ECONOMIC SPOTLIGHT - FOREIGN BANKS IN GERMANY
Foreign banks in West Germany are
reassessing their positions after a number of changes in the
markets and the regulatory environment that have dampened a
once-euphoric enthusiasm for expansion here.
    Banking sources said the most important changes were plans
to bring securities holdings into capital lending ratios, the
first such move in a major financial centre. This could place a
serious burden on several foreign banks, particularly those
active in primary and secondary bond markets. Foreign banks had
much lower equity and reserve capital than most domestic banks.
    Senior banking sources said talks between the Bundesbank
and the banking supervisory office over bringing securities --
primarily bonds -- under banking laws governing capital ratios
were in progress.
    Although no date had been set for imposition, banks as
early as this year may be obliged to bring bonds under 1985
rules that limit bank lending to 18 times shareholders equity
and reserves.
    Although other national regulatory authorities are known to
be considering similar steps in light of growing securitisation
of debt previously in the balance sheet, Germany, with its
tradition of prudence, may be the first.
    Brian Kissack, president of the Foreign Banks Association,
told Reuters, "It's not a positive sign. It could cause certain
people who are not in (West Germany) to query whether it was as
attractive to get in now."
    Larger banks may begin to use global networks to pass on
holdings in mark securities to other centres which had less
stringent ratios, taking business out of the country, he added.
    But sources said foreign banks faced a host of other
practical problems as well. These included,
    -- the apparent unwillingness of the Bonn government to
make an early move to abolish the stock exchange turnover tax.
    -- signs that London's "Big Bang" may have deeper
implications for German securities trading than first thought.
    -- difficulty in finding experienced securities
professionals to staff new subsidiaries.
    -- growing pressure on commercial banking margins that is
forcing widespread retrenchment and refocusing of activities.
    -- the threat of having to face a renewed push for market
share by the largest and most powerful Japanese banks.
    By leaving the stock exchange turnover tax out of the
initial negotiating session of the incoming federal coalition
government, Bonn had dashed hopes it would soon be abolished.
    The tax is 0.25 pct on each side of a securities trade by a
non-bank, but it is not levied on public authority bonds.
    This extra cost, particularly for finely-priced instruments
such as floating rate notes, had kept much mark securities
business firmly in the City, awaiting a change. But aside from
this, London was more active than domestic houses had expected.
    Large U.S., British, Japanese and Swiss investors often
preferred to execute block trades -- 50,000 shares and up --
with City market makers who could absorb at least some of the
paper in their own positions, diminishing the immediate impact
on the share price.
    Most German brokers and banks pass trades direct to the
exchange floor, cutting profits or adding to costs.
    Bank in Liechstenstein (Frankfurt) GmbH board member
Michael Zapf said London's share of German securities business
done was causing foreign banks without German units to weigh
whether establishment costs involved were worth the returns.
    Additional signs that London market makers may move into
secondary level stocks had added to this concern, he said.
    Now, plans by many foreign banks to transfer mark
securities trading entirely to newly established, mainly
Frankfurt-based units were being reassessed, sources said.
    The continuing existence of the stock exchange tax had also
effectively prevented the birth of a short-term mark paper
market in certificates of deposit or commercial paper.
    Many U.S. Investment and money centre banks in particular
were hoping experience in these would provide the lever to
prise open tight credit relationships between companies and
their domestic "house" banks.
    At the moment, U.S. Investment banks are expanding fastest
here. A unit of Salomon Inc <SB.N> began last summer and Morgan
Stanley Group Inc <MS.N> is currently fitting out offices,
probably for a summer start to business.
    A unit of <Manufacturers Hanover Trust Co> should begin
operations toward year end. Merrill Lynch and Co Inc <MER.N>
and Shearson Lehman Brothers are known to be weighing
conversion of current, small operations to full-standing units.
    But expansion had been hampered by the lack of experienced
personnel in a hitherto fairly small market. The big three
Swiss banks, which arrived between late 1985 and first half
1986, have been steadily building up securities departments,
taking staff equally from domestic and foreign competitors.
    The two U.S. Banks longest established here, Citibank AG
and Chase Bank AG, had been particularly hard hit.
    Both banks recently announced plans to cut back commercial
activities and shut down German branch offices on orders from
head office. In the competitive environment, return on assets
employed was insufficient to meet requirements, sources said.
    But the weakening attraction of "Financial Centre Germany"
was unlikely to deter major Japanese banks from setting up full
subsidiaries when the Bundesbank gives the green light for mark
eurobond lead management probably around third quarter 1987.
    Once banks such as Dai-Ichi Kangyo Bank Ltd <DIKB.T> and
Sumitomo Bank Ltd <SUMI.T> move in, competition for business,
for staff and even for premises would soar, sources said.
 REUTER
