U.S. Banks Must Improve Timing Of Their International Ventures
The ability of the United States to compete globally in the financial services industry is critical to its economic success. U.S. institutions must be able to actively handle dollar-based financial transactions overseas.
At a minimum, such international capabilities support the needs of U.S. industry abroad. Beyond that, they can enhance the profitability of U.S. banks and facilitate world trade.
The inability of U.S. banks to sustain a sizable international banking presence has been the source of major concern to many industry insiders and observers alike.
A Fragmented System
Many reasons have been cited for the failure to compete effectively in global markets. Most notably, our financial system's fragmentation is seen as a major competitive impediment.
Although size is important, it is not economic for the United States to have as few as 10 banks. Furthermore, such consolidation is not feasible given our political and cultural roots and market dynamics.
As further consolidation occurs along the lines of recently announced megamergers, U.S. banks grow in size and may be able to compete more effectively on that basis in the global arena. However, observation of American banks' international strategies shows a "last in, last out" attitude, which is a sure prescription for losses.
Missing the Boat
Our banks follow other international players as opportunities reveal themselves. But by the time we get ready to enter, the market is saturated. Nonetheless, many U.S. banks choose to be last in, rather than miss the opportunity altogether. By the time they enter the market, it has overcapacity and nonexistent margins.
Examples are the U.K. gilts (government securities) market and the Japanese equity warrants market, where wide spreads were captured by early participants. By the time American banks positioned themselves for entry, spreads had shrunk to a commodity-like margin because of overcapacity and the product life cycle.
U.S. banks typically enter when a product approaches maturity and then hang in as margins dwindle and competitors who harvested profits in the early stages exit the business.
Some Have Been Successful
The last-in, last-out approach is not an effective way to capture share, profit, or position in international banking. Instead, clear strategic objectives are necessary for success.
Salomon Brothers has met success in Japan with a narrow product line of U.S. government securities. It is a good example of leveraging a domestic strength and building a market from infancy, thereby taking full advantage of early spreads and capturing market share to sustain profitability as margins shrink.
As banking reform is being considered, and global competitiveness becomes an important objective of that reform, we should bear in mind that while size is important in global success, strategic focus and swift decision-making are equally important, if not more so.
Ms. Bird is national director of financial institutions consulting at BDO Seidman, New York.