Ingenuity in Adversity BANKING By LEOPOLD DE ROTHSCHILD A LTHOUGH in

1966, the old adage, 'your money and my brains,' is still the banker's prime preoccupation, there are certain shifts of em- phasis and emerging patterns to the background of his work that may well give the banker in London in 1966 cause to pause and reflect.

The present position of London as an inter- national financial centre, and the maintenance of this position in the future, must provide some food for thought. Foreign exchange controls relating to the finance of international trade in sterling have so far not been further tightened, but high interest rates have induced many bor- rowers to look elsewhere for finance of this type, and the highly flexible instrument built up in London for this purpose is now in some danger of becoming rusty.

Similarly, while there has at the time of writ- ing been no further restriction of the already very limited access to the London long-term capital market in sterling permitted to borrowers outside the sterling area, high rates of interest have kept the few qualified borrowers away.

Unfortunately, current credit restrictions do not treat the finance of third-country trade or the finance of United Kingdom exports any more favourably than purely domestic business, since all these categories are lumped together under the rule limiting total advances to 105 per cent of the level outstanding at March 1965. Although so far banks have managed, largely by the re- duction of private and professional advances, to hold the balance which the national interest re- quires between different categories of borrowers (and incidentally financing United Kingdom ex- ports at a generally unattractive rate) they may be faced in the not too distant future with agonising decisions, since cases may arise in which the only way in which demands for finance for United Kingdom exports or for third-country trade can be met is by the withdrawal of credit from established domestic customers with pos- sibly serious or even disastrous consequences.

The inherent contradiction, therefore, from the point of view of the London banker in the steps taken by the authorities for the purpose of supporting sterling in its role as a reserve cur- rency is that these measures not only restrict, as they are intended to do, the banker's domestic business, but also restrict the use of sterling as an international currency. This is not only be- cause the banker's capacity to lend is limited, but also because high interest rates, in part the result of credit restrictions, make the use of sterling for the finance of international trade unattractive.

Since the foreign currency deposits of United Kingdom banks may be employed without regard to the overall limit on sterling advances and also without regard to the time limitations which foreign exchange regulations impose upon the financing of international trade in sterling, United Kingdom banks have in the current year competed more keenly for foreign currency de- posits, and in particular Euro-dollar deposits, and it may be assumed that London has regained some of the lost international trade financed in sterling by substituting dollar lending.

In this connection, an innovation worthy of note has been the introduction in the United Kingdom of the certificate of deposit, long in use in the United States. So far, such certificates•. of deposit have only been issued expressed in US dollars. Since the marketable certificate of deposit so admirably covers the problem of many lenders who wish to have the benefit of fixed-term rates but with the facility to with- draw money earlier at a discount, the logical extension of this development in normal times would be the issue of certificates of deposit in sterling, the success of which amongst bankers and their clients would be undoubted. However, this refinement would probably not commend itself to the authorities.

From all these developments, it is difficult not to draw the melancholy conclusion that the position of sterling as a currency for the finance of international trade and investment is diminishing in importance.

On the brighter side, there is no doubt that since the introduction by the United States of the interest equalisation tax, to counter serious balance of payments difficulties, the role of London as a raiser of international capital has once again assumed significance, even though the currency provided, which is generally the US dollar, is not our own. Since 1963, when the tax was first imposed, the equivalent of no less than $750 million has been raised through this market on behalf of foreign governments, municipalities, institutions and companies and the invisible earnings thereon are by no means insignificant—a fact which is borne out by the fierce competition now being offered by New York, as well as Brussels, Frankfurt and- recently—M i lan.

This type of business has developed further in 1966 and new ground has recently been broken in this field by the raising of a long-term loan in dollars by London on behalf of a United Kingdom industrial company, thus combining the benefits of interest rates lower than those which would have been applicable to a comparable sterling borrowing and at the same time provid- ing funds for investment overseas in a manner which does not conflict with the Chancellor's directives.

A distinctive and on the whole relatively new feature of banking in the United Kingdom in the recent past, and one which may well develop further, has been the establishment of formal relationships between United Kingdom banks, both clearing and merchant, and banks overseas. Such associations have taken a variety of forms ranging from direct share participation or the creation of jointly owned overseas sub- sidiaries to the formation of what may loosely be described as clubs formed for the purpose of channelling business of certain types towards the members, but which in certain instances seem to be so loosely put together that their benefits remain to be seen. It is particularly in- teresting to note that associations of the kind above referred to by no means always take the form of the association of like with like. A foreign commercial bank has acquired a par- ticipation in an English merchant bank, an English clearing bank has taken a position in an overseas investment bank, and so on. The urge to set up such formal relationships may reflect the feeling that foreign business in the future may come less easily to the unattached insti-

tution and it remains to be seen whether this will be so. In any case, the potentialities of these associations are considerable and their full de- velopment could be of great significance.

Along similar lines, the participation of an English overseas bank in a London merchant bank and of a London merchant bank together with a clearing bank in a merchant bank in Scotland are developments which in the quite recent past would have been unthinkable and are indications of a new and uninhibited approach to banking problems.

All this adds up to a certain blurring of the differing functions of the clearing, investment and merchant banker to which one was once accustomed, and further evidence of this has been the as yet solitary incursibn of a clearing bank into the zealously guarded preserve of the issuing business and of another clearing bank into unit trust management and distribution, which developments follow upon the recent more positive attitude of the clearing banks to invest- ment portfolio management Having regard to their ready-made sales organisation and their fund of knowledge acquired from contacts with clients engaged in a wide spectrum of industrial, financial and commercial operations, the move into the unit trust field should come as no great surprise. Indeed, the surprise is that it has not been done before. As to issuing business, the diffi- culty and the time taken to build up an adequate staff with the knowledge, expertise and judgment necessary competently to undertake this type of business may have an inhibiting effect.

The entry of the clearing banks into the hire- purchase field, a development which has cer- tainly been beneficial to them and to the in- dustry, ought perhaps to have prepared one for the flurry in credit cards. Nevertheless, this latest move by what one had come to regard as highly conservative institutions did, in fact, come as something of a surprise. There is no doubt that the commercial banks are showing increas- ing competitiveness and imagination in the field of new business ventures and the full employ- ment of their great potential could have far- reaching consequences.

Another interesting development has been competition by clearing banks for deposits for which they are unable themselves to offer attrac- tive rates through subsidiary companies either already existing or formed for the purpose.

In seeking new sources of income through diversification of their traditional activities, the joint stock banks are no doubt in part influenced by the fact that the immediate outlook for their traditional business is not good. Growth in ad- vances is curtailed by the present monetary restrictions and, in addition, there is the pros- pect of increased salary bills (not helped by the selective employment tax) and of possible Satur- day closing which may result in reduced business. Staffing is a problem, too, since the counter- attractions which industry and commerce have to offer make it difficult to attract employees of the right type, particularly of managerial quality. Current high interest rates, which may well be with us for a long time, have, of course, so far helped to offset the adverse factors above referred to, but with the Prices and Incomes Board casting a critical eye not only on bank charges, but certainly on profit margins generally, the search for other sources of income is under- standable.

New avenues must continue to be explored, but it is obviously important to be able to dis- tinguish between what is fashionable but not necessarily very profitable and what is genuinely progressive and constructive.