Yank Banks Make London a Bridge to the World

Step out of Liverpool Station and into London's financial district and the accents you hear are as likely to be American as English.

More than any other foreign city, London is a home away from home for U.S. commercial banks. That includes some of the biggest names, such as J.P. Morgan & Co. and Citicorp; as well as smaller regional institutions, such as Mellon Bank Corp. and Wachovia Corp.; and niche players, such as Riggs Bank.

As financial markets continue to internationalize, bankers predict that London's role as a financial center will increase. And as global markets expand, they added, so will operations by U.S. financial institutions from London.

"London is a bridge for U.S. banks to international markets," said David C. Clementi, deputy governor of the Bank of England. "There are almost as many U.S. banks in London as there are in New York."

In contrast to New York, where much of banking is geared to the domestic market, London has always catered to international business.

"London is still the world's premiere financial center," said Jeremy R. Hawkins, chief economist for Europe at BankAmerica Corp.

U.S. banks have flocked to the city mostly because of its historical status as the biggest foreign exchange and international equity and bond market, its favorable regulatory and judicial environment, and its location halfway between U.S. and Asian time zones.

But several U.S. banks in London are moving beyond international activities there and into local consumer and corporate banking and asset management.

Citicorp, for example, runs a growing local consumer banking business from a nondescript gray building in the suburb of Hammersmith, on the western edges of the city.

MBNA Corp., the Delaware-based bank, has entered the market in force for credit cards. J.P. Morgan is carving out a portion of the local market for pension fund management. And CoreStates Financial Corp., which recently reached an agreement to merge with First Union Corp., entered the market for asset-based lending by purchasing Burdale Holdings Ltd. last year.

BankAmerica and Bank of New York have set up similar operations.

"We go after the internationally minded, financially astute customer," said Meredith L. Williams, business manager for U.K. consumer banking at Citicorp.

Like other U.S. banks, Citicorp got into the local market only recently, opening a full-fledged retail bank at the end of 1994 after selling off a large, but low margin, mortgage finance business. Since then the bank has taken in more than $500 million of deposits by targeting customers 35 to 45 with at least $50,000 in annual income.

This niche focus, combined with advanced banking technology linked to a worldwide network as well as specialized products such as dollar- denominated checking accounts, is Citicorp's main advantage, Ms. Williams said.

"This market can still absorb new players," she pointed out. Ms. Williams noted that companies ranging from GE Capital to Tesco, the British food store chain, and Harrod's, the well-known Knightsbridge department store, have set up local finance companies.

Though Citicorp tends to concentrate on expanding consumer banking in developing countries, building a business in Britain is important to the bank because of the expertise that can be gained and subsequently transferred to other, less developed markets, she noted.

"You have to continue to develop in developed markets because what works here will work well elsewhere in five years," Ms. Williams said.

U.S. bank efforts to expand international activities and crack into the local market come after several years of robust economic growth and growing indications that Britain's economy is about to start slowing.

"The expansion of the U.K. economy since 1992 has been very similar to that of the U.S.," said David Mackie, a vice president and economist at J.P. Morgan.

"But you can't enjoy that kind of buoyant growth and low inflation forever."

One of the main reasons behind the strong growth in the U.K. economy over the last several years has been an ongoing shift away from manufacturing and into service industries.

But high capacity utilization, combined with low unemployment, is putting increasing pressure on wages and prompting speculation that the Bank of England might soon move to raise overnight interest rates again above their current level of 7.25%.

That is already 150 basis points, or 1.5%, above the overnight rate 18 months ago and could be bad news for British companies. It will be even worse news for export-oriented industries which, in addition to having to cope with the burden of higher interest rates, also have to deal with a 20% appreciation of the British pound against other European currencies and a downturn in buying from Asian countries hit by financial turmoil.

"The real question is just how much the economy may actually already be slowing and will we slip into a recession or just a moderate slowdown," Mr. Mackie said.

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