Our first decade together

Marley is dead, to begin with. Charles Dickens so declared him in the middle of the last century, but it wasn’t really so until much more recently.

Marley and his partner, Scrooge, could have done without Euromoney, as they contented themselves with sitting in their counting house, monitoring their banking books. Serious bankers could have done the same even as recently as a few decades ago. However, the banking business has changed enormously in recent years, and all indicators portend continuing change into the future.

Ten years ago, Euromoney commenced publishing; that same year, I became chairman at Chase. In its brief span to date, Euromoney has ably covered, by reportage and analysis, key issues of concern to international bankers, businessmen and others. In this celebration issue, Euromoney has asked me to review the banking trends of this shared tenure and to speculate on what the 1980s might hold. From my perspective as chief executive of an American multinational bank, the past decade has been one of accelerating development and one in which commercial banking has emerged from static nineteenth century ways to become more adaptive and responsive to change. In seeking to lead change by anticipating and meeting the conditions, needs and opportunities of this century, progress in banking over the recent decade has left sound commercial banks well positioned and prepared for the next.

Any overview of the principal developments in commercial banking over the past decade should include, in one form or another, the increased emphasis on international operations and commitments, more aggressive marketing of services and the growth of innovative management techniques and technology.

With regard to the expansion of the international perspective, the evidence is clear. Not many years ago, the international arm of most banks served principally for handling foreign exchange, commercial letters of credit and collections, or in providing personal banking services for their domestic customers travelling abroad. Moreover, most banks were content to limit their aspirations primarily to domestic markets and projects. Increasing recognition of the economic interdependence of nations and the favourable results achieved by those who first ventured into the international arena have brought about a revolution in banking perspective.

Over the past decade, many large banks, Chase included, have undertaken larger and more complex foreign operations and commitments, and derive increasing proportions of their earnings from them. By way of illustration, the 1970s have shown a growth in the international share of total Chase earnings from about a quarter of the total to well over half. While this growth has not been uniform, the trend has definitely been upward.

Much of this international emphasis in commercial banking has been the product of major expansion in the industrialized nations as well as by increased business with less developed countries. The World Bank has categorized the LDCs into three developmental tiers. While popular opinion sometimes holds to the contrary, most of the expansion in commercial banking business has not been with the least developed tier of the LDCs, which are not sufficiently creditworthy to borrow heavily and without concessional terms from commercial banking sources. Rather, the emphasis has been upon mid-range nations, such as the Republic of Korea, and upper tier LDCs, such as Brazil and Mexico. In these nations and others like them, the potential for productive development is relatively high and risks are not unreasonable.

A second trend to emerge over the past decade has been increasing aggressiveness by commercial banks in seeking opportunities for growth and in meeting a broader range of clients needs through the development of new product lines. In the days of Marley and Scrooge, and indeed until relatively recently, most banks showed little imagination in making available to clients or prospective clients more than a limited range of traditional banking services. Nor did banks think to apply techniques long used by industry to increase their business volume and performance. While this more aggressive trend did not begin in the 1970s, it certainly has accelerated during that period.

In recent years, banks have expanded the services they provide to their clients, and have marketed these with increasing vigour and competitiveness. Commercial banks in particular have expanded their traditional role as lenders into a far broader range of capabilities and services. Many, Chase included, have taken steps to acquire and develop greater expertise in financial advice and management, syndication leadership, private placements, project finance and other activities, and they are coming to promote these services more extensively, especially in foreign markets. The competition is keen. The most successful banks are those that have pursued new opportunities with the greatest vision and skill. In this process, they have adopted far more sophisticated management forms, including a reliance on strategic planning as a means of increasing future growth and profitability. In my view, these trends will continue.

In domestic markets as well as internationally – wholesale as well as retail – banks are providing additional services and have increased the pace and intensity with which they seek new or expanded business. The wholesale domestic banking market has become increasingly competitive, with insurance companies, foreign banks, commercial paper and others all posing new business challenges. The retail domestic market is also a highly competitive one in which quality and service have assumed heightened importance.

Not only are banks more forward-looking and aggressive today than in the past, they are also more innovative in meeting the challenges of a changing world. The performance of banks in the international marketplace has required considerable ingenuity and creativity. Nowhere is this more evident than in international market and currency arrangements.

The creation of a Eurodollar market was an innovation of enormous importance for modern banking. It has provided a mechanism for supplying funds to industrialized and developing countries and has been particularly valuable since 1973 as a means for commercial banks to recycle petrodollars. Some critics expressed grave concern early on that the burgeoning petrodollar surplus posed a serious threat to the commercial banking system. Clearly, that has not been the case. The prudent and innovative use of the Eurodollar market provided a most effective means of dealing with this potentially troublesome problem. 

An aspect of innovation which many banks have expanded extensively is that of automation and the application of computer technology. The development of modern communications, automated equipment and associated processes has made possible more rapid and accurate funds transfers and other improvements in customer service. It has also made possible the development of advanced management information systems so key to the development of a disciplined management process. Banks who use these tools effectively are reaping the benefits of increased responsiveness and lower cost. The availability of sophisticated systems has enabled banks and their clients to manage cash more profitably, invest more wisely and generally manage their business with greater effectiveness. Chase’s Infocash is illustrative of the new generation of cash management capabilities which enable customers to remain well-informed about their balances.

Such technological advances have supported the growth of commercial banking by improving communications and automated accounting systems, expanding their worldwide reach and reducing the cost of doing business at great distances. The expanded services which banks now provide and the vigour with which banks compete for business are both supported by more effective management tools and techniques. The ability of commercial banks to operate in the complex and sensitive international markets such as the Eurodollar market is increased by access to modern techniques and new technology.

At the same time, a high level of integrity, prudence and responsibility has been maintained by commercial and other banks. In an atmosphere of increasing pressure from many sources and heightened competitiveness, the potential existed for erosion of responsible behaviour and prudent standards. Yet, every indication is that banks have by and large retained their high standards, even when operating in relatively unregulated environments.

Thus, my view of the past decade in commercial banking – a decade of evolution, adaptation, and change – has been one of expanded international perspective, greater aggressiveness in the development of business, more professional management of their business, increased innovation in banking arrangements and supporting technology and continued high standards of integrity and responsibility.

What might the coming decade hold?

Forecasting is a risky game. On the one hand, there is a tendency to see a revolution around every corner; on the other, there is a countervailing tendency to see the inexorable extension of current trends – without regard, in Robert Nisbet's pertinent phrase, “to the genius, the maniac and the random event.” On balance, however, I believe the coming decade will see an evolutionary transformation in most of the trends I have discussed.

As economic interdependence becomes even stronger – and I believe it will – reliance on international business is also likely to increase. While I would expect commercial banks to continue to broaden their international vision and extend their global reach, it is not likely that continued expansion into new markets will continue to play the large role it has in the recent past. Some new markets will become available, but they will not have the scope, magnitude and loan potential of new markets a decade ago. At the same time, successful commercial banks will increase their knowledge of, and sensitivity to, foreign markets and the additional opportunities they are likely to provide. Indeed, the increasing development of international business is likely to result largely from more extensive services to present clients, and from the expansion of business in current markets.

The trend toward more aggressive marketing of banking services is likely to continue. Packaging of management and advisory services, and an increased role for commercial banks in merchant banking operations are examples of potential growth areas for the coming decade. Competition will probably remain keen, requiring banks to market their capabilities with increasing vigour. Quality of performance by the commercial banks, both in their portfolios and in the services they provide to clients, will assume more importance.

To meet these challenges, and others not foreseeable, banks will have to remain innovative, flexible and adaptive. To an extent, improved technology and management techniques will be necessary. However, vision and leadership will be of paramount importance for continued growth in the highly competitive banking world.

At the same time as these increasing environmental and structural pressures will move management to change, undiminished integrity and responsibility will be – and must be – the foundation of the banking business, as it always has been. I expect that the banking community as a whole will continue to demonstrate the high ethical and judgemental standards which have always been expected of it. This is less a statement of hope than of confidence.

At least one alternative forecast for the coming decade can clearly be dismissed: reversion to the past, except with respect to fundamental principles. There will not be, there cannot be, a significant retrogression. Commercial banking has not only adapted effectively to a changing world; it has, in the process, helped change that world. The changes of the past decade – indeed of the past generation – are now largely institutionalized, at least in some respects. They constitute many of the strands that knit our society and our globe into an integrated, though nubby, fabric. They cannot now be untied or removed without destroying that fabric.

Marley is dead… there is no doubt about that.