Euro hits banks with force of a meteor

Date: 24/06/1999

By Tim Jones

FOR many European industries, the euro crept in six months ago and caused a couple of sleepless nights for accounting and information technology staff.

In the banking and finance sector, it struck like a meteor. When the currency changed, so did the lifeblood of the banking system in 11 EU countries and the City of London - the Union's financial 'interface' with the rest of the world.

The ripples were felt everywhere from the boardrooms of Crédit Lyonnais through the vast trading floor of the London International Financial Futures and Options Exchange right down to the counters of eastern German Sparkassen.

From the first trading day in January, 'wholesale' markets were integrated so that debts arising during the working day ('intra-day debt') could be settled.

From 11 separate systems, the European Central Bank's Trans-European Automated Real-time Gross settlement Express Transfer (TARGET) mechanism created one.

It took a few weeks for the new system to find its feet. Many banks were not confident enough to deal with counter-parties in other countries and chose instead to tap the more expensive funds at the ECB.

By April, more than a third of all real-time payments by credit institutions were cross-border deals processed by TARGET. That may not sound like a lot until it is compared with the proportion in December: zero.

For banks, the advent of the euro had a very real impact and many of them - ING Group in Brazil and Barclays Bank in Russia in particular - had to deal with it at the same time as they coped with the effects of economic crisis elsewhere in the world and a race with US mega-banks for global reach.

As economic and monetary union approached, middle-sized banks were already eyeing up potential partners to shore up their defences in a new giant market of nearly 300 million people and annual output of €6 trillion.

By spring this year, the merger wave had gone stellar. Deutsche Bank spent €10 billion on taking over US investment bank Bankers Trust, but this was as nothing compared with Banque Nationale de Paris's gargantuan €37-billion bid for its two domestic rivals, Société Générale and Paribas.

Bank of Scotland's farcical unpicking of its deal with American TV evangelist Pat Robertson and last week's collapse of the Bank of Ireland/ Alliance & Leicester merger suggest that the sector is running out of decent partners.

Merrill Lynch banking analyst José Luis de Mora does not agree, but wonders what some of the banks are up to. "When you look at some of the failed deals - like the Bank of Ireland/Alliance & Leicester or UniCredito Italiano/BCI - the size of the bid is hard to justify in terms of the added value that be can achieved or the costs to be saved. The only thing that leaves is the motivation to be big and cross-border, to defend themselves against other predators."

Within a decade, European banking is expected to be dominated by ten cross-border players, with building societies and savings and loans banks left to battle it out for business in niche markets.

"Some of these banks should think again," says de Mora.

"In some markets, they should think about pooling assets and providing services to various banks rather than going in for straightforward mergers."

Bank employees, needless to say, are less than enthusiastic about the merger wave and the potential impact of the single currency. Staff unions claim that the euro will eventually cost between 200,000 and 500,000 jobs, although employers' organisations insist that the worksforce will shrink not because of the euro but because of online and telephone banking.

Yet even this is disputed by some banks, which anticipate jobs lost to traditional services being replaced by those needed to enable them to present a more 'human' face to the public.

Last week, the UK's second-largest lender Abbey National was accused of preparing for mass redundancies as it shut down a third of its counter tills. The bank did not deny the closure plans, but rejected the impact assessment coming from banner newspaper headlines.

"We have a programme to close some of our till positions," said Abbey National spokeswoman Lorna Waddell. "However, we are introducing new customer service telephone posts and in-branch interview rooms, which will take up the people working on the counters. There is no question that our plans will lead to redundancies or branch closures."

Retail banking remains largely national in nature despite the creation of these new mega-banks, yet it is a shining example of 'Europeanness' compared with the markets for insurance, pensions and mortgages.

Most EU citizens may now live in a single currency area but, if they want to buy a house, insure their car or provide for their old-age, they can still only do so at home.

Every government in the EU as well as the European Commission have long recognised this contradiction, but there has been no political will to do anything about it.

The latest plan to create a genuine single market for financial services only came about because the British government, when it held the EU presidency in the first half of last year, felt left out by the euro-phoria of the 11 administrations heading for single currency membership.

A task force of finance ministers' officials was created and it recommended what everyone had long known ought to be changed. This resulted in 'communications' from Acting Internal Market Commissioner Mario Monti setting out a five-year reform programme for the EU's banking, insurance and securities sectors and an overhaul of the supplementary pensions industry.

The most radical plan is for those who manage employer-run pension schemes to be allowed greater flexibility in determining where to invest their funds rather than being forced to sink a large portion into national government bonds.

This flagrant violation of the spirit of the EU's rules on free movement of capital has been tolerated since the creation of the single market because too many powerful governments wanted to hang on to this preferential access to the capital markets.

Monti hopes warnings of financial apocalypse will do the trick as governments face the prospect of funding pensions when, within 25 years, it is estimated that the proportion of the population in the Union over 65 years of age will virtually double to 40%.

On the mortage front, the Commission is running into roadblocks as it attempts to cajole representatives of consumer organisations and home-loans institutions to draw up a voluntary code of conduct to ensure customers are given "adequate information" about loans on offer.

This would, in theory, allow consumers to compare like with like when choosing between deals in different member states.

The collapse of the talks has raised the threat - which could well be carried out by Romano Prodi's incoming Commission - that binding rules could be drafted.

Early indications suggest that Monti's understandably softly-softly approach to creating the 'genuine' single market for finance may be about to give way to a tougher regime.

Article forms part of a survey 'Financial Services'.