MARCH 11, 1971
International Credit on Capital Markets Now & in the Future
AN ADDRESS BY E. J. W. Hellmuth,
DIRECTOR, MIDLAND BANK LIMITED
CHAIRMAN The President,
Harold V. Cranfield
GRACE Rev. Hugh M. Bedford-Jones
From your advance notice card you see that our speaker works for a bank called the "Midland". Leaving out the Bank of England, the Bank of Scotland and the Bank of Ireland it is about as established as any of the 150 major banks of Britain for it was founded in 1836. Which makes it just younger than the Bank of Nova Scotia 1832 (Mr. Boyles) and much older than the Royal 1869 (Mr. Anderson) and the Toronto Dominion (Toronto 1856) and (Dominion 1871) present charter 1961 represented here by Mr. White and is much older than the Canadian Imperial Bank of Commerce (Imperial 1875) represented here by Mr. Greenwood its president and of course junior to the Bank of Montreal 1817 represented by Mr. R. L. W. Softly. But if my arithmetic is right The Midland has more money on deposit than any of the great Canadian banks except two, The Canadian Imperial and the Royal, and stands second in position of the great British banks with 2623 branches in England and Wales. Barclay's has 2630 branches and Lloyds 2000 branches. Its deposits of two thousand three hundred and twenty-one million pounds, again place it ahead of Lloyds and just behind Barclay's.
The Midland Bank Head Office is on the site of the former St. Mildred's Church which is part of a place designated as "Poultry". Poultry is a former market place and in 1444 the London Common Council received a petition of protest against live poultry being kept in the markets of the city. Just outside the door of this prestigious bank is St. Mildred's Court--but up to 1754--310 years after the petition it was still known as "Scalding Alley" because the birds were scalded before being plucked. Three hundred years for action!--that beats our own City Hall. This is a singlelaneone-way street and when I went there by appointment two years ago to make this appeal to our speaker of today, by taxi, I found it to be as narrow as any Cornwall country lane except that instead of hedge-rows I was surrounded by the canyon walls of the surrounding stone buildings. In this setting then you find antiquity in its origins, size in its many branches, capital in its billions of dollars and to use an Americanism "know-how" in its management. The topic of today's address, "International Credit on Capital Markets, Now and in the Future" demands that our speaker have experience in world markets. He has this! His banking duties created opportunity for travel in the Middle East, the Far East, United States, Australia, the United States of Soviet Russia, Communist China and of course regularly to banking institutions in all the European capitals.
Our speaker has three very special qualifications to be here today. The first of these is his affiliation with the Canadian armed forces for he served two years with the 2nd Canadian Corps and those of you who were there recognize Neimegen as the focus of this Canadian action. He was awarded the Croix de Guerre and I understand is an officer of the Order of Orange of Nassau, the latter he tells me was because of a tremendous party he put on one night which of course is quite a ridiculous story.
His second special qualification for being here is that he has always been a banker. He was born in London in 1907, the famous year of the birth of Hans Selye and your chairman. He entered the Midland Bank just after his 17th birthday in 1924 and his banking qualification is further supported (2 years later) by winning the Beckett Prize for first place in all England in the Institute of Bankers Examination.
The third and final special recommendation is that he has always had orientation in International banking. This, for example, was as the United Kingdom member of the Joint Foreign Exchange Agency in Germany. (Incidentally he is fluent in German having learned it in a 9 months total immersion banking experience in Germany as a young man.) I think it is especially noteworthy that he pioneered EastWest trade with the U.S.S.R. by facilitating a 100 million dollar financial arrangement with Russia. (Pounds sterling not rubles.) The ultimate in East-West trade was to indicate to Communist China at a time when Communist China was not necessarily popular in Britain that their credit was good at the Midland Bank of which Mr. Hellmuth is Executive Director. While I shall not name them he is on the Board of Directors of a dozen banks in Britain, Malta, West Africa, Brussels, New York and Canada. Surely he is The International Banker and is therefore fully qualified to present his topic, "International Credit on Capital Markets Now and in the Future." I now give you Mr. Edward John William Hellmuth whose friends (of which I count myself one) call him Tony. I give you Tony Hellmuth.
Mr. Chairman, ladies and gentlemen, thank you very much indeed, Mr. Chairman, for your very kind introductory remarks. I must say, going back to the time of the war years when I was privileged to serve on two Canadian Corps staffs, I little thought when I was sitting in my tent just outside Nijmegen and blessing the Canadian custom of living in tents rather than quarters, that I would find myself twenty-seven years later addressing the Empire Club in Toronto.
Mr. Chairman and gentlemen, I am delighted to be here once again in Toronto, and I appreciate very much indeed the great honour you do me in asking me to address you.
The Chairman's introduction has outlined some of my qualifications; whether I deserve them or not I cannot say. I can say that I have found myself in the hot-seat of international banking certainly in post-war years and I did presume, therefore, to talk about international credit and capital markets today. I do so as a parochial clearing banker sitting in London and looking out across the world and watching the capital market develop.
I well remember being in Toronto in 1963 at a time when we in the Midland Bank were thinking in terms of the multi-national investment banks that were at that time being pioneered. We set up, in our own case, the Midland and International Banks, which includes as one of our partners the Toronto-Dominion Bank, the First Bank of Australia, and the Standard Bank.
Whilst I was in Toronto I was talking about this new institution, this new sort of dimension in banking, as we thought very modestly this bank would be; an investment bank. The bank we were thinking of founding was to provide a so-called awkward term of finance, the period which is too long for the ordinary constituent deposit bankers and too short for the institutions. These sort of three, five and seven-year credits.
Whilst I was in Toronto, as on this occasion, too, obviously I was questioned about sterling and I was asked just at that time what did I think of the future prospects of sterling. What I said in 1963 does not necessarily follow in 1971, but I was able to say when we were setting up this bank in London, based on what Lord Culver, who was at that time the Governor of the Bank of England and now the Ambassador in Washington, had said.
We were thinking that at long last the United Kingdom had in fact got itself back into a balance of payments viability position. We thought, too, that sterling would be much stronger in the future and the fact that we have been living on a thin red line of reserve, on a knife-edge in the post-war years defending our pound sterling, convinced us that we had sufficient expertise in managing our affairs, and the opinion of the Governor of the Bank of England at that time was that we should be in due time opening up the London capital markets once again in terms of sterling. He also envisaged the dismantling of exchange controls.
Well, I talked in this way during my visit and it was not long when I got back to London and I discovered that the balance of payments' position, which had improved, deteriorated over the following years, as you know. Instead of sterling once again being used as a reserve currency and the London market being capital market available in terms of sterling for overseas investment, we found ourselves applying further stringent restrictions on the use of sterling, even to the extent of using sterling within the sterling area.
Where in the past we had always assumed this would always be available for transfer and for investment purposes in transfer across to Australia, South Africa, and Eire; these particular areas were subject to so-called voluntary restraint and we did restrict the investment which was permitted in sterling into these areas.
In addition to that, too, what was traditional about the London money market and the facilities provided by the banks--the acceptance business had always been made available for the financing of third country trade. It was one of the sort of functions of the reserve currency to provide this facility and we felt it was a very retrograde step when it was decided in the context of our balance of payments' difficulties that we had to withdraw these facilities.
London back in 1964-1965 had itself the infra-structure of institutionalized approach to financing. It had, if one may say so, the expertise. It had what is vitally important in international banking (and that is why one comes to Toronto, too), the contacts, the overseas contacts that are necessary. But they had not got the raw material to use for their particular financing projects.
It so happens, of course, that just about that time the so-called Euro-currency markets were merging, based at the early stages on an interest differential mainly, of course, in terms of dollars, in that a rate was offered above the regulation Q ceiling for the deposit, and the borrowing was on the basis of a rate which was competitive with the actual costs of the prime rate of all facilities provided by U.S. banks.
Very quickly this market grew apace and through particularly the institutions in the London market, found they had access to currency finance which could well take the place of the frustrated operations which had always been planned in terms of sterling.
Now today I don't need to repeat to this sophisticated audience the figures we have in view of what our Chairman has been telling us today about statistics. The Euro-currency markets are estimated or guestimated to perhaps have achieved a figure of fifty billion dollars today.
As I say, born from very small beginnings this fantastic pool of international liquidity, this sort of modern lubricant of international trade, is a market which provides today the vehicle for a vast amount of overseas finance. We have through these markets, and mainly, of course, Euro-dollars, we have the banker facilities of straight Eurobond issues in dollars or in other currencies. We have short, medium, long-term finance through specialized institutions. We have convertibles; we have units of account. We have all kinds of innovative methods of financing which have been introduced in the context of this vast market.
Of course we usually assume that this market is being based mainly on the U.S. balance of payments' deficit in that the bulk, eighty to ninety per cent of these funds, are in fact U.S. dollars. The growth of the market is not necessarily linked to the size of this deficit, as, of course, one can tell from the actual figures disclosed of the U.S. liquid liability to foreigners in 1967, which was roughly thirty-three billion dollars, and in 1969 it will go into something like forty-one billion. During this time the Euro-dollar markets should grow from a figure of seventeen-and-a-half billions in 1967 to something like thirty-seven-and-one-half billions in 1969. This tremendous flood of international liquidity is without any overlord control. There is no multi-lateral controls at all over the way these funds move around. It works on interest considerations; differential. There is no lender of last resort, although, of course, there is a certain tacit acceptance of responsibility in terms of domestic institutions, but it is free from controls really on an overall basis; although, of course, subject to controls which the central banks are able to introduce from time to time based on sometimes domestic monetary considerations and, of course, by the active operation through the Bank of International Settlements, which is a federal reserve, and through the commercial banks operating sometimes at the behest of the central banks. Sometimes, too, the central banks are able to exercise control by the specific exchange controls and by suasion, which is a very powerful weapon of the central banker over the commercial banks. They can also go into the market and adjust the actual swap arrangements to fit into the domestic situations which may arise as a result of Euro-currency funds floating from one country to another. They can intervene actively in the forward markets but it is a very fascinating situation in that we have today Eurocurrency funds totalling, say, fifty billion dollars which in terms of GNP probably exceeds most of the European countries' GNP. This vast amount of funds is there which has been harnessed, as I say, in a very sophisticated manner, and has been provided with secondary markets and all the services which specialized institutions can provide.
Why am I talking so much about this Euro-currency market? Simply because really it has completely conditioned the London market in the past few years. The Governor of the Bank of England at a recent banquet of the Overseas Bankers Club mentioned, instead of talking about the domestic scene and the credit squeeze, which is the usual miserable topic which he has to adopt, he was able on this occasion to talk freely about the breadths and depths of the London financial markets based on the Euro-currency funds. He was able to say that in the last year or two we have had an absolute influx into London of all these overseas banks, particularly American banks. We have already had the Canadian banks there for many years so they don't need to come in there. They are very welcome and very important members of our market. Today we have something like 160 overseas banks operating in the London market, representing something like fifty countries, and outnumbering the British banks by two-to-one. This is a very lively situation and it is reflected in the cost of banking accommodation. On the ground floor site today it costs thirty pounds a square foot in London. The Governor of the Bank of England was reminded by McKinsey's when they were in there recently that he has a very large paper wastebasket and that the cost of this particular wastebasket's accommodation was roughly thirty pounds and he ought to do something about it! Well, I don't know whether the Central Bank is permitted to deal with the vast amount of paper which must come his way but certainly I suppose it does indicate the vast amount that the Governor has to deal with and he probably found the best place to put it. It does indicate, I think, this situation that has developed in this city square mile.
I must apologize for talking about London but of course it is my place of business and I think in terms of the Eurocurrency market it is of paramount importance.
Along with this development in the London market and on the Continent and across the world has been the challenge to the banks and particularly the international banks, of the so-called emergence of the multi-national companies. These are great, by whatever definition you use, but their management and their production across the world is against the international company. Their requirements become more and more sophisticated and particularly in terms of the U.S. corporations, which are subject to their voluntary and mandatory restraints on overseas investments. They have had increasing access to the facilities provided by these special institutions and there is something like two hundred or so in London at the moment that specialize in Eurocurrency transactions of one kind or another.
The multi-nationals, because of their size and because of the nature of their operations and because of their multi-currency requirements, are in fact the raison d'etre perhaps to many of the new consortium banks that are being formed; the linking of New York banks, U.S. banks, with British merchant banks, the linking of European banks together to combat "Le Defi Americain," which I don't think is unknown in Canada. Certainly Schreiber's book says a lot about the problem which is presented within Europe, particularly in terms of finance, but I think in banking the challenge certainly is to be able to deal with the banking requirements of the multi-national companies.
If one looks at the statistics, of course, for two or three years back the multi-nationals were mainly dominated by U.S. corporations. In fact, I think the figures in 1967-1969 thirty per cent of the issues in the market were for the account of U.S. corporations, which do represent something like seventy or eighty per cent of the funds raised. In other words, we have a major banking challenge, as it were, to deal with the requirements of these multi-national companies which are not all American now. There is a great increase, quite apart from European, Canadian multinationals. They want somewhere to go to consult in terms of multi-currencies, to find the proper place to deposit their funds, their temporary liquidity problems, and also they want a place to go to get advice at the right level, the right type of banker who has also some time to be multi-lingua: to deal with his responsibilities, to advise on the very, very broad front. These finance directors of these multi-national companies now expect their bankers to give them this on thespot sort of service, in that they expect not only the routine sort of facilities but they want to meet somebody who stands more or less, pari passu, in terms of international experience in advising them on their future financial policy, That is the situation as we have it in London today.
The banks, international banks, are all looking for partners. There is a tremendous amount of promiscuity. There is the merchant banks in their own area sort of wanting access to the funds provided by the big deposit banks. The big deposit banks want to widen the range of their facilities because as you probably know the clearing banks in London have always found themselves since the war in a strait jacket in terms of the domestic sort of facilities they are able to provide. They have always worked under ceilings and restrictions, directives, qualitative and quantitative credit controls. So it is in branching out into international banking and making use of the other currencies but sterling that they see the greatest possible developments in the future.
To talk about the future of the Euro-dollar market, its size, and will it persist, one obviously must do so in the context of the future. You talk about the major consideration here, the U.S. balance of payments, whether it stands roughly as it is, and it is the greatest deficit ever by whatever method they follow in assessing it. Is it going to increase? If so, of course it presents a problem in that the host countries for those dollars may find themselves not so willing to hold and to increase these dollars which are becoming available on nonresidents' accounts. The suggestion that another reserve currency may be found can be looked at in the context of the negotiations that have been going on in Brussels within The Six about the economic integration and monetary integration that is to take place in the next decade. It may be, and it is most unlikely, I think, that the United States may run into surplus and then we would be presented with quite a different problem.
In all these circumstances I think that one can confidently say this great market of fifty billion dollars will persist. It will be there. It will also be the main business, I think, in the City of London for a long, long time to come whatever happens in terms of our joining the Common Market and the impact that might have on sterling as a reserve currency; or whether it becomes merged in the arrangements that will be made within the Common Market, the enlarged Common Market. I think nevertheless whatever happens--if we go into the Market or we don't London remains the financial centre in its own right because of the ingenuity and expertise and the institutionalized infra-structure that it has which will always give it, I think, the flow of business which will give it an outstanding and predominant position in the financial markets.
I don't know how long I am supposed to speak, Mr. Chairman, but I could go on for a long time speaking to you about the implications for the United Kingdom in joining the Common Market, on the financial side and in the trading area. With a Canadian audience I think I ought to address myself on the subject, which Mr. Nicholson talked about at some length at one of your meetings. I did notice he mentioned the fact that Euro-currency markets provide a means of overseas investment in Canada. In view of some of the statements of ultra-nationalisms that I have been reading in one or two papers I am wondering whether that was an altogether very sensible thing to suggest just at that time.
I think we realize that the United Kingdom has this tremendous stake in Canada. We have this very special relationship. I am delighted to see the flags behind us today. It gives me a feeling of great pride. It takes me back perhaps to my days in two Canadian Corps when we were integrated.
As far as I can see, the position with the United Kingdom, vis-a-vis the Common Market, vis-a-vis its trading position with Canada, will be one that is not discussed so much in the negotiations in Brussels as it was some years back when Mr. Heath, before he could get on with the negotiations, said he had something like seventy different items which his Canadian friends had asked him to negotiate in detail before he proceeded with further negotiations. Today, with the Common Market negotiations well under way, and I was listening to Lord Jellicoe a few weeks ago, he indicated that there are just these three items--the Commonwealth sugar, the special position in New Zealand, and a small matter of the contribution we make to the budget in the period of the transition. The position so far as Canada is concerned, I think, is fully understood in terms of my own experience in the British National Export Council. There it is fully realized that the problems that face Canada in an attempt to diversify her overseas trade, her eye on her great neighbour with her 70 percent participation in terms of her exports; her need to look very carefully at the impact of the common external tariff and the loss of the Commonwealth preference that might flow from her joining the Market; the need to determine what is going to be the impact on the politically very sensitive agricultural products which you export across the world; the fact that in the last year or so--and I may be wrong on this--I got the impression that your export performance to the Common Market and to the United Kingdom was about 40 per cent up on the previous year. I would have thought that exacerbated to some extent that deficit which exists between trade with the United Kingdom and Canada. It seems to me you are doing pretty well in terms of your exports to the Common Market at the moment and therefore I would have thought on balance the impact that our joining the Common Market would make today would be very much less, very much more insulated, than would have been the case four or five years ago.
I think that we have no option about it. I think now if we get the right terms we are going into the Common Market and we do so with the long-term dynamic consideration very much in our minds. It could well be that the vast trading relationships and contacts that exist between our two countries could well be the sort of vehicle the United Kingdom would become for a more effective approach into the Common Market itself because the perfidious Albion will certainly get in on terms. I think Mr. Ripon has said we don't go in as shareholders; we go in as directors. We shall have something to say about what goes on inside that Market. I think we shall tend to make it more outward-looking than inward-looking and I don't think Mr. Ripon has said this, but I would have thought that is the sort of task of our philosophy in becoming members of the Common Market.
I am afraid, Mr. Chairman, I have probably talked too long. I was told to keep it down to twenty minutes. I am wandering all over the place. I think it was Robert Morley who said he had to listen very carefully to what he was saying, otherwise he didn't know what he was talking about. I am afraid I rather wandered across the scene and perhaps wandered away from my subject. I did think perhaps I should pay some reference to trade between our two countries.
I perhaps should mention I feel very much encouraged by the latest figures that we were able to read in your papers yesterday on the balance of payments' position in the United Kingdom. We had a surplus last year, much more than we expected, despite all our difficulties, all the wage explosions, price increases and very low productivity. Nevertheless, balance of payments-wise the figures are very impressive and we had there something like five to six hundred million in sterling in balance and for the first time since 1928 a balance on the current account on visible trade in our favour in addition to invisibles. I had the pleasure of working on the committee on invisibles when we examined the figures about five or six years ago. Invisibles are now turning into something like five to six hundred millions a year net and provide something like 40 per cent of our total foreign exchange earnings. Even in banking modest bankers are earning in London today something like a hundred million sterling, which is compared with the figure of twenty-five millions four or five years ago. So we are not in Eurocurrency finances for our health. We make a reasonable profit out of it.
As I say, probably I could go on much longer talking in a very random sort of way. I am reminded of the little story of a working man's club up in Yorkshire and one of the enthusiastic members eventually became the chairman. He swatted up his speech. He got up and having got over the first two minutes he had no nervous trouble--once you feel comfortable it is jolly difficult to sit down. Very much as I am doing today. Eventually he sat down and mopping his brow he turned to his predecessor and he said, "Well, how did I get on?" He said, "I don't rightly know but it certainly shortened the winter." Well, gentlemen, I don't want to shorten your afternoon by speaking too long, but I do hope that you have found my odd comments of some interest. I say once again how much I appreciate being invited to address you today.
Perhaps a final tidbit, just to say that we are taking full note of the tremendous developments taking place in Canada and particularly with the European approach. I would like to say my own particular bank, along with our European friends, the Deutscher Bank, the Amsterdam Bank, the Rotterdam Bank, and the Societe Generale de Banque in Brussels, these four European banks, think it is important for us to be closer to the Canadian scene. I hope in a month's time we shall be having a joint representative here who will do a job much better than Mr. Hellmuth has done today to present to our Canadian friends the facilities that are available in Europe and the reciprocal sort of quid pro quo basis the facilities for improving trade and investment between our two countries. Thank you very much.
The gratitude of the Club was expressed by Mr. Herbert S. White of the Toronto-Dominion Bank.