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ArchiveNovember 2 2000

Financial magnetism

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Although consolidation is reducing the number of foreign banks in London, the city retains its status as Europe’s financial capital, reports Michael Blanden.

More settled conditions in global financial markets and recovery in the Southeast Asian economies have made for a less harassing time for international banks over the past year.

The pressures are as always reflected in the representation of foreign banks in London, the leading European financial centre and one of the three top world players along with New York and Tokyo. The Banker’s annual listing of the foreign bank offices in London starting on page 41 provides a barometer of international developments and confidence in the banking sector.

Last year saw some dramatic changes. Many Japanese banks pulled back from international commitments, mergers (voluntary or forced) in Southeast Asia reduced the number of potential players and, among others, the troubled Russian banking sector saw several banks abandon plans to expand into international markets. This year has seen rather less movement.

The number of banks withdrawing still exceeds the new arrivals but by a considerably smaller margin. Overall, the total number of foreign banks present in London, through subsidiaries, branches or representative offices, is down from 358 to 333 (the total avoids double counting; where a group has more than one form of representation it is counted only once).

Alongside the banks pulling back from global activities, a powerful influence on the listing continues to be the worldwide trend towards consolidation in the financial sector.

The US banks have led the recent moves, but now the pattern is general as banks around the world seek greater size and strength in order to compete. Continental Europe has seen a raft of get-togethers – and some attempts which failed – predominantly on an in-country basis but also regional. Scandinavia, in particular, and the Benelux countries have been a focus of cross-border alliances.

The mergers have an inevitable impact on the listing where the partners have had their own representation in London. They can also present problems in bringing together established operations with different ways of doing business.

The recent round of consolidation is reflected in the latest list. There is a more to come as the latest mergers work their way through. The impact can be substantial where their London presence is large, as with JP Morgan joining Chase Manhattan.

The importance of the foreign banking community to London’s financial centre is generally acknowledged. It is vital not just to the City – the "Square Mile" which forms the traditional base for financial services – but to the broader metropolis spreading out to central London and to Docklands in the east.

The financial sector’s role in London and the UK is underlined by British Invisibles (BI), the organisation which has the task of "promoting UK financial services throughout the world". Its report last month on “International Financial Markets in the UK” showed its importance to trade and employment.

"The financial sector continues to make a substantial contribution to the UK economy with BI’s recently published City Table showing that net overseas earnings reached a record £31.2bn [$45bn] in 1999, up from a revised figure of £30.0bn in 1998. Within the City of London, there were 138,300 employed in financial services in 1998 and in Greater London as a whole financial services employment totalled 311,200. BI’s latest report on World Invisible Trade shows the continuing importance of invisibles; the current account deficit of £11.0bn resulted from the record £26.8bn shortfall in goods being partly offset by a £15.8bn invisibles surplus."

The banking sector is particularly important for London. BI says that in spite of the recent fall, "the number of foreign banks in London remains far in excess of those located in other major international centres".

It also points out that the European single market means that foreign banking activity is understated by those figures: "In addition there are an increasing number of banks from the European Economic Area, 199 in March 2000, which are authorised to provide cross-border services, but without being physically located in the UK."

The role of foreign banks remains vital, but the continuing process of consolidation has an ongoing impact on the listing and on the potential for employment in London. The list this year already reflects a number of changes. Prominently, in France the Banque Nationale de Paris acquisition of Paribas now appears as the new group BNP Paribas with a total of 2600 employees (separately, the two organisations last year had 650 and 2100).

Among other changes, developments in the US now see the former BankBoston branch subsumed into Fleet (which previously had only a representative office) following the FleetBoston get-together. The listing also sees the first impact of the extensive changes on the way in Japan. Mitsui Trust has got together with Chuo Trust.

The first stage in the big three-way merger has also happened, with Fuji Bank changing its name to Mizuho Holdings, with 241 in its London branch. That is due to be joined with Dai-Ichi Kangyo, which has 200 people in London, and Industrial Bank of Japan, which has two substantial operations employing some 560.

In due course, Bank of Tokyo-Mitsubishi, with 513 in London, is to get together with Mitsubishi Trust (97). Sakura Bank (100) and Sumitomo Bank (450) are to join, as are Sanwa Bank (200) and Tokai Bank (245 in two operations).

The list has also been affected by the international ambitions of the UK’s HSBC Holdings. That group’s recent acquisitions have been responsible for the disappearance of Republic National Bank of New York (230) and Crédit Commercial de France (400, including Charterhouse). There are more substantial changes as recently announced marriages come to fruition.

Most dramatically, the Chase Manhattan/JP Morgan link is likely to have a substantial fall-out, as the new group puts together two major operations with 5800 and 5500 staff in different locations. The trend of consolidation in financial services internationally is set to continue and will leave its mark on the London banking community.

There is so far, however, little indication that the attractions of London as a financial base in Europe are fading significantly. Whether that will last with the UK staying outside the single currency area, or whether the rival temptations of centres such as Paris or Frankfurt will prove too powerful, has yet to be determined.

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