Henry Harington looks at the effect of September 11 on foreign banks in London, and finds many questioning their policy of maintaining all their operations under one roof.

Reverberations from the destruction of the World Trade Center on September 11 have echoed around London's foreign banking community as loudly as in the political and military arenas. While many London bankers mourned colleagues of many nationalities lost in New York, they may also come to regret the passing of a banking regime that was less hedged around by regulatory controls and the need for enhanced risk management in the wake of the outrage.

Following the attack, on a purely practical and logistical level, London played an important part in providing some of the computer and telecommunications infrastructure for banks forced to flee lower Manhattan. In the process they underwrite the advantages of globalisation and the diversification of location for global banks.

A foreign banker in London who spoke to The Banker questioned whether it was desirable that banks concentrated their operations under one roof, as many are doing by migrating to Canary Wharf, or that banking itself should be so geographically concentrated in an area such as Docklands.

A secondary impact of the tragedy has been the heightened awareness about the funds being used by terrorists to finance their operations. The consequence has been a listing of the organisations suspected to have links with Osama bin Laden by the US Office of Foreign Assets Controls (OFAC), which has been adopted by UK regulator the Financial Services Authority (FSA).

Carol Sergeant, managing director of regulatory processes and risk at the FSA, says: "As with the names of suspected terrorists published recently by the FBI, it is important that all firms should review any dealings with the individuals and entities named by OFAC, if they have not already done so. Under money laundering and anti-terrorism legislation, firms need to ensure all necessary suspicious transaction reports have been made to the National Criminal Intelligence Service in the usual way."

The extent to which this extraterritorial law enforcement is necessary in the current circumstances raises questions of how the benefits of London's regulatory arbitrage will be undermined by increasingly global regulation.

Foreign affairs

A source within the foreign banking community in London maintains that there are three problems confronting foreign banks in London: "Regulation, regulation and regulation."

In this context, there is the concern that while progress towards the completion of the Basel II round is being made, anxiety is being voiced that the interpretation of the proposed regulations concerning credit risk mitigation, in jurisdictions outside London (with specific reference to continental Europe), will be more "flexible" than in London.

The managing director of an "outplacement" agency that deals with swathes of bankers being made redundant at international banks in London admits, with some embarrassment, that business is booming. He adds that there had been a flow of firings and an anticipation of further "downsizing" prior to September 11, but the events put the seal on the fate of many as bank executives used the occasion as an "excuse" to accelerate restructuring.

City's laxity criticised

But for all London bankers' desire to escape what they see as over-regulation, the City's somewhat laissez-faire attitude to money laundering was highlighted in a report by the Swiss Federal Banking Commission which identified London-based banks as the conduit for the late Nigerian military dictator Sani Abacha's financial plunder of his country.

As recently as last month, a report by a French member of parliament Arnaud Montebourg claimed Britain offered a safe haven to terrorist money and that the authorities were lax in their scrutiny measures. While the MP is seen as a maverick, the results of his report's findings square with those of investigations under way at BBC Online, which suggest that the systems in place to deal with money laundering are woefully inadequate for the task.

Mr Montebourg's report also called on Britain to dismantle offshore tax havens such as Jersey and Gibraltar and other places where criminals are suspected of hiding dirty money.

A spokesman for the FSA said Mr Montebourg's report was out of date, adding: "We are now very close to taking out tough new powers to tackle money laundering, and things will change in a matter of weeks."

Wholesale banking

However, in a move that is likely to lighten the load of regulation, the FSA has put into play the idea of "wholesale-only" banks. These would be required to meet the same minimum standards as other authorised institutions, both in terms of initial and continuing requirements and in adhering to the rules and guidance in the FSA's handbook. Although it is not possible to be precise at this stage, there may be some cost savings to wholesale-only banks through fewer regulatory visits and lower compliance costs if they pose less risk to the FSA's statutory objectives. This proposal should encourage new entrants to the UK banking sector.

Disappearing act

The changes in the list of banks in London this year is probably one of the most dramatic in recent years but reflects not so much what has happened in the past year as the working through of the takeovers and mergers of the past two years. The number of banks with one or more forms of representation has fallen from 331 last year to 286 this year.

A significant contributor to this downturn was the withdrawal of the 21 predominantly Tuscan banks represented by Etrufin Reserco. One bank of this group, Banca Popolare di Lodi, is reportedly investigating the establishment of a branch in London.

Disappearing are such well-known names as Banca Commerciale Italiana and Banco Ambrosiano Veneto (itself a child of mergers) which are being subsumed into IntesaBci. Also acquired by IntesaBci is Slovakia's Vseobecn‡ œverov‡ banka, which means that four of the countries in line to join the European Union (Poland, Czech Republic, Slovakia and Hungary) have no direct representation in one of the world's most important banking centres.

Bank Handlowy w Warszawie's London branch was closed following the bank's purchase by Citibank in Poland. Komercn' Banka of the Czech Republic and SKB Banka of Slovenia have been acquired by Societe Generale. Bank Austria and Bank Austria Creditanstalt International now form part of the HypoVereinsbank (HVB) group and their international focus on behalf of the HVB group is now directed toward central and eastern Europe.

A number of famous Japanese banking names have disappeared: Sakura Bank, Toyo Trust & Banking and Sumitomo Trust International. The last named was a securities operation but, generally speaking, the departures are a result of the continued weakness of the Japanese banking sector. The change of name of IBJ International to Mizuho International is an indication of the slow but steady progress being made in the integration of Fuji Bank, Dai-Ichi Kangyo Bank and the Industrial Bank of Japan under the Mizuho name. Whether bigger is better remains to be seen.

Other Asian banks have also closed branches or subsidiaries: Korea Exchange Bank's subsidiary KEB International and Seoulbank, Siam Commercial Bank and Overseas Trust Bank's branches have shut although OTB is now part of Dao Heng Bank which has changed its status from that of a UK-incorporated institution to a branch. Thai Farmers Bank has replaced its branch with a representative office.

The only new names on the London scene are Habib Allied International Bank and Bank of Butterfield (UK). The former is a new UK company set up to amalgamate Habib Bank's international operations with those of Allied Bank of Pakistan, which has already transferred its assets to the new company and surrendered its current branch license. Habib Bank is expected to follow suit by the end of the year. It is expected that a similar merger of operations in the UK of National Bank of Pakistan and United Bank will occur by year-end 2001. Bank of Butterfield (UK) is the result of the purchase of the UK's Matheson Bank by Bermuda-based Bank of NT Butterfield earlier this year.


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