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To adapt or die, orto die trying.

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The spate of mergers and acquisitions lhat have iaken place wirhin the hanking sector since Ihe beginning of the year. may have made hdnkers remi~sce,some maybe with nostalgia, about the late 1980's and the fireworks over the Thames to celebrate the liheralisation of the London Stock Exchange -the Big Bang. Then, banks and stockbrokers jostled with each other as they tried to secure a prominenl position in the maket by merging with or acquiring the dealer and broker firms operating in it, or by enticing away whole teams of brokers with the offer of astronomical salaries -something very welcomed by the owners of the watering holes in h e <:ity. as these individuals promptly invested siiieable ckunks of their windfall in these estahlishments. The ii-dntic activity that ensued in London, as in olher tinanciiil centres, was hoosted by the merger mania in the corporate sector. 2nd continued until Black Monday in Odober 1987. This time round, some 01. the rrasons given lor the mergers and acquisitions may be the s a n e and will probably menlion synergy, economies o l scale or competitiveness, bu1 now they are taking place in the wake o í a recession and the atmosphere is one of glmm rdther lhan self-congrdtulation. In the L1.S done, 277 mergers and acquisitions have taken place since the beginning of the year. In August, the merger hetween Chemical and Chase created the country's higgest bank wiih assets of $297 billion. In March Mitsubishi Hank and Bank of Tokyo sealed a merger cxdting ¡he world's biggest bank with assels of $700 hillion. In the IJ.K, Swiss Bank Corporalion bought the investment hanking business of s.G.w&&~, Dresdner Bank bought Kleinwori Lknson. and recently Lloyds and TSB hdve a g m d to merge, to mention but a few examples. What are '!he reasons íor al1 these mergers and :acquisitions? There are many, hut the main one is "financd disintermediation". Traditiondly, banks have had a virtual monapoly as intermediaries in the financial system; they accept d e p i i s (appearing as liabilities in their balance sheets) and make loans (which appear as assets), with

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ihe pe~uliaritythal most of ihose deposits are liquid since ihey hdve lo be repaid on demand, and most of the loans are illiquid since they are granted with maturities in the hture. This "intermediation" 1s sustainable as long as savers wntinue to channel their money to the banb, and borrowers do not deíault. What ha been bdppening in recent years is that banks, on ihe one hand have heen confronied by the proliferation of non-bank finzncial intermediaries in the form of investment funds, insurance companies, and even the financial arm of depariment stores, competing to attrdct the money from savers and investors. and on the olher have suffered losses as a result of loan defaults andor bad managemenl. Even their traditional husiness of lending lo corporates has been hit by this process of disintermediation, as wmpanies have increasingly resorted to the capital markets to rhise funds. In view of al1 this, analysis and academics have for some time been speculating on whether we are witnessing ihe slow agonising death of most banks, to be replaced by a m w a d of Financial intermediaries specialising in specific areas, and those banks which are deemed necessary for the smuoih functio~ngof a modem financial sector. Whether this scenano is probable depends, to a large extent, on how we define what a bank is. The process of disintemediation and the competition h m non-bank Financial intermedkaries have forced many banks to adapt to the changing circumslances, and they have done so in many different w a p . In some cases the trdnsformation of a hmk has been ofsuch a m a g ~ t u d elhat is has led to the question: is it a hank or a financid services company offering hank services'? Tcday, many secalled banks derive a higher proporiion of their income from securities and Foreign exchange trading. and fees. than they do from the interest spread on their lending. The picture ihat emerges is a L Lone. ~ if' anyihing hecause in some countries a banking group will own a relail hanking operation concentrating on "traditional" lending to individuals and smalllmedium companies though a branch nelwork, mayhe another bank catering for large corporales and engaged in investment

banking activities, a securilies trdding operaiion, im insurdnce company, etc. in continental Europe, for example, there is a tradition of universal banks ofkring Ihe whole spectnmi of financial servics. and with large shareh«ldings in industrial mmpanies that result in an intimate, and sometimes exclusive, lending relationship. For a long time, these banks operdted in oligop>lislic markets sluelded from foreign competition by regulation and the high costs of entry, but with [he gradual removal of restrictions for foreign banks and the onsel o í the Single European Market, some of them hegan to break ranks in order lo adapt and compete in a new environment. in Spain, Banco Santander t w k the initiative hy the ininduction of the siipercueritrrs in 1989, and since then banks have fought fierce battles to keep or to poach each others customers as new or revamped pnducts have been introduced into the market (investment tunds, morlgage loans. personal pensions, etc.). During this period there have also been a numher o í mergers and acquisitions, the two largest of which created Banco Bilbao V i z c a ~ and Banco Central Hispano; the consolidation of ihe puhlic sector banks into Argentaria; and the majorily purchase of B a s t o by Banco Santander afier íhe collapse of the former in December 1993. What dms appear lo he clear h > m Ihe process undeway in the hanking sector is that banks have to adapt or die. Some, like the American investment hanks ha%-e for a long time followed a strategy of providing specialised and innovative services al a global Ievel (admnedly, forced lo some extent by the provisions of the Glass-Steagall Act); others have opled to stay in their home markeis trying to become a dominant force by increasing volume tluough mergers and acquisitions; some have sought new markets in the emerging economies; and yet others have concentrated, more than mosl. in providing risk-managemenl pnducts and in securities and foreign exchange trading. Some will succeed and others will, for various reasons, die trying like Banesto and Barings -bu1 as Kipling would say, that is another story.

Patricio Fernáodez Urbina

To adapt or die, or to die trying