The
Consolidation of Banking Systems
1) Increasing competition.
2) Strong uncertainties
of the environment.
3) Banking strategies.
3)
Banking strategies.
Throughout recent years, strategic turnarounds of several major
international banks have been so numerous that it has sometimes
been disconcerting. The fluctuations in the recommendation of
consulting firms have barely contributed to enlighten the debates
on the strategic options of these banks!
The impressive success of certain banks (ex: great old local
American banks, like Bank One, at the end of the 1990s) went
hand in hand with the no less spectacular failure of others
(ex: Dresdner Bank and Deutsche Bank in Germany, after their
aborted attempt of merger in 2000).
The disruptions in the rating of the major banks in the world
(and within large local spaces) for the past 1à years
are a good indicator. They have frequently thwarted many predictions.
Indeed, the failures are often attributable to a bad definition
of the strategy or to a fickleness (or a lack of means) in the
pursuing of the goals held.
The examination of strategies followed during the past 10 years
leads to concentrate the discussions on the open strategic options
to the banks and their restrictions about the following point:
• What needs to be produce and for which market?
• Aspects of the competition and the regulation on various
markets.
• To produce and / or to distribute ?
• Diversifying or refocusing?
• Retail bank, investment bank, universal bank or “monocline”
bank?
• Increase: why? How?
• Inner rise, outer rise by taking over the control or
by a merger between equals?
• Partners? What for ? With who ? To what extend?
• Which financial means have to be mobilized ? The case
of public and mutualist banks.
• Reduction of costs or receipts increase ?
• Growth centered on the domestic market or oriented toward
the international market ?
• Which organizational structure? Filialition of some
activities, subcontracting and «Outsourcing »?
What
needs to be produce and for which market?
Financial
innovations, new technologies, progress of financial sciences
(techniques of assets promotion) and new financial actors have
questioned the nature banking activities, including the retailing
ones; banks do not limit themselves to deposit offer, credits,
and means of payment. They are more and more assemblers of financial
products and managers of associated risks.
It is therefore necessary to define the content of banking production;
even the notion of banking, more generally, a double evolution
appears in term of products and banking services:
• Standardization of an increasing number of ordinary
(« merchandises or « amenities»), produce
in mass and with poor margin.
• The emergence of sophisticated products tailored («
Customized ») for limited segments of the customers and
with a strong added value (margin).
Banks must wander which type of products (and services), how
many and according to which “Mix” they are going
to offer the evaluation of the potential demand and its growth
is an essential precondition. Aspects of the competition, depending
on the type of product, are also a crucial element in this regard.
Aspects of the competition
Traditionally, wholesale banking activities, with major firms
and on funds markets, have been highly competitive. Retail activities
with the customers of private and small firms have often been
more protected and less competitive because of two types of
barriers at the entry:
• The branches network
• The stock of private information on customers, generator
of an informational private income.
Nowadays, many retail banking activities are however characterised
by the aspects of questionable markets (erosion of the barriers
t the entry, almost- lack of barriers at the exit) because of
the technological progress available, including for potential
newcomers.
To produce and / or to distribute?
A question that used to be irrelevant: the bank produced and
distributed its products and services in an absolutely integrated
way under its own brand (importance of the reputation in the
contract that represents the banking service or financial asset).
From now on, some financial products can be elaborated by some
institutions and be distributed by some other.
Some small banks can enlarge their offer with products elaborated
by other (for example, in the field of savings products of collective
management). Some newcomers can then interfere with the distribution
of financial services (for example, mass marketing). It also
enables a more rational use of branches network (for retail
banks that distribute insurance products). Banks which have
a strong reputation in the development of sophisticated financial
products can run this asset in a more intensive way.
Diversifying
or refocusing?
The disruption of banks environment throughout these past years
has led them to rethink their initial model. The disintermediation
and the rise of funds markets and by-products led:
• Deposit banks to examine (or search at all costs) the
opportunity to enter in investment banks activities (ex: Citibank
in the United States, Barclays in United Kingdom, Crédit
Agricole and BNO in France), or to give up their initial activity
to favour the investment bank (the bank of New York, Bankers-Trust
in the 1980s).
• Some universal banks are willing to strengthen this
activity at the expense of retail bank activities (ex: Deutsche
Bank and Dresdner Bank in Germany from the end of the 1990s).
More generally, some banks wander about the question of the
optimal degree of the diversification of their activities and
the main strength that they want to favour. Banks are multi-producing
firms. The works on substantial economies in banks are not very
conclusive.
The question of the promotion of their franchise is generally
asked, due to new regulatory constraints, accounting norms and
the pressure from shareholders; some have then recently become
essentially « Monoline »banks (ex : Bank of New
York, and State Street Bank, American medium-deposit banks have
shortly become the worldwide leaders of the preservation of
stocks activity).
Increase – Why?
For about ten years, banks have been involved in a big race.
Some gigantic banks have emerged (ex: Citigroup, Morgan Chase,
Bank One, HSBC). Are there any earnings associated to a big
size?
Studies on the existence of volume discount have never been
conclusive, even if their methodology can sometimes be questionable.
Major banks can beneficiate from a better grading…or be
considerate as too big to fail, which reduces the refunding
cost.
Only they have access to the customers of major firms and institutional
customers demanding sophisticated services which often generate
high commissions. So it seems that some activities (ex: stocks
preservation, activities related to the management of assets)
generate strong volume discount.
Outer growth, hostile taking over or merger between
equals.
For recent years, most of the banks of industrialised countries
have favoured outer growth (matured national markets increasing
slowly, population already highly equipped in financial products).
There are many cases of merger between equals that hide a certain
taking over by a partner (JP Morgan and Chase).
There are many cases of hostile taking over, and some have failed
(ex: BNP and Société Générale at
the end of the 1990s in France).
The partnerships in specific activities (generally generator
of strong volume discount) are more and more frequent.
The partnerships can be insurers, brokers, societies of funds
management, distributors…
Those partnerships enable a sharing of the high fixed costs
of entry and risks associated to new operations.
Reduction of costs or receipts increase?
Many mergers are motivated by the desire to reduce cost because
of the synergies emitted for this occasion, calculated by the
merger projects promoters; those are not always a reality. Everything
depends on the profits of merged banks.
In retail banks with network, how far are branches redundant?
Can they close? (Ex: the merger in the Netherlands between ABN
and Amro at the end of the 1980s led to the closing of several
agencies).
The incompatibilities between operating systems are often the
cause of the weakness of the synergies emitted. We can also
reduce the costs by the search for productivity earnings in
case of inner growth.
The efforts, often concentrated on salaried employees can come
up against social laws or the population pyramid in the considered
country. The reduction of the costs enable the growth of receipts
which is the only one that can relay the decline of costs (currently,
French retail banks relaunch the establishment of branches to
generate a volume of receipts more important).
Domestic growth or abroad
The recent restructurations of banking systems of major industrialised
countries have had a strong domestic bias (in the United States
since the deregulation measures of the 1990s, in various countries
of the European Union despite the arrival of the unique market
then the monetary union in Japan).
Growth strategies abroad have not been neglected. They have
to be considered when:
• The bank possesses one or many competitive assets that
can generate higher profits abroad.
• The domestic banking market while foreign markets possess
a higher growth potential (ex: appeal of Central and Eastern
Europe for big German banks, Austrian banks, and Italian and
French banks. Taking over of the German HypovereinsBank by the
Italian UniCredito).
• The purchase of bank abroad enables to diversify the
portfolio of risks (ex: purchase of the British Abbey National
by the Spanish Santander Central Hispano).
Sometimes, banks only delocalize some specialized subsidiary
companies abroad in order to take advantage of cheaper operating
costs or a regulation more favourable (ex: activities of assets
management and of « back office » in Dublin).
Organizational aspect
Twenty years ago, « the fragmented bank » appeared;
which echo did this work, a little provocative, encounter?
The combining of the possibilities offered by new technologies,
financial innovations and regulatory, accounting innovations
and the demands of profitability from shareholders led to a
disruption of the organization way of banks.
Finalisation, subcontracting, outsourcing and partnerships have
become a rule. Finalization enables to isolate some activities
in a partnership perspective, or to isolate a profit centre,
or to take advantage of the regulation (ex: the management of
assets entrusted to subsidiary companies of Asset Management).
Outsourcing is a major lever of costs reduction while evacuated
some risks, including operational ones, from now on they are
taking into account in the ratio « Mac Donnough ».
Societies of computing services are often very interested in
the tasks of banking subcontracting. They are often delocalized
in countries with a low cost workforce. The bursting of banking
functions have however its limits in coordination issues and
in the global management of the risks.
