the volatility of emerging markets, is creating growing concern in banking circles, Mr. Shipley remarked.
"As we have seen over the past three months, the emerging markets still remain uncomfortably vulnerable to exogenous forces totally outside their control," he said.
Just as a rapid rise in U.S. interest rates precipitated a debt crisis in developing countries in the early '80s, so the recent rise in interest rates precipitated a selloff in emerging markets and sparked concern that a new debt crisis may be developing.
Investors at Risk
Mr. Shipley noted that unlike the early '80s, when banks were vulnerable to risk in developing countries because they held such a large portion of the lending, securitization of capital flows to emerging markets has left institutional and retail investors at risk around the world.
But he warned that the lessons of the '80s debt crisis are already being ignored. Mistakes of the past may be made again, among them:
* The possibility that "undisciplined inflows could once again permit the substitution of external capital for domestic savings."
* Softer underwriting standards.
* Capital inflows becoming unbalanced between long- and short-term investments.
* The notion that all emerging markets are identical.
"The world can't afford to have a securities crisis following a bank lending crisis," Mr. Shipley warned. "And while my intention is not to raise undue alarm, I can tell you that the issue is beginning to receive mainstream attention."
Equally challengingg to banks has been the impact of political changes on international banking and finance. Much U.S. bank lending in the postwar period was politically geared to supporting developing countries and preventing them from falling into the Communist fold.
"In retrospect, we may all wish we hadn't made all of the loans we made, but the fact is that Western policy, particularly U.S. policy, particularly framework for those loans," Mr. Shipley remarked.
In contrast, the collapse of Communism has expanded international markets and created enormous demands for credit, but raised new worries about political instability and the risks of dealing with potential borrowers from former Soviet republics.
"Today, we operate in a global economy with new rules, yet we're not sure what some of the new rules are. And in the absence of an overarching theme, global relationships have changed - and thus, risks have changed.
One solution of reducing risks while helping developing countries, Mr. Shipley suggested, might be for multilateral lending agencies like the International Monetary Fund to provide guarantees for private-sector lending.
He also argued that big banks with large-scale operations may be better equipped to deal with the new international realties.
"I am not suggesting that there no longer exist opportunities for smaller banks, particularly in the area of trade finance," Mr. Shipley said.
"However, I would suggest that to be a broad-based player in the global markets of today requires greater scale and mass than ever before."
Chemical's own merger with Manufacturers Hanover Trust proved beneficial for the combined bank's international operations, according to Mr. Shipley. Chemical had largely divested its overseas businesses before the merger, while Manufacturers Hanover remained an important international bank.
Chemical's own international focus is to provide international banking services to Fortune 1,000 companies, as well as do advisory work and underwrite securities issued by companies in emerging markets.
Mr. Shipley said Chemical was currently devoting its main attention to Mexico, where it has applied to openn a subsidiary, and to China, where it has applied to open branches.
In Mexico, he said, the bank plans to focus on capital and debt markets from its office in Mexico City and on commercial banking and private banking from an office in Monetary that will work closely with Chemical's Houston based subsidiary, Texas Commerce Bank.