Trade, Investment and Competition in International Banking

Trade, Investment and Competition in International Banking

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Trade, Investment and Competition in International Banking Aidan O Connor

Aidan O Connor 2005 Softcover reprint of the hardcover 1st edition 2005 978-1-4039-4132-9 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No paragraph of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, 90 Tottenham Court Road, London W1T 4LP. Any person who does any unauthorised act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The author has asserted his right to be identified as the author of this work in accordance with the Copyright, Designs and Patents Act 1988. First published 2005 by PALGRAVE MACMILLAN Houndmills, Basingstoke, Hampshire RG21 6XS and 175 Fifth Avenue, New York, N. Y. 10010 Companies and representatives throughout the world PALGRAVE MACMILLAN is the global academic imprint of the Palgrave Macmillan division of St. Martin s Press, LLC and of Palgrave Macmillan Ltd. Macmillan is a registered trademark in the United States, United Kingdom and other countries. Palgrave is a registered trademark in the European Union and other countries. ISBN 978-1-349-52070-1 ISBN 978-0-230-51237-5 (ebook) DOI 10.1057/9780230512375 This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. A catalogue record for this book is available from the British Library. Library of Congress Cataloging-in-Publication Data O Connor, Aidan, 1955 Trade, investment, and competition in international banking / by Aidan O Connor. p. cm. Includes bibliographical references and index. 1. Banks and banking, International. 2. International finance. I. Title. HG3881.O268 2005 332.1 5 dc22 2005047293 10 9 8 7 6 5 4 3 2 1 14 13 12 11 10 09 08 07 06 05

To the memory of my father and For my mother

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Contents List of Tables List of Figures Acknowledgements x xiii xiv Introduction 1 Part I The Evolution and Development of International Banking 3 Chapter 1 International Banking in the Pre-Modern and Modern Banking Eras 5 Developments in northern Italy 5 Northern Europe 6 Amsterdam and the onset of modern banking 8 The United Kingdom emerges as the leading creditor country 9 France as a competitor creditor country 12 Germany finances industrial development 14 Switzerland s internationally active banks and capital exports 14 European banking systems and national economies in the 19th century 15 The United States and the shift in economic power and the centre of international finance 18 Japan s modernisation and internationalisation 21 International financial centres in the late 19th century and early 20th century 23 The internationalisation of banks from the 19th century to the mid 20th century 27 Consortium banks 30 The onset of contemporary banking 32 vii

viii Contents Part II The Characteristics of and Influences on Contemporary International Banking 37 Chapter 2 Contemporary International Banking Markets 39 International money and capital markets 42 The euromarkets 43 The foreign exchange market 47 Derivative financial products 50 The gold market in London 56 Competition between intermediaries 58 The influence of institutional investors 61 Capital flows 64 Chapter 3 Regulation, Trade Agreements, Consolidation and Integration in International Banking 70 Deregulation of financial markets 71 Capital adequacy 73 Liberalisation, international trade agreements and international banking 75 Concentration in domestic banking markets 80 Cross-border mergers and acquisitions among financial firms 82 Electronic banking 91 Part III Internationally Traded Banking Services 95 Chapter 4 Trade Theories and International Banking 97 Theories of international trade 99 Theories of international banking 102 International financial centres 107 Chapter 5 The Scope of International Banking, Business Activities and Markets 117 International and foreign claims 118 International and multinational banking 120 Types of banks 125 Organisation type of foreign bank offices 130 Organisation structure and business description of multinational banks 134 International banking and securities markets 145

Contents ix Part IV Competitive Advantage in International Banking 149 Chapter 6 The Leading International Banks 151 International banking market and product reach 151 Competitive advantage in services among international banks 153 Part V The Evolving International Banking Industry 167 Chapter 7 Trends and Strategies of International Banks 169 Notes 176 Index 185

List of Tables Table 1.1 Ratio of Bank Offices to Total Population 16 Table 1.2 Bank Assets as a Proportion of National Income and National Wealth 17 Table 1.3 Financial Assets to Tangible Assets Multiples of Gross National Product 18 Table 1.4 Foreign Deposits in London, Paris and Berlin 1913 25 Table 1.5 Net Foreign Private Long Term Assets 1855 1913 33 Table 1.6 Gross Nominal Value of Capital Invested Abroad 1914 1938 33 Table 1.7 Estimated Stock of Accumulated Foreign Direct Investment 1938 1960 34 Table 2.1 Global Foreign Exchange Market Turnover 1995 2004 48 Table 2.2 Geographical Distribution of Foreign Exchange Market Turnover 1998 2004 49 Table 2.3 Leading Banks in Foreign Exchange 2004 49 Table 2.4 Leading Derivative Dealers 2000 53 Table 2.5 Global Over-the-Counter Derivatives Market 2003 Notional Amounts Outstanding and Gross Market Values by Risk Category 54 Table 2.6 Global Over-the-Counter Derivatives Market 2003 Notional Amounts Outstanding by Risk Category and Instrument 55 Table 2.7 Global Exchange Traded Futures and Options Derivatives 2003 Amounts Outstanding by Risk Category, Notional Amount, Instrument and Location 56 Table 2.8 Financial Assets of Institutional Investors 2001 61 Table 2.9 Financial Assets of Institutional Investors by Type of Institutional Investor 2001 62 Table 2.10 Portfolio Composition of Institutional Investors 2001 62 Table 2.11 Total Financial Assets by Type of Institutional Investor 1993 2001 63 Table 2.12 Individuals Claims on Institutional Investors 2001 63 Table 2.13 Current Account Balances 1991 2004 64 x

List of Tables xi Table 2.14 Financial Flows to Developing Countries 1956 1985 65 Table 2.15 Net Private and Official Capital Flows to Developing and Transition Economies 2000 2003 66 Table 2.16 Percentage of Foreign Bank Affiliates Assets to Total Assets 2001 68 Table 2.17 Foreign Bank Ownership in Emerging Economies 2001 69 Table 3.1 Concentration in Banking 2003 81 Table 3.2 Cross-Border Alliances in Banking and Financial Services in the European Union 1987 1993 83 Table 3.3 Number and Value of Mergers and Acquisitions between Banks 1990 2001 85 Table 3.4 Aggregate Number of Mergers and Acquisitions between Commercial Banks, Securities Firms and Insurance Firms 1985 2000 85 Table 3.5 Financial Firms Cross-border Mergers and Acquisitions 1985 2000 87 Table 3.6 Leading Banks in Retail and Corporate Internet Banking 2004 93 Table 4.1 Banking Services in Europe to Affiliates of Foreign Firms 105 Table 4.2 Best Treasury and Cash Management Banks 2004 106 Table 4.3 The Most Important Criteria for a Financial Centre and Factors for the Leadership of London in Europe 110 Table 4.4 Foreign Banks in London 2004 and New York 2003 111 Table 4.5 Personnel and Office Occupancy Expenses in Financial Centres 2004 112 Table 4.6 Foreign Banks Business Activities in London 2004 113 Table 4.7 Selected Domestic Assets of New York Offices of Foreign Banks 2004 114 Table 5.1 Favoured Type of Office of Foreign Banks in London 2004 and New York 2003 134 Table 5.2 International Banking and Securities Markets 2003 145 Table 5.3 International Banking Market 2003 146 Table 5.4 International Securities Markets by Nationality of Issuer 2003 146 Table 5.5 International Securities Markets by Type of Issue 2003 147

xii List of Tables Table 5.6 Profitability of Commercial Banks 2003 147 Table 6.1 Proportion of Banks in the Leading 1000 World Banks by Origin 2004 154 Table 6.2 Banks Ranked in the Leading 50 by Assets or Tier 1 Capital 2004 154 Table 6.3 Banks Ranked in the Leading 50 by Assets or Tier 1 Capital and Range of Assets by Country of Origin 2004 156 Table 6.4 Banks Ranked in Leading 50 and 1000 Banks by Assets or Tier 1 Capital Ranked by Origin, Number and Proportion 2004 157 Table 6.5 Banks Ranked by Proportion of Foreign Assets and Total Assets 2004 158 Table 6.6 Leading Banks by Business Activity 2004 160 Table 6.7 Frequency of Banks Ranked among the Best Banks by Business Activity 2004 161 Table 6.8 Banks Ranked by 30% or More of Foreign Assets and in Three or More Business Activities 2004 162 Table 6.9 Leading 24 Banks in International Banking 2004 162 Table 6.10 Leading Banks through Recent Mergers and Acquisitions 163 Table 6.11 Best Bank in Business Activities 2004 164

List of Figures Figure 2.1 International Money and Capital Markets 42 Figure 2.2 Derivative Contracts, Instruments and Risk Category Markets 51 Figure 2.3 Alternative Sources of Funding among Private Sector Units 60 Figure 5.1 International and Foreign Claims of Banks 119 Figure 5.2 Classification of Domestic, Foreign and Euro Bonds 119 Figure 5.3 Features of Domestic, Foreign and Euro Bonds 120 Figure 5.4 Typology of International Banking 121 Figure 5.5 Typology of Trade in Banking Services and Foreign Investment by Banks 124 Figure 5.6 Typology of International Banks Principal Customers and Banking Activities 129 Figure 5.7 Country Characteristics, Banking Market Dynamics and Bank Advantages Affecting Bank Internationalisation 130 Figure 5.8 Relative Advantage of Alternative Foreign Offices 133 Figure 6.1 Market and Product Reach of Banks 152 Figure 6.2 Strategic Groups of Banks Competing in National Banking Markets 152 xiii

Acknowledgements Writing a book depends on many people and organisations for its completion. While those who assisted me are too numerous to mention I must acknowledge the support of the many scholars and organisations that supplied books, journals, articles or research papers. In particular, I must acknowledge the support of the various academic libraries, and the many helpful librarians, who allowed me access to their resources. The generosity of all astounded me. I am most grateful to several people at Palgrave, to Rebecca Pash, Assistant Editor for her efficiency during the administration of the project, to Stephen Rutt, Publishing Director, for his prompt response to my proposal which encouraged me enormously, and finally to Jacky Kippenberger, Commissioning Editor, for her patience and advice in managing the process. Aidan O Connor France July 2005 xiv