The Origins and Evolution of Global Banking

Emerging Patterns

From the Florentine merchant bankers of the Renaissance to the contemporary period, banking has become an increasingly global business. Two major forces were responsible for the globalization of banking. The first was technology. Recent improvements in technology and communications have decreased drastically the cost of recording, transmitting and processing financial information. This cost reduction makes it cheaper to extend and maintain realtime control over overseas operations. The second major force was the liberalization of financial markets. Recent decades have experienced the institutionalization of savings. Throughout the world, individual investors gave way to institutional investors who provide professional, prudent management and best execution for their customers. The growing importance of institutional investors has had an enormous impact on financial markets worldwide. The need of the new democratic nations of Eastern Europe and the Republics of the former Soviet Union to build market economies created an enormous demand for international capital. Moreover, competing for this capital there was an array of countries in need of developing modern, eficient economies. In the world markets countries with a restrictive financial environment found themselves in a situation of competitive disadvantage before countries with lesser regulation. As capital gravitated to wards countries with the freest markets it increased the pressure on other countries to deregulate. This pressure provided the impetus for the liberalization of financial markets and the consequent growth of international banking.

While the nationalities of the leading international banks have changed from time to time, the overall trend of international banking has been the same: rapid expansion of the types and the volume of services offered and of the number of banks providing those services, (which range from the traditional businesses of deposit taking, lending, and transfering of funds, to the new sources of financial profits: financing the worldwide thrust toward privatization of state-owned entreprises, and trading currencies, securities and derivative products). Advances in the theory of finance, combined with technology, have made it possible the development of a wide range of new derivative financial instruments, such as options, swaps and futures, as well as the trading of these derivatives. These advances have made it possible for banks to better manage the complex risks inherent in their business. More importantly, they have enabled banks to offer their corporate clients financial advice and risk management services, and allow them to better control and manage their international exposures.

As international markets become more integrated, competition in international banking will intensify still further. Recent changes in U.S. regulations have triggered a wave of "megamergers" that is producing banks with the size and strength necessary to face the fearsome competitive world of international banking. Moreover, long overdue regulatory revision toward financial consolidation should enable U.S. banks to offer, through bank-holding-company structures, a full range of banking, securities and insurance services. Their main competitors are EC's universal banks, many of which provide these services throughout member countries from a single legal entity. Japan's keiretsu banks operate like universal banks, providing all of the financial services needed by the companies affiliated to them. As the key players from each group will seek to become global banking powerhouses, competition will intensify still further. Experts anticipate that, of the 40 or 50 banks currently aspiring to such a role in the year 2000, only a dozen or so will succeed. Global status will demand covering customers in major product and geographic markets around the world. This implies market segmentation to identify the needs of specifc groups of customers and provide products and services tailored to the needs of these groups, anywhere in the world. Global banks must also be able to intermediate a sizable portion of the growing international flow of capital while remaining flexible enough to shift resources as needed to fast-growing areas and profitable businesses.