Obituary for Foreign Exchange Proves Premature amid Volatility

Article excerpt

U.S. banks are experiencing a dramatic revival in foreign exchange businesses that were considered moribund earlier this year.

Currency volatility in the second quarter combined with banking industry con- solidation and expanding global asset management contributed to sharp revenue gains at institutions including Citicorp, Chase Manhattan Corp., and BankBoston Corp.

"Foreign exchange has clearly become a commodity product ... but there is still a need for it," said James Borden, managing director of global foreign exchange at BankBoston. "There's certainly going to be a significant amount of opportunity going forward."

The bullish outlook at BankBoston and other U.S. banks marks a sharp turnaround from last year and early this year, when many banks were cutting staffs as profit margins thinned and European currency volumes declined in anticipation of the 1999 target for establishing a single European currency.

With foreign exchange responsible for as much as 5% of revenue at some U.S. banks, the falloff and its profit implications were not taken lightly.

It was also feared that advanced electronic foreign exchange brokerage ser- vices would cut sharply into revenues at the big traditional market makers. This development prompted many banks to start trimming trading staff.

"The big surprise was that disintermediation did not have as much an impact as was feared," said Chris Mandell, deputy head of global foreign exchange trad- ing for BankAmerica Corp. in New York.

An even bigger factor, he said, "was stronger volatility. Volatility creates opportunities, and trading profits are up as a result."

Not only has the dollar surged against major European currencies like the German mark over the last few months, but also several actively traded Southeast Asian currencies like the Thai baht and Malaysian ringgit have suf- fered sharp drops against the dollar after intense market speculation.

In addition, acquisitions made some banks' currency trading businesses bigger. BankBoston picked up a large number of foreign exchange customers from its merger with BayBanks Inc. …