Comment: 'Euroland' Is Ripe for Banking Megamergers

American Banker, January 26, 1999 | Go to article overview

Comment: 'Euroland' Is Ripe for Banking Megamergers


By LeClair BYRNE, ALFRED J.T.^Ryan

A quiz will follow. But first, some background to set the stage and provide a fair shot at the right answer.

The chairman of the Senate Banking Committee says he will make financial modernization a top legislative priority. Across the Hill, the chairman of House Banking sticks to his guns and lobs in his reform bill from the 105th Congress. Wish them both well.

Headlines, meanwhile, preview conclusions translated by the analysts:

"Banking Industry Bulking Up." Translation: As margins put pressure on operating results, more banks are consolidating to realize efficiencies and economies of scope and scale, and promise to improve their efficiency ratios.

"Demand Deposits Hold Key to Success." Translation: Because banks make money off the "spread" - and, at the best banks, increasingly from fees for noncredit products and services - they will make more money if their cost of funds is low.

Demand deposits are the cheapest. And for setup and periodic processing expenses, they're free. It follows they're the most profitable funding source.

"Institutions Seek Larger Base." Translation: Banks need to acquire, consolidate, or merge with other banks, retain existing customers, and attract new customers. At the same time, they need to reduce costs and spread them over a larger customer base. Doing all these things will make them more competitive and more profitable. It's market share, stupid.

"Comptroller Opts for Op Subs." Translation: The Comptroller of the Currency allows national banks to form bank operating subsidiaries to conduct activities closely related to banking, such as insurance distribution, payroll services, and even health-care data processing.

The Federal Reserve is not a big fan of this approach. It prefers those activities be housed in "affiliated" subsidiaries of a bank holding company.

"Banking and Insurance Industries at Odds." Translation: It's bad enough the OCC says it's all right for banks to sell insurance, which doesn't engender a whole lot of sympathy from the insurance agents. But consider the groundswell of insurance company applicants for charters at the Office of Thrift Supervision. Now that's got the attention of commercial bankers.

So here's the quiz, a multiple-choice question: We are going to form a huge, full-service, cross-border financial institution, to be called "BancoAmericano." Where will we put its headquarters?

(A) Charlotte, N.C.

(B) San Francisco

(C) Madrid, Spain

(D) None of the above

(For the answer, see the bottom of this column.)

What's this got to do with banking in America? What if BancoAmericano will have worldwide assets of $281.3 billion? And 8,681 branches throughout Europe and Latin America? Not to mention 106,510 employees scattered about the globe?

Well, it has about 20% of its domestic market for loans, deposits, and funds under management-right up there with Chase, J.P. Morgan, First Union, and Bank One. By some measures, it's larger than Bankers Trust, Wells Fargo, and Fleet, and substantially larger than Wachovia, Bank of New York, and Mellon, to name a few.

To enjoy some competitive advantages, BancoAmericano should be located in a region where efficiency ratios of commercial banks trail those of their U.S. counterparts and therefore offer tremendous upside potential for improved profitability.

It should be a region that embraced cross-border banking directives more than a decade ago, where the institution that has your checking account might also issue you an insurance policy or sell you securities.

Here are a few suggestions why it's important for U.S. banking and other financial institutions to look at our BancoAmericano model.

Begin with economic and monetary union in the 11 European Union countries that have now embraced a single currency, the euro. …

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