Banks better buck up

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WHO would be a European banker? Many financial institutions face a tough post-euro future, but the banks are first in the firing line. The disappearance of national currencies will lose them a lot of foreign-exchange business and expose them to far more competitors. A Portuguese bank with expertise in dollar-escudo business, for example, will struggle to compete with bigger rivals’ dollar-euro work. Similarly, the disappearance of guilder-denominated bonds will hurt Dutch banks, which run around 85% of issues of such debt.

One hope for such banks is that local knowledge might remain valuable. But relying on this to cement national strength may turn out to be only a holding action—technology is making local knowledge easier to replicate, and the price of most services is steadily falling. Thus a second option: to go for cross-border mergers, and try to create something big enough to confront the world’s megabanks. Yet few banks in Europe have so far managed this. The only results have been mergers within the Nordic region, such as Merita’s with Nordbanken, or the consolidation within Benelux—although several German banks are said to be interested in acquisitions in France or Italy.

An alternative to all-out mergers, suggested by Jean Dermine, a professor at Insead, a business school near Paris, is to form a co-operative venture with foreign banks. He draws a parallel with the regional agricultural banks in the Netherlands that established Rabobank, a co-operative big enough to create products that local banks then distributed. A co-operative European bank formed by medium-sized institutions in several countries could, similarly, generate products that nationally focused banks would package and sell in domestic markets in which relations with customers still mattered.

Networks of specialists linked by a small central institution might also be constructed on functional, rather than national lines. Economies of scale are much debated in banks: few monsters have proved good at exploiting them. Some American research suggests that diseconomies of scale start to outweigh economies when a bank’s assets exceed $25 billion. Herwig Langohr, a colleague of Mr Dermine’s who is also on the board of KBC, a Belgian bank, echoes Adam Smith’s observation that only the size of markets limits the degree of division of labour, and suggests the future lies in specialisation.

Niches that it may not have been worth occupying on the national level could be more attractive across the bigger euro market. So instead of massing into larger size, some European banks may choose to unbundle. But even then, they will face competition from new, technologically astute and more focused firms of the sort already offering telephone banking or on-line share dealing. The future for euro-bankers looks grim.