JANUARY 15, 1976
Type International Expansion of Banking
AN ADDRESS BY Guido P. Hanselmann,
UNION BANK OF SWITZERLAND
CHAIRMAN The President,
H. Allan Leal, Q.C.
Ladies and gentlemen: We bid you a warm welcome on this brisk wintry day to The Empire Club of Canada. We also welcome an impressive group of bankers, near bankers and money consumers, to our head table today. I'm not sure that I ever knew the proper collective noun for a group of bankers--at least not one that could be used in polite circles. I thought of a "bevy of bankers" but that has sexist overtones and is therefore entirely unacceptable, at least unacceptable outside the bedrooms of the nation. I hope they will not find it offensive if I refer to them as a "bonanza of bankers". May I confide in you, and I mean them no disrespect, that in our preprandial discussions, I was not a little surprised to find them such a friendly and articulate lot. In my former dealings with bankers, I found them to be somewhat curt, and our discourse demanding: a limited vocabulary, usually proceeding on the following lines:
"How much do you want?"
"What can I have?"
"Could you manage five?"
But I am confident that, with the two and a half dollars Canadian I received and Dr. Shulman's book, I will attain my financial goals.
When Tennyson's Northern Farmer counselled his son not to marry for money but to go where money is, it is entirely probable that even at that time he had the Helvetian republic in mind. In any event, we have gone to Switzerland for our visitor and guest speaker today.
Mr. Guido P. Hanselmann was born in Spain, but received his formal education in Switzerland and graduated in business and finance. After a three year trial run with Union Bank of Switzerland in Zurich and Geneva, 1942-45, he spent fourteen years in the international business community and returned to the bank in 1959. He became manager of the Foreign Exchange Department in 1967, Deputy General Manager of the Services Division in 1968, and General Manager with responsibility for the International Division of UBS in 1969. He is here to open a Toronto Branch, UBS Representative (Canada) Ltd.
We welcome him cordially and invite him to address us on "International Expansion of Banking--Expectations and Results".
Mr. Chairman, ladies and gentlemen: Over the last fifteen years, the internationalization of banking has displayed impressive growth. It continues to do so, although obviously at a slower pace.
Buildup of an International Network
The opening shot for this expansion was fired by the large American banks, who also gave the initial impetus. In the early sixties, a number of banks in the United States began to build up their foreign branch office network. For example, the three biggest banks in the world--the Bank of America, Chase Manhattan Bank and the First National City Bank--alone increased the number of their branch offices abroad from 123 to 460 between 1960 and 1974. Other major American banks, such as Continental Illinois Bank, First National Bank of Chicago, Chemical Bank and Morgan Guaranty Bank also expanded their foreign office network, if not quite so aggressively, and even medium-sized and smaller banks pursued this aim as well.
Your banks have been active in foreign countries for over a century. It was in 1855 that the first agency of a Canadian bank was established in New York. In following years, additional agencies and branches were opened in such major cities as London, Paris, Chicago and San Francisco. As important and distinctive as these longestablished ties have been and still are, the present organization of Canada's international banking activities was largely shaped after World War II. Canadian banks have played an increasingly active role in financial centres all over the world, either through branches, agencies, representative offices, subsidiary trust companies, controlled corporations, minority holdings or participations in multi-national banks.
It was primarily the invasion of American banks in the early sixties that prompted the large European banks to react. For instance, the establishment of the EBIC Group (European Banks' International Corporation) may be considered a response to the increased competition offered by U.S. banks in Europe. Interestingly, the EBIC Group soon launched a counter-offense in the United States. It founded the European American Banking Corporation with registered offices in New York. This organization, especially since the takeover of the sound assets of the Franklin National Bank, has attained a prominent position in the New York financial community and has been very successful in its operations.
Similar groups followed EBIC, with some of them including non-European members, for example, Societe Financiere Europeenne. Other groups of this type are Orion, of which the Royal Bank of Canada is a member, the Euro-Partners, the Abecor Group and the InterAlpha Group. These groupings have secured positions in the international banking system, but this does not imply that the member banks operate exclusively through the facilities of their partners in the group if they wish to do business in their partners' home countries. The Swiss banks have been reluctant, however, to join such international banking clubs. In fact, the three largest Swiss banks have even agreed among themselves not to participate in any such groups.
In addition to the establishment of branch offices in other countries, mainly by American banks, and the formation of groups of the type I have just mentioned, banking has expanded internationally in other ways as well. Worth special mention in this connection are the multi-bank consortia, which have been very fashionable during the last five to eight years, but which are being regarded again today with somewhat less enthusiasm and greater dispassion.
The concept of the multi-bank consortium sprang from the desire to be present in a certain financial centre or in specific areas of operations where it was impossible to do this alone for lack of financial, staff or organizational capabilities, but where it became feasible in collaboration with associated banking institutions from other countries who pursued similar interests. Typical examples of this type of co-operative venture are the numerous multi-bank consortia with headquarters in London. These are designed to provide their members with access to this most important centre for international money market operations without the individual banks incurring expenses beyond their capacity. Multi-bank consortia headquartered in other financial centres serve similar purposes, as do institutions that were founded to provide financing for specific countries or specific sectors or industries of the economy. As examples, I might cite the European Brazilian Bank or the Banque Internationale pour le Financement de l'Energie Nucleaire.
The expansion of foreign activities over the last fifteen years has also featured the opening of numerous representative offices by internationally operative banks. Representative offices are generally established in places where a branch office or affiliated bank does not appear profitable, but where the business interests of the bank or those of its customers justify a showing of the national colours, so to speak. Swiss Banks Abroad--Foreign Banks in Switzerland
At this juncture, I would like to comment briefly on the position my country has taken toward this process of expansion and the situation as it exists today in Switzerland.
How are the activities of the Swiss banks, especially of the three big Swiss banks, to be evaluated in light of the trend toward internationalization? It can be noted that marked restraint has been exerted in the opening of branch offices and affiliated banks. The Swiss banks therefore maintain far fewer offices abroad today than do American, British, Japanese or French institutions of similar size.
I might mention that my bank, for example, decided five years ago to establish its own offices only in the most important international centres of finance. We have, in the meantime, been faithful to this policy and, with the network we now have, feel that there is no need at present to expand further.
The Swiss Bank Corporation and the Swiss Credit Bank have apparently been guided by similar considerations and have chosen to follow a similar path. The result is that all three banks maintain offices in London, New York and Tokyo, and there is--a certain degree of coexistence in Luxemburg, Panama and Singapore. Some of these banks also maintain branch offices in other cities. Naturally, the assessment of the importance and business potential of individual finance centres can vary. The reluctance of the Swiss banks to establish branches abroad most probably results from realistic evaluations of their own organizational and staffing capacities, as well as concern to maintain their genuine Swiss identity. It is still the intention of the Swiss banks to place the main emphasis on operations in their home country.
On the other hand, the large Swiss banks have made substantial efforts to develop a network of foreign representative offices, which entail relatively modest operating costs. At present, the three big Swiss banks maintain more than fifty representative offices, whose main purpose is to support and advise their own customers on interesting existing and potential markets abroad.
In turn, a growing number of foreign banks have set up offices in Switzerland. The earliest foreign banks were founded by European, particularly French, financial institutions. From 1957 on, the interest in Switzerland shown by foreign banks began to increase markedly and reached its zenith in 1969. Today, about a hundred foreign banks have branch offices or affiliates in Switzerland, not to mention around thirty representative offices. European institutions account for the majority of the offices and American banks for roughly one quarter. Owing to a lack of reciprocity, there are no Canadian branch offices or affiliates in Switzerland, although the Canadian Imperial Bank of Commerce does have a representative office in Zurich.
It is interesting to note the reasons given by foreign banks for selecting to locate in Switzerland. A recent survey showed that the principal considerations were Switzerland's importance as an international centre of finance and the good opportunities for trust operations. Other important reasons cited were monetary stability, engagement in the Euromarket and the financing of trade with the home country, or providing support to industry and customers from the home country. Banking secrecy and fiscal considerations, on the other hand, played no essential role in the selection.
Reasons for Increased Internationalization
The strong trend toward developing foreign business was based only to a limited extent on the free decisions of bank management members. Of greater importance were the increased internationalization of the banks' clientele, the pressure to open up new export markets for industry and the necessity to become better acquainted with relatively unknown countries--factors that made it virtually a must for us bankers to align business policy more closely with foreign operations.
The international expansion of banking business is a direct result of the internationalization of the banks' clientele. The best illustration of this is the interest of many American industrial companies in Europe, Asia and Latin America, as evidenced by the fact that U.S. direct investments abroad rose from about 32 billion dollars in 1960 to more than 100 billion dollars in 1974. The American banks soon realized that it was necessary to provide their services directly to international clients in other countries instead of relying on correspondent banks. Any bank that viewed this development with scepticism at the beginning found itself forced to do the same within a few years in order not to jeopardize its business relations at its New York, Chicago or San Francisco head office.
Although there was a certain time gap, a similar trend developed in Europe. The internationalization of the banking system was encouraged by the concurrent growth in economic ties and interdependence among nations, and above all, by the exceptionally strong expansion of world trade, which within a ten-year span of time had increased fivefold by the end of 1974. The need to expand internationally is also underscored in times of keener competition, as the banks must do everything within their power to provide their customers with new possibilities in foreign markets as well. The proliferation of foreign operations by the leading banks had created the prerequisites for these facilities.
Along with the strengthening of economic relations among nations and the substantial growth in world trade, supra-regional financial markets have also gained in importance over the past few years, for instance, in regard to international money market and underwriting operations. Both sectors of activity are extremely important to Swiss banks, and interestingly enough to our Canadian banking friends as well.
I would like to cite a few figures to illustrate this: the volume of the Euromoney market rose from 57 billion dollars in 1970 to about 230 billion dollars by mid-1975. In the same period, issues in the amount of approximately 25 billion dollars were placed on the Eurocapital market, with a record being set by the 6.5 billion dollars' worth of issue placements in the first three quarters of 1975 alone.
The Swiss banks participated substantially in both markets. Lacking a well-developed money market in Switzerland, the banks and their clients must invest their surplus funds in other countries, a fact that is expressed in the roughly 45 billion dollars placed abroad on either a fiduciary basis or for the banks' own account at mid-1975.
Thanks to their strong placement capability, the Swiss banks also play a prominent role in international underwriting operations. A sizable percentage of all Euroloans have always been placed with the clients of Swiss banks. Moreover, between 1950 and 1975 the total of notes and bonds placed in Switzerland for foreign account came to some 17 billion dollars. In the past few years, an increasing number of Canadian municipalities and public enterprises have made use of the Swiss capital market to finance investments, especially in the energy sector. In 1975, my bank alone placed seven Swiss franc bond and note issues for Canadian borrowers, equivalent to about 250 million dollars, and participated as manager and comanager in ten other international placements for a total of 400 million dollars.
Of interest in this connection, and of importance for the internationalization of banking, is the change we have been observing for some time now in the nature of the credit demand.
Whereas in the years of the economic boom in the industrial nations and during the strong growth in world trade, international credit operations were characterized mainly by the credit requirements of private enterprises, for some time now the strong dominance of public and semi-public borrowers has been apparent. Deficit financing within the framework of government spending programs to stimulate the economy, the financing needed to cover the balance of payments deficits of certain industrial nations and most of the developing countries, as well as the immense volume of funds required by the industrial nations for their energy development programs, necessitate amounts of capital of such huge dimensions that they can be raised only through the close collaboration of the large banks at an international level.
The same holds true in regard to the investment of the large balance of payments surpluses of the oil-producing countries, which today are the largest lenders on the Euromarket. In 1975, their surpluses aggregated about 43 billion dollars and will come to about 35 billion dollars in 1976. The oil-producing nations are today the major financiers of the Euromarkets.
Necessity and Risk
The internationalization of banking is a logical and necessary outgrowth of global economic expansion over the past years. There can be no doubt that the expansion of foreign operations has been of great benefit to the banks, but it has also meant that the banks have had to assume the risks and dangers involved. It is up to us to reduce these risks to a minimum by appropriate internal measures and by realistic assessments of possible danger spots. Worth remembering in this connection is the fact that risk-taking is a central and legitimate aspect of our free enterprise system. If nothing is ventured, no economic progress is made. This also holds true for internationally operative banks, whereby the shouldering of a risk is justified from the operational standpoint if management thinks that the opportunities clearly outweigh the dangers.
In my opinion, the greatest threat is not posed by the financial risks possibly connected with a transaction. We are, of course, concerned with the soundness of assets, even that of money market investments at banks, and are forced to keep a constant eye on them, while the maintenance of liquidity in connection with investments abroad exacts special care and caution. But, the most serious threat is that a company may not realize its limitations in time, and thus place excessive demands on its own organizational and personnel resources. As experience unfortunately shows, the lack of an overview and proper control or an unsound balance sheet resulting from expansion fever leads more quickly and radically to problems than an unfortunate business transaction. One of the most essential duties of a company's management is to assess its own capabilities objectively, to be able to say "no" to further growth when operations can no longer be kept safely in hand organizationally or in terms of personnel. An experienced and responsible staff as well as an efficient organizational structure are absolute prerequisites for keeping a close check on all of the risks involved in business. This holds true, of course, not only for operations with other countries but also for business at home.
Not only the simple risks connected with the execution of transactions are to be taken into account. If an order is not carried out properly, a bank can also incur a loss. This is a threat to which every company is constantly subject, but the customer becomes aware of such risks only when an actual breakdown occurs.
The most obvious problem spot is the risk coupled with credits, investments, participations and so forth, with differences between home and abroad being merely a question of degree. In foreign operations, other specific risks are added to the credit risk, such as the currency risk, to name one. Since we have had floating currency rates, such risks have become substantial, as various painful experiences over the last two and a half years have shown only too clearly. Another special hazard connected with operations abroad is the transfer risk, that is, the possibility that the government of a country in which we have assets or investments will no longer allow their transfer upon maturity.
All measures taken to reduce these risks are therefore of cardinal importance. Any large-scale expansion in foreign operations becomes pure adventure if we do not program ourselves, both from the organizational and personnel standpoint, in such a way that consumate orderliness prevails in the selection of business transactions, in the choice of our foreign partners, in the determination of amounts and the monitoring of maturities, in the selection and placing of limits on the amounts of the currency required, in the choice of the right currency for the purpose in mind as well as in the technical execution.
In 1974 especially, the international banks were able to amass considerable experience. All of us have examined our organizational structure and undertaken corrections wherever they seemed indicated. For example, internal controls were tightened greatly on the basis of experience gained; limits for countries and clients were reviewed and in some cases reduced or completely eliminated. This procedure was followed not only in Switzerland but throughout Europe, the United States and Canada as well. The international banking system of 1976 is probably healthier and conforms more to realities than two years ago.
What Does the Future Hold?
Allow me a look into the crystal ball. Undoubtedly, in the coming years the desire, I might even say the need, for international co-operation will continue to grow in view of the scope and complexity of the problems to be solved.
Let me clarify these comments by using your country as an example. We might take the energy sector, and mention the most important projects--the James Bay and Churchill Falls projects, the plans for more nuclear power, the tar sands of Alberta and the Mackenzie natural gas pipeline. This sector alone will require capital expenditures of about 250 billion dollars by 1980, which can be financed only with the help of foreign capital. On the other hand, Canadian know-how, especially in the fields of mining, harbour construction, telecommunications and so on, will be applied in joint ventures with foreign capital in other countries.
This shifting of international capital will be considerably facilitated if a sophisticated international banking system is available. Because the tasks grow in complexity and thus often exceed the capabilities of a single nation, the internationalization of banking operations will make further strides. Only a limited amount of capital is available, however, to meet the demand, which is virtually inexhaustible. To achieve the best balance possible is the task of the international money and capital markets, in which the banks play and will continue to play a significant role.
However, in respect to all of these factors that underscore the need for a truly international banking system, the risks involved must be borne in mind. In addition, the banks must continue to make great efforts to offer new and improved services to their clients.
Finally, the internationally operative banks must do everything in their power to maintain and further develop liberal international trade and capital movements. Only the free growth of the economy will make it possible to find optimum solutions to the global economic problems of today. Freedom of growth also serves as the best foundation for raising living standards in many parts of the world.
Canada, with its considerable need for foreign investment capital and its rich raw material and energy reserves, is predestined to take a greater part in this process at an international level and to play an even more significant role than it has in the past.
Our distinguished visitor and speaker was thanked on behalf of the audience by Mr. Robert L. Armstrong, a Past President of The Empire Club of Canada.