The Euro-Bank: Its Origins, Management and Outlook PDF
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THE EURO-BANK By the same author THE MANAGEMENT FUNCTION IN INTERNATIONAL BANKING THE EURO-BANK Its Origins, Management and Outlook Steven I. Davis Second Edition M MACMILLAN To my mother and father for setting the example © Steven I. Davis 1976, 1980 Softcover reprint of the hardcover 2nd edition 1980 978-0-333-30003-9 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No paragraph of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, 33-4 Alfred Place, London WCIE 7DP. Any person who does any unauthorised act in relation to this publication may be liable to criminal prosecution and civil claims for damages. First edition 1976 Second edition 1980 Reprinted 1990 Published by MACMILLAN ACADEMIC AND PROFESSIONAL LTD London and Basingstoke Companies and representatives throughout the world British Library Cataloguing in Publication Data Davis, Steven I. The Euro-bank - 2nd ed. I. Banks and banking, International I. Title 332.1 '5 HG3881 ISBN 978-1-349-05663-7 ISBN 978-1-349-05661-3 (eBook) DOI 10.1007/978-1-349-05661-3 Contents Preface vii Introduction and OvervieK' 7 Some Earlier Patterns in International Banking 7 2 The Evolution and Description of the Euro-Bank 26 3 Asset Management 48 4 Liability Management and Capital Adequacy 72 5 Fee-Earning and Other Activities 89 6 Financial Performance 98 7 Issues Arising from Euro-Bank Experience 118 8 The Outlook for Euro-Banks 136 Notes 150 Index 153 v Preface Whereas I described my personal reactions on writing the first edition of this book four years ago as alternating between panic at stating the obvious and exhilaration at rediscovering the wheel, preparing the second edition provides another double-edged insight into both the performance of the Euro-banks and the validity of my own observations in mid-1975. Whilst their market environment has shifted drastically from a relatively attractive risk/reward relationship for lending in the aftermath of the 1974 crisis of confidence to a highly competitive borrowers' market characterised by significant structural overcapacity, the Euro banks as a market phenomenon have not only survived but also, in most cases, prospered to the extent that their profitability is generally competitive with that of their domestic parents. On the other hand, the intensity of competition and the increasing overlap of activities with parent organisations pose basic challenges which have resulted in the restructuring of a large number of Euro-banks. In writing the second edition I have retained the basic structure of the first while updating all the statistical material and the interviews of senior Euro-bank executives, as well as taking advantage of new statistical series which have been made available since 1975. I have also made an effort to broaden the base of Euro-banks analysed from the exclusively London-based sample of four years ago by including a brief analysis of banks based in Hong Kong, Singapore and Luxembourg. A particular effort has been made throughout to analyse the changes which have taken place since 1975 and to present in the outlook section a more comprehensive and less tentative forecast than was possible in the first edition when the Euro-bank movement was largely in its adolescent stage of development. I would like first to express once again my appreciation to T. M. Farmiloe of Macmillan Press and the banking colleagues, professors and friends who were instrumental in the conception and preparation of the first edition of this book. I am indebted to not only the senior executives of the 40 London-based banks but also the Asian bankers vii viii Preface whose comments in extensive confidential interviews provided the basis for the bulk of Chapters 3, 4 and 5. Finally, a special word of thanks to Sally Watts whose outstanding secretarial skills were complemented by her research talent in updating the statistical tables. London, October /979 STEVEN I. DAVIS Introduction and Overview The purpose of this book, quite simply, is to analyse today's generation of Euro-banks from the perspective of management to determine how these banks are dealing with the critical issues they face at the end of the 1970s. The Euro-bond and Euro-currency markets centred in London have been the objects of extensive research and analysis by scholars, journalists and practitioners focusing on such sectors as economic theory and practice, market evolution and structure, and lending and investing practices. For an excellent coverage of these and other aspects of the Euro-markets, the reader is referred to volumes by Paul Einzig, Geoffrey Bell, Brian Scott Quinn and the Robert Morris Associates/ Bankers' Association for Foreign Trade.1 Relatively little attention, however, has been devoted in the current literature to the separately capitalised, specialised banking institutions which have grown up with the market since the early 1960s. This book will attempt to describe some of the historical precedents for these institutions, the rationale for their establishment, their activities and objectives, and, in some detail, the conduct of asset and liability management as well as activities which do not relate directly to the balance sheet. There is nothing in this book that will significantly raise the learning curves of bankers active in the Euro-markets, but the consolidation in one volume of a body of management practices and the issues faced by Euro-bank management will hopefully have some value to those interested in management behaviour as well a!i the factors which will determine the future of these banks. Euro-banks, rather than branches or other overseas operations of existing national banks, have been selected for analysis as their experience brings into focus more sharply many of today's issues in international banking because of the heavy concentration of their activity in the Euro-markets. While relatively unimportant in terms of market share, these banks in many respects are 'pure' international banks because of this Euro-market concentration. In addition, they are relatively free from the domestic influences which may dominate the behaviour of an overseas branch of an international bank. While this 7 2 The Euro-Bank choice creates definitional problems which cannot be entirely resolved, the use of a sufficiently broad sample of Euro-banks should minimise these problems. My focus throughout is on how management deals with the major issues confronting banks operating primarily in the Euro-currency market, and an attempt is made to define these issues. The book concludes with an effort to describe the factors which will influence Euro-banks in the future and to enumerate a few likely trends for Euro banks individually as a market sector. As a by-product of the Euro market boom of the 1960s and early 1970s, the Euro-bank in some cases was a fashionable, contemporary aspect of a national bank's overseas expansion programme; once established, however, most of these banks have developed a momentum and character of their own. In addition to my own direct experience in the market since 1970, I have used as source material the bulk of the literature in English on the specific activities of international banks since the Middle Ages; recent books on Euro-market structure, theory and practice; and current statistical data published by international bodies such as the Bank for International Settlements and World Bank Group as well as such national authorities as the Federal Reserve Board and Bank of England. To supplement this data, I have also compiled statistics through 1978 on the financial performance of banks in London, Singapore, Hong Kong and Luxembourg to reflect actual management practice in terms of such key variables and measures of performance as gearing, asset com position, liquidity and return on assets and capital. Selecting both individual banks and financial centres inevitably involves making arbitrary distinctions. As defined later in this book, Euro-banks are separately capitalised international banks which were established or restructured since the mid-1960s largely to participate directly or indirectly in the Euro-markets based in London and other financial centres. In practice, they are generally owned by one or more financial institutions based in national banking markets. While conceptually the ideal Euro-bank carries on its own internationally-based business, in reality its ownership pattern and the use for regulatory and other factors of separately capitalised banks as proxies for branches of parent institutions means that the analyst must arbitrarily select for his Euro bank sample institutions which have a relative identity separate from their parents as defined by their role in the interbank market. the presence of a separate loan portfolio, and so forth. When the first edition of this book was written in 1975, I felt that the analytical portion could be centred only on Euro-banks whose major
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