Banks tot up their profit and loss

Date: 28/11/1996

By Chris Johnstone

MOST banks will be short-term losers from the single currency. However, with time, some will emerge far stronger than others.

The European Banking Federation estimates that its members will be spending around 10 billion ecu on staff retraining and adapting their information networks in the run-up to the euro. That process has just begun and is likely to take at least two years.

The long term costs are expected to be far more significant - and far more unevenly spread.

The banking shake-up which will accompany the advent of the single currency in some countries will clearly leave winners and losers in its wake.

The transition to the euro from 1999 will slash earnings from retail and corporate currency exchange transactions and cut the opportunities for banks to earn further cash from bond dealing, currency speculation and market-making.

The loss of currency exchange earnings will be higher in countries which have economies tightly plugged into intra-

European trade and less dramatic in those which have a more global outlook or a strong domestic market.

Thus a study by the Organisation for Economic Cooperation and Development (OECD) showed Portugal, Belgium, the Netherlands and Ireland all heavily exposed to the impact of the euro, and the UK and Germany relatively protected.

London, Europe's biggest financial centre, estimates it would only lose around 10&percent; of its foreign exchange business if the widely-tipped half a dozen front-runner countries take part in the single currency.

But it insists the gap should be easily filled by London exploiting emerging or east European markets or even standing still in a fast expanding world-wide market for cross-border wholesale payments.

Banks in euro member countries will be exposed to increased competition amongst themselves and with outsiders as the partial protection offered by specialising in their own national currency disappears.

Financial institutions in over-banked countries, such as Belgium, are regarded as vulnerable to a wave of mergers and take-overs. Belgium's biggest bank, Generale Bank, makes no secret of the fact that it would not oppose a tie-up with one of its rivals at the same time as investigating expansion outside national frontiers.

The Netherlands is seen as less exposed, as it has already been through a series of mergers which threw up large international banks such as Internationale Nederland Groep (ING) and ABN-AMRO.

The UK, which like Denmark has an opt-out from the single currency, is preparing fast for the foreign currency trading implications of the euro.

However, uncertainty over whether the UK will sign up to EMU or not has deterred the banks from doing much to prepare the general public for the possible demise of the pound.

“Once the banks have a target they can really begin their preparations,” says Roger Brown, director of economics and statistics at the British Banking Association. “They are already spending tremendous amounts on the overall preparations.”

He insists that there is no doubt that UK banks will be ready to trade in the euro and meet their corporate customer demands for operations in the currency from January 1999.

The association dismisses fears that London could lose its primacy as a world financial centre if the UK exercises its single currency opt-out. “We had a study in September which showed that London would still be a financial services centre in that scenario provided that preparations were made for trading in the euro,” says Brown, who points out: “London is a big centre for trade in German bonds although we are not in the deutschemark zone.”

Danish banks support their country's adherence to the euro as soon as possible. “We think it would be good for the Danish economy and therefore good for banks,” says Klaus Willerslev-Olsen, deputy-director of the Danish Banking Association.

He insists Danish banks will be ready to deal with companies' demands for euro trading and services but, as in the UK, the retail sector is not being prepared with anything like the same urgency.

One sector which is actively praying for a delay in the introduction of the euro is Europe's foreign exchange industry.

Thomas Cook, which owns the world's largest network of bureaux de change, has been preparing contingency plans over the last year to replace lost business with new revenue streams.

“The whole EMU issue is still very vague and it is not at all clear when the euro will be in place across Europe. However, if the single currency does arrive, we have been looking at ways of replacing lost business through, for example, joint ventures with credit card companies. EMU is a significant challenge for us and we will make sure we face up to it,” said a company spokeswoman.

Small independent money-changing businesses, however, will not be presented with the same opportunities to move into new markets.

“When the euro is in place we will have to close the bureau; it is as simple as that,” claimed one worker at an independent office in Brussels.