Banks as Multinationals (RLE Banking & Finance)

Geoffrey Jones

• Publisher: Routledge
• Year: 2012
• eBook ISBN: 9781136267376
• Edition: 1
• Topic: Economics
• Subtopic: Business General
• Index: Economics

This comparative, international study looks at origins and business strategies of multinational banks. A distinguished team of bankers and academics from the United States, Japan, Europe and Australia survey the evolution of multinational banks over time and suggest a conceptual framework in which this development can be understood.

In-depth analyses of the multinational banking strategies of selected countries and institutions lead from early nineteenth century on to late twentieth century developments and future trends in investment banking. The approach is interdisciplinary, with economists and business historians joining together to confront theory with facts.

The findings presented in this major study will be of interest to scholars and professionals in international business, banking and finance, economists and business and economic historians.

Chapter one
Banks as multinationals¹

Geoffrey Jones

Multinational banking and international business

This book examines why banks of one country own banking facilities in other countries. Different writers have given this phenomenon different names, such as transnational banking, international banking and multinational banking. In this volume, the term multinational banking is used, and a sharp distinction drawn between this and international banking. International banking includes foreign trade finance and lending to corporations and governments resident in foreign countries. A bank may own a branch in the foreign country in question, but cross-border lending and trade finance can be - and often is - conducted without such facilities. Explanations of international banking need to draw on theories of international financial intermediation. Multinational banks own and control branches and affiliates in more than one country. They often perform international banking services, but the essential question is why such banks move across borders.

The search for an explanation of multinational manufacturing has generated a large literature from the 1960s. In contrast, the subject of multinational banking languished until the publication in 1977 of Herbert G. Grubel's 'first attempt to develop a general theory of multinational banking'.² Subsequent literature has clarified many conceptual and empirical issues. John H. Dunning's 'eclectic model' of international production has been found useful as an explanatory tool by several writers, with particular attention being devoted to the sources of advantage of a foreign bank in a host economy.³ Product differentiation, economies of scale, imperfections in markets for information and technology and government support have been discussed in this context, while Robert Z. Aliber has stressed the importance of differences between countries in the cost of capital.⁴ Parallel with this work, the business strategy literature has argued that banks often become multinational by following their corporate clients over national borders.⁵

Recent writers on international business have emphasized the need for interdisciplinary approaches to the subject, and there has been a renewed interest in the potential of business history in this respect.⁶ This trend has coincided with a shift of opinion in some leading American business schools towards incorporating historical approaches in their teaching and research programmes.⁷ This book, in line with this growing conviction about the value of historical analysis in understanding business behaviour, approaches the subject of multinational banking through the experience over time of countries and institutions. The empirical evidence presented here can be used to 'test' the explanatory models of economists and business strategists, but it also has an importance of its own. Institutional developments, such as the emergence of multinational banks, have to be set firmly in their contexts of time and space.

The historical pattern

Multinational banking has a long pedigree. Italian bankers of the later Middle Ages sometimes established branches in foreign countries to assist their cross-border lending and trade finance activities. Bankers often sent members of their family or other staff to represent them abroad temporarily, or developed reciprocal agreements with their equivalents in foreign countries.⁸

Modern corporate multinational banking, the primary focus of this book, has occurred in two waves. The first wave came in the nineteenth century. The earliest and most extensive examples were the British overseas banks, which began to appear in the 1830s and which are discussed in the chapters by Jones, King and Merrett in this volume. These institutions were headquartered in Britain but did not conduct domestic banking in that country, and initially had no shareholding links with domestic British banks. By 1914 they had large branch networks in parts of the British Empire, notably Australasia and southern Africa, and they were also influential elsewhere, especially Latin America.

Later in the nineteenth century the British overseas banks were joined by corporate banks from other countries. These usually had more limited branch networks and were generally linked to domestic banking institutions in their home economies. As Hertner observes, German multinational banking was essentially the creation of domestic German banks, which opened their own branches in London and established subsidiaries to operate in Latin America, Asia and elsewhere. Nineteenth-century French multinational banking followed a similar model. The Banque de l'lndochine, the most vigorous French overseas bank, was founded in 1875 by a domestic bank.⁹ In the decade before the First World War, French domestic banks also took substantial equity stakes in leading Russian banks.¹⁰ In Belgium, the largest domestic bank —Societe Generate - acquired a French bank in 1890, and in the 1900s founded a number of overseas banks, notably the Banque Sino-Belge in 1902 (to operate in China) and the Banque Italo-Belge in 1911 (to operate in South America).¹¹ The same pattern is discernible, as Cassis shows, in Swiss banking, although the Swiss showed little interest in multinational banking. The first Japanese multinational bank, the Yokohama Specie Bank, was a product not of domestic banks but of the Japanese government itself. One country which had few multinational banking interests in the nineteenth century was the United States, whose banks had, as Wilkins notes, only a tiny handful of foreign branches.

A number of features of nineteenth-century multinational corporate banks deserve emphasis. Their branches were nverwhelmingly concentrated on developing economies. Brown's study illustrates, however, that developing economies were not simply virgin territories. In southeast Asia in the nineteenth century, powerful overseas Chinese business houses conducted international banking, sometimes through multinational branching, which co-existed alongside the Exchange Banks discussed by King. Banks also established branches in international financial centres, notably London, but foreign penetration of the domestic banking systems of Britain, continental Europe or (with the few exceptions noted by Wilkins) the United States was virtually non-existent. Secondly, the kind of banking services offered by the multinational banks abroad were diverse. Frequently domestic retail banking, trade finance, and investment banking were performed by the same institutions.

Nineteenth-century multinational corporate banks operated in a world of diverse institutional and contractual arrangements. They existed alongside many private banks, whose international activities are less easily categorized as falling into distinct 'waves'. From the time of the medieval Italian banks, private bankers had undertaken international banking, sometimes establishing branches or other forms of representation in foreign countries. This practice continued in the nineteenth century. Merchant banks and private bankers handled much of the trade and capital movements between Europe and the United States largely through correspondent networks, partnerships and cross-holdings.¹² This book does not attempt to explore this complex world in detail, but McKay's chapter on the Rothschilds provides a valuable case study of the growth and business strategy of one major group, while Wilkins discusses the activities of British private banks such as Barings in the United States in the nineteenth century. Multinational corporate banking was one of a variety of ways to conduct banking over borders, and the challenge is to discover why and in which circumstances this mode was adopted in preference to others.

Multinational banking in the nineteenth century also spilled over into multinational investment in other sectors. Again this important topic could not be discussed in great detail in this volume, but several chapters touch on it, if only tangentially. In the nineteenth-century Chinese business houses discussed by Brown, banking and other trading and commercial activities were closely integrated. Wilkins observes Barings' direct investment in land development in Maine in the 1790s. Gay describes how, one hundred years later, the Imperial Ottoman Bank was nearly ruined by acquiring a large portfolio of South African mining shares. The continental European practice of mixed banking often led to a combination of banking and non-banking multinational activities. Before 1914, for example, French banks became closely involved in Russian industry via their Russian banking affiliates. Deutsche Bank combined multinational banking with foreign direct investment in oil production and distribution. In the 1900s Banque d'Outremer of Belgium owned and managed considerable mining, natural resource and paper interests in Canada. This investment had been abandoned by 1923, but other continental European mixed banks continued to make diversified foreign direct investments in the interwar years. In the 1920s, for example, Banque de l'Union Parisienne invested in various banks in central Europe, but was also involved in direct investment in Czechoslovakian heavy industry in alliance with the French armaments company, Schneider.¹³

The multinational corporate banks established in the nineteenth century proved very durable institutions. Britain's continued role as the world's leading multinational banker (at least in terms of numbers of branches) owes much to this historical legacy. As Chapter 3 shows, the British overseas banks engaged in extensive multinational branching after the Second World War, adding to their facilities in South Africa and Australasia, but also expanding rapidly in the developing economies of Black Africa and, later, the Middle East. Jones examines the shifting business strategies of the British overseas banks as environmental changes led to the decline of their original competitive advantages, while Merrett examines their continued role - and eventual demise in the 1970s - in Australia,

The 1960s produced a second wave of multinational corporate banking. As Huertas notes, there was a dramatic expansion in the overseas branches of American commercial banks. At the same time American investment banks abandoned their previous reliance on agency relationships and began making foreign direct investments, a process discussed in Quinn's chapter. American institutions led this second surge of multinational banking, but were not alone. By the 1970s, as Jones notes, large British domestic banks which had previously had none or very few overseas branches, such as Midland Bank and National Westminster, acquired banks in the United States and opened branches elsewhere. From a low base in the 1960s, Japanese banks also expanded overseas. By the mid-1980s Japanese institutions had over 200 branches abroad, were represented in all leading financial centres, and had built up through acquisition a significant share of the Californian banking market.¹⁴ As part of this trend, ANZ was transformed in the 1970s from the last of the British overseas banks in that country into an Australian-owned and headquartered multinational bank.

These 'second wave' multinational banks varied from their nineteenth-century predecessors in their geographical location and products. Like the first multinational banks, they established branches in international financial centres. The birth of the Eurodollar market in the late 1950s enhanced this trend and made London - its home - an even more attractive location for banks. New York had a key importance as a money centre - every bank with any pretension of being a multinational had some form of representation there. In the 1970s the rise of offshore centres and the growth of the Asian Dollar Market led to Bahrain, Singapore and Hong Kong attracting many branches. Beyond these financial centres, multinational banks were far more concerned with developed economies than their predecessors had been. While American banks were active in western Europe, European and Japanese banks invested in a direct and unprecedented manner in the United States. In the 1980s Canada and Australia also became attractive locations for branches when regulatory controls were liberalized to allow them. However, some American banks before the world debt crisis - did also build large branch networks in several Latin American countries, particularly Brazil, Mexico, Venezuela and Argentina, providing some continuity with the nineteenth-century branching pattern.

Initially the products offered by the multinational banks of the 1960s were not too dissimilar from the nineteenth-century banks. Trade finance, servicing corporate customers from their home country, and retail banking were all found. The large domestic branch networks built up by American banks such as Chase and Citibank were similar to those in Australia and South Africa established by the nineteenth-century British overseas banks. Perhaps the use of the Eurodollar, and later Eurobond, markets was the main distinguishing feature of multinational banking from earlier periods. From the mid-1980s, however, as Huertas notes, American banks except Citicorp pulled out of foreign host country domestic retail banking. There were similar trends among the multinational banks of other countries. By 1990 there was a widespread conviction that a foreign bank was unwise to pursue a retail banking strategy except through the acquisition of a local bank, as with Hongkong's Bank's purchase of Marine Midland discussed in the chapter by King, although one favoured alternative strategy —participation in investment banking - proved a hazardous option for many commercial banks.¹⁵

Explaining multinational banking

Explanations of multinational banking need to begin with the recognition that it has always been only one of a number of institutional and contractual arrangements that were possible. Correspondent or independent agent-type relationships provided profitable means of engaging in international banking without the risks often associated with owning branches abroad. This was usually the chosen strategy of nineteenth-century private banks, and in the main American commercial banks up to the 1960s.

Why, then, did banks branch over borders? As the essays in this volume demonstrate, nineteenth-century multinational banks were the product of a number of factors - entrepreneurial perceptions of profitable opportunities in conditions of expanding territories and imperial frontiers, a desire to apply domestic banking skills in foreign markets, and the wishes of politicians for banks, as in part in the cases of the Yokohama Specie Bank and the Imperial Ottoman Bank.

Banks established for such reasons located their branches where they perceived a sufficient 'advantage' over local (or other) institutions to enable a profitable business to exist. Government regulations and the strength of indigenous banks ...

Table of contents

• Cover
• Title
• Copyright
• Contents
• List of figures and tables
• List of contributors
• Preface
• 1 Banks as multinationals
• 2 Evolution of multinational banks: a theoretical perspective
• 3 Competitive advantages in British multinational banking since 1890
• 4 Paradise lost? British banks in Australia
• 5 Structural alternatives and constraints in the evolution of exchange banking
• 6 German banks abroad before 1914
• 7 The Rothschilds: ownership advantages in multinational banking
• 8 The Imperial Ottoman Bank in the later nineteenth century: a multinational 'national' bank?
• 9 Swiss international banking, 1890-1950
• 10 Chinese business and banking in South-East Asia since 1870
• 11 The Yokohama Specie Bank: a multinational in the Japanese interest 1879-1931
• 12 Banks over borders: some evidence from their pre-1914 history
• 13 US multinational banking: history and prospects
• 14 US investment banks as multinationals
• Index