Chase: From lending to financial engineering

By Peter Field

When the top officers of Chase Manhattan Bank met in May to discuss strategy, they did something remarkable. They didn’t change it.

After Drysdale, Penn Square, Latin America and numerous other loan headaches, Chase’s policy and planning committee decided only strategic fine-tuning was necessary.

Everyone who matters at Chase is on the committee: the chairman in the formidable shape of Willard Butcher, Tom Labrecque, the sleek and youthful president, Tony Terraciano, newly appointed chief financial officer, international boss Francis Stankard, son of a Boston policeman; 16 in all, at senior vice presidential level or higher. They met at Williamsburg a couple of weeks before the seven-nation summit, but with considerably less publicity.

And they decided no change was necessary in the wake of 1982’s traumas. “We stepped on a rake and got hit in the back of the head,” said Butcher, referring to Drysdale and Penn Square. “But we have dealt with these problems, and cleaned them out, and cleaned out the people responsible for those activities.” Strategy was not affected: “They were aberrations. They in no way related to the strategic emphasis and objectives of the bank.”

But however little the Chase committee formally decided to change, it was clear, looking back over 1982, that a quiet but fundamental transformation in the objectives of international banking was under way. The process certainly started earlier than 1982, but the loan headaches of last year quickened the pace.

This transformation means that, as the major banks move deeper into the 1980s, they are putting much less emphasis on the lending of money, important though that remains, and much more on the provision of an ever widening range of services; they’re putting much more emphasis on the quality of those services, and much more on the speed and ease of delivery – which in a word means technology – for both retail and corporate clients.

Put another way, this transformation implies that international commercial banks are coming to resemble much more merchant banks. In this shift, Chase is a prime example. Predicted chairman Willard Butcher: “It will be less just lending money, more engineering the financial product, that is, the approach of a merchant bank.” That’s not to say that the traditional areas of international bank activity are dying. By no means. For example, you’d expect nothing but negatives about Latin America, energy or syndicated lending after the events of the past year. Not at Chase Manhattan. As Butcher’s institution sees it, you can’t be an international bank if you’re aloof from these three areas. “Obviously,” explained executive vice president and international head Francis Stankard, “we’re not marketing too many loans to Mexico at the moment.” But he does see the problems of central and south America as temporary and “looking five years out, I’d put the same emphasis on Latin America as we did a few years ago.”

Similarly in the energy sector. “We are a major financer of energy,” asserted Butcher. And Chase’s commitment to energy financing remains as strong as ever. “That includes BP, Royal Dutch Shell, Exxon and so on,” said Butcher. In addition, even though the bank does not intend to build assets for the sake of building assets, it would still, according to Stankard, like to be number one in the lead manager stakes in the syndicated credit market. These objectives, however, belong as much to the 1970s as to the 1980s. For the next five years at least, the aspirations of the Chase, like those of many of its rivals, are almost mundane. Ask a Chase man these days what he dreams of at nights and he won’t say “Lead managing a $3.5 billion deal for Mexico”, or “Raising $6 billion for Gulf Oil”, or wax lyrical about the complexities of financing the Woodside gas project in a remote part of Western Australia.

He’ll pronounce: trade finance, institutional banking, electronic banking or private banking. He’ll emphasise above all the merchant banking approach. Butcher was enthusiastic about the Chase Manhattan Capital Markets Group, set up as a separate subsidiary last year with a capital of $175 million. But he viewed merchant banking as more than just a line of business. “We would hope to get it somewhat contagious in terms of how we operate our bank,” he stressed.

To a large extent, the difference of approach in the 1980s compared with the 1970s is a result of the changing economic environment and the historical development of Chase. Chase had very few overseas offices in 1960, but put a lot of effort into remedying that in the next two decades. “I don’t think, as we look at the 1980s,” said Butcher, “that we’ll have to increase dramatically the number of countries in which we’re represented. Our principal strategy will be to put some meat on bones.”

In addition, economic prospects are not for the present, as bright as they were. “The world is going through a period of slower growth; therefore our strategies are somewhat differently paced,’’ explained the Chase chairman. Despite the downturn in the world economy, which resulted in a fall in the volume of world trade for the first time last year since the Second World War, Butcher saw trade finance as the other major area, apart from merchant banking, to be emphasized by his bank. “By and large US banks have not done as good a job on trade finance as many others like the Japanese and British overseas banks.” There’s always going to be demand for goods and services, whatever the state of the economy, and the Americans reckon they can increase their market share – helped by their lead in technology – even if there isn’t a near-term pick-up in world trade. “You’re going to see all the US banks and certainly Chase accelerate their trade and export finance activities,” predicted Butcher.

This strategy implies a slowdown in the growth of assets. Merchant banking and trade finance should boost fee income without swelling the balance sheet. The trend in asset-building at Chase has clearly flattened out. At the end of 1982 the total of $75.3 billion (for 15th place in the Euromoney Five Hundred rankings of assets in the world) was only $1 billion up on the previous year. There was a time when that would have upset people at Chase. After all, it’s only just over a decade ago that Chase was bigger than Citibank, and it was soon after Citibank overtook David Rockefeller’s institution, as it then was, that Rockefeller fired the president, Herbert Patterson, and installed Willard Butcher in an attempt to revive Chase’s flagging growth and earnings performance.

Butcher claimed that Chase has never had “some preconceived objective of asset growth.” But there was a conscious decision to slow asset growth. “It was in 1979,” recalled Stankard, “after the second oil crisis and the huge increase in interest rates.” Growth in international assets over the period 1979 to 1981 was only about 9o/o, 􀈥d 1982 “was really tough.” International loans grew by a little over 3%, according to Stankard. That compared with 18% to 20% in 1978179.

Despite the spurning of too many new assets, “I still think I’d like to be the leading syndication manager,’’ revealed Stankard, “but I’m not going to go out and balloon those assets to get it.”

It’s too soon to gauge the effect on assets so far this year, but Chase is certainly among the leading syndication managers again this year with key roles in major deals for Sweden, Denmark, Indonesia, Korea, Malaysia and, the latest, Spain. In 1981, it was ranked number one in the Euromoney Syndication Guide league table of lead managers of syndicated credits; last year, it was number three.

Like all banks’ strategies, Chase’s is a combination of considerations of clients, products and services, market segments, geographic location and general principles which every business would claim to espouse like quality, efficiency and so on. Chase has decided that it wants to serve all three major classes of customer over the next few years: corporate; retail (though upscale) and rich people, or – as the jargon has it – high net worth individuals; and institutions (mainly other banks). It’s targeted the products and services it wants to be best in: merchant banking, treasury and foreign exchange, trade finance, electronic banking (though accurately speaking, that’s just a delivery system), private banking (to serve high net worth individuals and some others a little lower down the scale, though still relatively well-heeled institutional banking (correspondent banking), leasing and insurance.

Chase has also decided where it wants to be: everywhere where it makes sense. It claims to be one of the very few global banks, and it’s probably right.

“It’s one of the few things that would distinguish us from Deutsche Bank in Europe,” said Robert Hunter, senior vice president in charge of Europe. “Deutsche has become a power-house in its own right, but it still doesn’t have the network of the Chase, and to let that network in any way become less than total would be to undermine a unique competitive advantage that maybe only Chase and Citibank, among the world’s majors, have to the same extent.” Chase’s basic strategy was mapped out in the late 1970s when, according to First Boston bank analysts, the institution was ahead of its competitors in getting into strategic planning, “possibly because of earnings problems in the mid-1970s.” This was laudable, First Boston said in its study of New York banks published at the end of 1981, because Chase “has traditionally lacked a strong planning philosophy.”

The essence of the new strategy was not to be all things to all men. It’s a phrase Butcher and other top executives of Chase are fond of quoting.

The problem as some see it is that many major banks have adopted the same approach. “All banks had the big management consultancies come in and do studies for them,” noted one New York bank analyst. The majority of these, he claimed, had almost exactly the same message: Play up your strengths, cut out your weaknesses. “Well, hell, you could tell that to a railroad, an airline or a breakfast food manufacturer,” said the analyst incredulously. “That’s nothing in the rocket-scientist’s department.’’

Butcher’s answer to the problem of differentiating Chase from other US banks has been an emphasis on “quality and profitability.” The key, said Butcher, is “the quality of our client” and the “quality of our service. In one given class of client we may only want to deal with the top 200Jo, in another it may be the top 90%. What we do know is, it isn’t the bottom 10% or the bottom 80%.”

Quality may or may not be discerned by a client as distinguishing the Chase from other banks. But it may be hard for the average customer to detect any differentiation in the products and services actually provided. Said one bank analyst: “Chase basically continues in its operations to appear to be doing virtually everything for everybody. There’s no evidence they’ve discontinued any part of their business and you can’t really tell which ones are being emphasized over others.”

Not true, corrected Labrecque. Before 1978, Chase, he agreed, was trying to do everything for everybody “and we came out plain vanilla.’’ With the big change in strategic direction in 1978, a fifth of Chase’s domestic branches were closed, a global industry approach was created and merchant banking has been built into a major subsidiary, according to Labrecque. “That’s why it always amazes me to hear people say that,” the Chase president said of the charges that little has altered at his bank. “We were the first to do global specialized industries. We’ve done more than anyone to organize global petroleum in the last 15 years.” Among corporations, the bank has concentrated on the Fortune 1, 000 to 1,500, said Labrecque, as well as some of the emerging companies and industries. And “out middle market activities have tended to be focused around this region and about seven others.” There Chase either has an Edge Act office, a remote marketing office or an asset-based finance office. These regions are California, Houston and Dallas, Atlanta, Boston, Cleveland, Detroit and Chicago. “I would say we have focused,” claimed Labrecque. Part of Chase’s problem in getting its message across is its size and its commitment to both corporate and retail markets. It can’t rely on the luxury of being number one in any particular region, or in any particular market segment. It’s number three in the US by assets, number two in New York. It’s neither the top retail bank like Citibank, nor the top wholesale bank like Morgan Guaranty. It has done nothing as dramatic as Walter Wriston’s institution in going pell-mell after retail customers through every marketing and technological device known to man; nor as bold as Bankers Trust in dropping retail business almost completely and selling off its retail branches.

But Chase is number two or three in the corporate business in America and in the top three or four in retail. It’s certainly among the very top international banks, though again probably behind its major New York rival.

Its commitment to both corporate and retail markets remains as strong as ever. There’s no question of dropping out of the retail end of the market, though some retrenchment has taken place in individual foreign markets, especially Europe. “Globally, we will be pushing corporate very, very hard,” said Robert Douglass, the executive vice president responsible for both legal and strategic sides of the bank, “and the other area will be what I call the upscale consumer, the upper end of the consumer market.”

Douglass, who was the- bank’s general counsel with responsibility for domestic strategy before being given overall strategic planning earlier this year, expressed Chase’s intention “to be the premier corporate bank in the world.” The bank’s “principal heritage, our basic strength starts with the large corporations, US, multinational, global.” From that starting point, the idea is ‘‘to reach deeper and deeper into the quality, but smaller companies in the US first, then in overseas locations where we have the opportunity to begin to lend to good quality smaller sized national corporations.”

Chase’s advantages in doing this are its overseas network and its expertise in particular industries: the petroleum industry, real estate, utilities, mining and shipping, according to Douglass.

Acknowledged Robert Albertson, Smith Barney’s bank analyst: “Chase had the savvy to perceive the difference between a multinational corporation and a non-MNC. Since then, it’s dominated the world wholesale market.”

According to Hunter: “We used to take the approach where we were emphasizing basically US multinationals as a market segment; now we’ve defined it more along key industry lines than along multinational, or local national.” In Europe, Hunter said, “We looked at the corporate market in about 15 different market segments defined by industry and selected from them about half a dozen or so that we said we wanted to aspire to leadership in.” These included commodities, shipping, capital goods. But Hunter stressed that Chase wouldn’t turn customers away if they emerged from sectors that Chase hadn’t put priority on. Example: “If we decide not to place special priority on the aerospace market, that does not mean if British Aerospace or Rolls-Royce is an attractive client to the bank per se that it won’t get first-class treatment from Chase. To the contrary. Our basic business is with customers, not with broad categories of market segments.’’

The industry approach does have its limitations, however. As soon as you get away from the developed areas of the world, country risk considerations take the upper hand again: “Organizing people on an industry rather than a geographical basis is a lot easier to do in the US,” admitted Stankard. With some industries, “you have to factor in where the companies are.”

Iran was a prime example. It aimed, under the Shah, to become one of the top steel producers in the world in 20 years. “But when the envelope of that country fell around it, that was it,” recalled Stankard. On the other hand, you can’t say that because there’s a wonderfully efficient country that they must know how to run a steel plant. “So there has to be this constant pulling and tugging between country, industry and product considerations.”

In the retail area, Chase’s strategy, like some others in the US, is to lure through its doors the customers it sincerely wants to serve and give a cool reception to those it finds less attractive by repricing some of its services to consumers. Chase’s ideal account, according to Douglass, is a family with both spouses employed, professionally or semi-professionally. Chase is also trying to offer new services to these upscale consumers. Earlier this year, following the lead of West Coast banks, it purchased a Chicago discount broker, Rose and Company. “It’s a key element in being able to offer a cash management type account,” explained Douglass. Cash management accounts have been popularized by non-banks like Merrill Lynch that are not fettered by regulation and allow ease of switching between cash and investments to maximize the returns on the account.

Chase’s determination to stay a force in the retail business as the regulations Change was also signalled by the aggression it displayed when banks were permitted to offer new money market deposit accounts late last year. Chase saw it as a chance to garner new deposits in a once-and-for-all shift, and for a time it offered a higher rate than any, other US bank.

The other end of the individual market, the high net worth end, is a world away from the long queues at tellers’ desks and indifferent service. The private banking division has its own offices and something of a mystique. The global private banking group was created in 1980 and around 350 professionals are employed on the international side alone. Switzerland is plainly important in this business but London, the Channel Islands, Hong Kong and Singapore are also key parts of the Chase private banking network.

It’s hard to pin down the height of one’s net worth that makes you a potential customer of the division, but for investment management or trust activities, said William Kaufmann, the vice president formerly in charge of international private banking and now in charge of trade finance, “unless you have $250,000 or $500,000, it is really very hard to do a very comprehensive investment management internationally based portfolio”.

For the rich person, the primary concern in using private banking facilities is what Kaufmann called “asset preservation.” Stankard confirmed: “The greatest reason for a lot of private banking is just plain safety.” Secrecy is a lesser concern. “In the US,” pointed out Stankard, “we don’t come anywhere near anything that could be called banking secrecy, yet all kinds of money has flowed into the US in the last several years.”

Stankard, who started the private banking initiative at Chase four years ago, sees the market as a terrific source of deposits. And because of the nature of those deposits, “they tend to be very stable.”

Chase’s competitors in this field are the major banks in Switzerland and the other big US banks. They also have to fear the new alliance of American Express and Trade Development Bank. “They lack certain things,” noted Kaufmann, “but they also have a lot going for them and we consider them a rigorous competitor.”

In the institutional or correspondent banking market, Chase has few peers, and aims to keep it that way in the next few years. Donald Boudreau, the vice president in charge of international institutional banking, claimed Chase had “the largest staff of professional correspondent bankers in the market,” and thought it was safe ‘to say “our products in aggregate lead the market.’’ Chase is reckoned to undertake 26,000 transactions a day, moving on average $100 billion. There’s no doubt that it’s harder to make money in this area of banking than it was even two years ago. Other banks have realized the potential of correspondent banking and put more emphasis on it; and the advent of same day settlement in the US last October has reduced the balances that were once retained as a by-product of the correspondent banking relationship. Clients have also become more sophisticated. Said Boudreau, with some regret: “Given the growing cash management expertise of our clients, given their own profitability concerns, they have learned how to manage their balances fairly well.”

It means a rethink by the banks on how to maintain their profits on correspondent banking. “I think the business is in a state of transition,” acknowledged Boudreau. It’s not just that the fat returns to be made on balances a few years ago have vanished, but the costs of installing and constantly updating technology to maintain market share are substantial. The answer, according to Boudreau, is a combination of fees and balances, though “clearly we are a relationship bank and correspondent banking is a relationship business, so you do not just look at a product on a stand-alone basis and say, ‘I have got to have a return on that product.’ But in the aggregate you have to have returns on your products.”

Chase has 3,200 relationships around the world, predominantly commercial banks, but including every central bank on the globe.

American banks have a natural opportunity to exploit in correspondent banking: every dollar transaction in the world eventually results in settlement in New York. So even though deposit balances actually declined in 1982, Chase thinks it can improve profits over the next few years. If correspondent banking has been one of Chase’s oldest lines of business, trade finance, in an organized sense, is one of its newest. It was set up as a separate group only in 1979, an example of how American banks have lagged behind the Europeans in this field.

The attraction of trade finance is not just that it is profitable or that, from a low base, the potential for increasing market share is much more apparent. (Robert Hunter noted this advantage in Europe. “Chase, as one bank in Europe, is a very small share of the total trade finance market.” But it means ‘‘we can grow in a very substantive way without having to take large market shares away from any single competitor.’’) Trade finance is also an entree into other business. From letters of credit can flow foreign exchange, other lending possibilities and scope for new ways of binding customer to bank. But even with technology increasingly removing a lot of the mundane work of the trade finance business, a good back office is essential. “The whole key,” said Anthony Walton, executive vice president of Westpac Banking Corporation in New York and the man who established and ran Chase’s trade finance group until early this year, ‘‘is to get the documentation right. Chase devoted a lot of time to getting it right in a wide range of jurisdictions.”

The development of both these sectors – trade finance and correspondent banking – will be heavily influenced by technological advances. And Chase has made a very firm commitment to technology. Electronic banking is regarded within the bank as almost an end in itself rather than simply a means to an end. This elevation of a delivery system almost to the level of a product line was stressed by Butcher: “We’ve made a major commitment to technology in this bank and we’re going to keep that commitment.” (See box)

One of the most innovative strategic moves by Chase has been the establishment of a separate capital markets subsidiary. Capitalized at $175 million, Chase Manhattan Capital Markets Holdings became operational in March this year. Its four subsidiaries are the already existing Chase Manhattan Ltd in London and Chase Manhattan Asia Ltd in Hong Kong, and two new ones: Chase Manhattan Capital Markets Corporation in New York and Chase Manhattan Government Securities, also in New York. The idea of this separate group is very simple and far-sighted. It is to be ready for the day that the Glass-Steagall Act gets wiped off the statute book. “If Glass-Steagall were changed tomorrow, we’d be ready to do business tomorrow,’’ enthused Otto Schoeppler, president of Chase Manhattan Capital Markets Corporation and one of the two people whose brainchild the corporation was. The other was William Ogden, then vice-chairman of Chase, who with Schoeppler dreamed up the idea a couple of years ago when, as Schoeppler admitted, “repeal of the Act seemed very close.” Although the immediate prospect of repeal has receded, Schoeppler still sees it as inevitable, in which case Chase will have stolen a march on its competitors. No other commercial bank has trodden the same path as Chase in this respect, though some have half-heartedly imitated the Chase lead by creating capital markets groups within the parent bank.

Chase believes, that, if Glass-Steagall goes, banks must engage in the securities business through separate subsidiaries. By registering with the Securities and Exchange Commission, by registering as a broker-dealer in every one of the 50 states, as well as the District of Columbia and Puerto Rico (the registration process took almost a year), by requiring employees of the group in New York to undergo training with the National Association of Securities Dealers, Chase is clearly ahead of most in the game, if that is the way it’s going to be played. Chase may be well prepared in this respect, but it may be running before it can walk. The marketing and management of syndicated loans are still the staple business of the merchant banking subsidiaries. Schoeppler acknowledged: “We’ve proven over time we’re as good as anybody, and better than most in the syndicated loan business and in project finance, but in most of the other products we still have some work to do.”

Basically, Chase Manhattan Capital Market Holdings as a group can do everything except the underwriting of corporate debt and equity in the US. That means it can trade government securities (through Chase Manhattan Government Securities), do private placements, mergers and acquisitions, corporate financial advisory business and leasing as well as syndicated loans and project finance. Chase’s involvement in the

Government securities business is of course blemished by its dealings with Drysdale Government Securities. Chase hasn’t attempted to break into the commercial paper market like some of its money-centre rivals which have challenged the regulations in order to do so. But: “We’re seriously looking at it,” said Schoeppler. In the M & A field, its one recent major assignment has been to represent the trade unions in the buy-out from the government of Conrail, the rail-freight system. The value of that transaction will be around $3 billion. And, said Schoeppler, “We were competing with some of the best firms on the Street for that.”

In the Eurobond market, Chase Manhattan Ltd has made little visible impact. Despite the flood of US corporations into the European markets last year, Chase’s London merchant bank featured nowhere in the top 40 in the Euromoney rankings of lead managers of international capital market issues for 1982, though Morgan Guaranty Ltd was 4th, Citicorp 17th, Manufacturers Hanover Ltd 19th. “We’re not satisfied with our role on the lead management side last year,’’ admitted Schoeppler. “We intend to change that.” Chase has notched up a number of co-managements and, according to Schoeppler, “our position in the market is quite honestly underestimated, not by the market, but by the outside observer.” The trading room is excellent, he said, with the firm a leader in the floating rate note trading area and with increasing activity in the trading of straights.

Chase, it seems, confronts the same problem as other money-centre banks in this field: how do you implant the entrepreneurial spirit and skills of merchant/ investment banking in the sometimes stodgy, bureaucratic base of a large commercial bank? One of Chase’s solutions has been to hire from the opposition. “The vast majority of our professionals are outside mid-career hirees from various investment banks around the world,” explained Schoeppler.

Meanwhile, despite the Latin American and East European debt problems , Chase’s management of international loans is as prominent as ever, reflecting, no doubt, Butcher’s determination to see stability in lending to the Third World, and his belief in the correctness of the Chase strategy in lending to those nations over the past decade. (See box)

Chase’s exposure to the Third World is Large – 11% of total loans in 1982 – though not quite as large as some of its rivals. The potential for disaster striking from that area is therefore no greater than its competitors.

But there’s the extra Chase factor which worries a lot of those who monitor the bank’s performance: the strange capacity for falling into unpredictable messes. The collapse of Drysdale Government Securities in New York and Penn Square Bank in Oklahoma City last year were prime examples. “You could argue that Chase is an accident-prone institution and that it was bad luck for Butcher to be chairman when one of the accidents came,” said a senior New York bank analyst. Drysdale was a technical problem, he argued, and you couldn’t expect the chief executive of a bank with his schedule of travel and meetings to be able to avert something on that level.

There are some, however, who say that Chase has a management problem, that it’s too much of a coincidence that two major embarrassments developed for the bank in 1982 even before the Latin American debt crisis broke. “There’s no consistency to their management,” claimed one critical investment banker in London.

As if to underline that this year, William Ogden, vice chairman and chief financial officer, resigned just at the time he was asserting Chase’s lead in the general debate over sovereign debt. The Institute of International Finance was mostly his brainchild. Neither Ogden nor Chase have given any convincing reason for his resignation at the age of 56. He’s said to have been piqued ever since the appointment of Tom Labrecque to the number two slot in 1980. That move by Butcher also provoked the departure to First Chicago of another key figure in Chase’s top management: Barry Sullivan. To him was credited a major part of the responsibility for the revival of Chase fortunes in the late 1970s after the earlier REIT problems. · At lower levels like vice-presidents, the turnover seems quite rapid too. You only have to spend some time in the Gulf to realize how many have been lost to the Middle East division.

If stability in staff can be regarded as one Chase problem of the future, stability of earnings is another, after the blows of 1982 which knocked $170 million out after tax. “Profitably and properly are the cornerstones of the Chase,” stated Butcher. “Also, it will be a requirement of this bank that it has stability and quality of the earnings stream, and I sure hope these objectives stop us from being in another Drysdale where there clearly was not the quality that is imperative to the objectives of the Chase.”

While the market seems to have forgiven Chase for much of its 1982 problems – the price of its stock at the beginning of July was 53 against a low in the previous 12 months of 31¼ and a high of 62¼ – Chase executives recognize the need to improve the execution of their corporate strategies. “We spent a lot of time at the Williamsburg meeting talking about how to make things work better and faster,” observed Labrecque. That means giving people in the field more authority. But that doesn’t increase the danger of another Drysdale or Penn Square, he insisted. “If anything, we’re freeing the policy people to do more reviewing. I think that reduces the risk rather than increases it.”

As Chase looks ahead to the end of the 1980s; it is clearly prepared for the changes in its operating environment that will come. It’s ready on the domestic front, with its capital market operation, with its bank in Delaware and with its other interests dotted around the country. “Our presence,” said Douglass, “whether physical or indirect through mailings, is beginning to light up the map of the United States to a much greater extent.”

Chase is also ready on the international front, with a commitment and presence that is rivalled by only one other institution. Some 65% of its income is from foreign sources. But if deregulation speeds up in the US, it doesn’t necessarily mean the balance will change. “What will happen is the international will keep on growing and we’ll just grow the domestic faster,” predicted Douglass.

The key to both these sectors – the catalyst for even faster change in the way banking is carried on in the 1980s and 1990s – will be technology. Chase will be on the forefront of that, Butcher is certain. But the advance of technology also means the blurring of lines between the provision of information and the provision of services. It means the provision of a comprehensive range of both will become even more crucial. It means a further downgrading of the role of credit within a bank.

On the other hand, however much Chase executives and top people at other major banks say that building assets for the sake of building assets is old hat now, the fact is that sheer size still counts for a lot. “We are not going to emphasize asset growth,” maintained Hunter, “but one of the strengths of the Chase Manhattan Bank is that we are enormously large, and we are a major player in the world markets, and I for one would not want to see us become a good little bank.”

As one of the leaders in Third World lending, you’d think Chase would have more reassessment to do than most. But Chase officials are unrepentant about where they’ve put the bank’s money in the past 10 years. They’re not backing off from the energy sector. ‘‘The oil industry has always gone through cycles,” argued Willard Butcher. ‘‘And the oil industry is not a has-been industry now.”

Nor is Chase dumping Latin America. “It is possible to have readjustment,” the Chase chairman insisted. “The history of the world says so. But it takes some stability on the lending side, and it takes political will in the countries concerned.” Butcher considered Mexico “to be doing the right things” and Jacques de Larosière, managing director of the International Monetary Fund, to be exercizing “strong, one can almost say, dramatic leadership.”

International chief Francis Stankard stressed the temporary nature of Latin America’s problems and the misunderstandings that had arisen from lumping all the countries of that continent together. “One of the important things we should put in any strategic plan,” he said, “is that Latin America doesn’t, exist, and that’s what is causing a lot of this trouble.” The undiscriminating approach to individual countries and problems in that continent was underscored for him by the fact that “there are some European countries which borrow rather easily’ whose figures look very Latin.”

Could some of the other losses and problems have been avoided? “Nothing is perfect,” replied Butcher. “But is it wrong to finance the export to Brazil of ‘locomotives made in Schenectady, with steel made in Ohio and Pennsylvania, and employing workers in all those places? Thai’s precisely where a lot of our debt came from.”

Butcher becomes heated at criticism of the banks. The idea that “they went go-go to see how much money they could shove down the throat of the Mexican finance minister” was completely wrong, he maintained. Not every loan was wise, he admitted. If that had been the case, “Sure, we’d have no charge-offs, but we’d also have very few loans.”

Stankard claimed that the growth in Chase’s exposure to Mexico in the couple of years before the crisis had been in line with inflation – “American not Mexican,” he added with a laugh. And European chief Robert Hunter believed that Chase had prudently managed “the exposures we have in some of the highly publicized parts of the world.”

It’s been hard to maintain the return on assets in the international arena and conform with Chase’s overall target of 55 to 65 basis points. “To get to 65 after taxes, you have to start at about 200,” explained Hunter. “If all you are getting for lending money is between 25 and 100 basis points, then there are a lot of other things you have to do with the customer in order to get the 200 basis points.”

“ And we are doing it,” enthused Hunter, dressed in a sports jacket that signalled an imminent trip from his Belgravia home to New York. Indeed, on a historical perspective, returns on international business can’t have been as bad as the shrinking margins at the end of the great syndicated loan spree in 1981/2 might suggest. Hunter could describe the field as “an enormously attractive source of profit at a time when, for a variety of reasons, the opportunities in the domestic market were not so attractive.”

For this reason, Hunter was adamant that “it would be an enormous mistake to be tempted by (the loan problems) to re-trench in a business which has been and should continue to be enormously profitable for the bank.”

The ability to offer products and services electronically and worldwide will count for a lot later in the 1980s and 1990s. It may be the factor which keeps some international banks at the top of the tree and which inspires the fall of others. The pace of change has quickened markedly over the past two years, partly because of advances in technology and already, it seems, most banks have been left behind. “I think it’s perhaps a bit presumptuous,’’ ventured William Osterman, Chase vice president in charge of electronic banking, but I see the global thing becoming largely a Chase/Citibank race.”

Having a widespread international network in place is one of the prime qualifications for entering this race. Few banks do. “Mellon Bank gets superb marks in cash management,” agreed Osterman, “but it’s probably fair to say that in the overseas market they’re not one of the first-tier players because they are not principally an international bank, as a few of us are.”

Osterman considers that electronic banking “is strategically crucial to our future in worldwide wholesale banking.” If you want to be a world player in wholesale banking, his argument runs, you have to build. “Twenty years ago you had to build bricks and mortar to do it. Today, you have got to build electronic delivery systems.”

To some extent, the application of banking technology to the overseas markets was just a case of building on what had been learned in the domestic US market. But another spur was the advances in technology. “Five years ago,” said Osterman, “the technology, particularly the global telecommunications that you need, was just not there.” Finally, the volatility and height of interest rates, and the fluctuations on the foreign exchanges have helped speed the pace of change.

For the moment, the electronic revolution, at least within Chase, has affected its relationships with other banks more than with companies. “We have seen more offshore electronic banking with correspondent banking relationships to date than we have in the corporate market,” noted Osterman.

But it’s in the corporate sector that the major battle will be fought over the next few years. Electronic delivery systems are one of the most potent methods yet devised for prising corporate customers away from other banks and for stealing into the lead slot in a relationship with a large corporation.

The services on offer from Chase in the US range from statement reporting to reporting balances on other banks, to money movement by terminal, to issuance of commercial paper. “What we are about now,’’ explained Osterman, “is putting those same kinds of capabilities into our key offshore branches.” That cycle starts with London, where, according to Osterman, “comparable electronic banking capabilities are on offer to what we offer in New York.”

Certainly, electronic banking is seen as crucial by Robert Hunter, Chase senior vice president in charge of Europe. “The area where we are going to be placing the greatest emphasis,’’ he said, “will be electronic banking.”

Osterman divided electronic into three main categories.

Information reporting: to tell a customer quickly, accurately and fully what’s happened to his position at the bank overnight and on a current day basis. “By providing descriptive data on a timely basis to the company on the liquidation of say documentary collections,” elaborated Osterman, “we can not only help him be a better cash manager, we can to improve his sales process.”

Transaction initiation: If foreign exchange is involved, a contract may still have to be obtained by telephone but otherwise funds can be remitted by use of a terminal. Said Osterman: “For us today in the US in the corporate markets, our customers make more terminal payment than by any other single media, far more than by telephone.”

Decision support tools: This is where Osterman sees the greatest opportunities. You don’t just provide the customer with information on, say, his foreign exchange position, you give him the tools to play What if? games, helped by the development of microcomputer technology, “Most of the lead banks in this country today,” said the Chase man, “have active development projects to move from dumb terminals to microprocessors. We are heavily involved in it, and that technology, I am convinced, will be rapidly deployed on a global basis.”

The prize for all this effort is to assume not only the lead credit position with a corporate, but the lead operating position. “We want to be lead in the full service sense,” said Osterman. And electronic linkages are what makes that possible. “A lead operating relationship also brings you collateral benefits, for example, deposits, and it makes for a more enduring relationship too.”

The progress of the Chase electronic banking initiative has been rapid since the highly articulate Osterman joined the bank in 1974 and introduced its first cash management product. And it hasn’t been slowed by any concern that increasing the ease and speed of a transaction for a client would reduce the profit to the bank. In fact, banks that have dragged their feet for those reasons have lost market share. “Corporations are going to manage their cash tightly one way or another,” emphasized Osterman, “and there is strong evidence to suggest that the bank that went to the corporation and provided it with the tools to do that was the net winner.”

Within five years, Osterman expects a customer to be able to establish from one, terminal session, working with one bank, where he stands on a global currency basis, what the underlying transactions· are and then be able to execute payments from that terminal in a fully automated way. In certain countries, that kind of facility is close to reality already. But when it does become more common, it will reinforce even further the decline of the role of lending and the importance to a bank of offering a whole package of services.

Robert Douglass had just come back from a trip to Morocco with David Rockefeller, where they’d had a sumptuous banquet with King Hassan, and was rushing off to a meeting in the corporate office. But he had time to adumbrate the Chase view of how the banking restrictions on interstate banking and on securities business, would break down.

Douglass has had a good vantage point from which to operate: as general counsel of the bank for five years. That background made him the logical person to chart domestic strategy. Earlier this year, the highly articulate Douglass was given global responsibility for strategy, as well as the legal side of the bank.

The breakdown in geographical restrictions, “is more likely to happen at the, state level than at the national level”, he thought. “It’s harder to get Congress to face up to it as a national issue because they get a lot of pressure from various states and the smaller banks.”

Chase, like other banks, is taking advantages of reciprocal arrangements between New York and other states. Citi- bank went to South Dakota. Chase has gone to Delaware. “Chase created that opportunity,” said Douglass, “and we intend to grow that Delaware bank.” Should it continue to be a consumer-oriented bank, exporting around the country, or should it be built into a full-service regional bank with commercial interests? Douglass is working on that now.

By the late 1980s, Douglass predicted, “you’ll have nationwide banking for all intents and purposes.” In fact, bar one piece of the jigsaw, it exists today. “The only thing we can’t do is take deposits and make loans in one [non-New York] entity,” explained Douglass.

The strategy is to go into states and carry on the activities that are already permissible, running them as separate entities. “Then, at some later date, when interstate banking comes, you either put a roof over their head and call it a Chase Bank in Florida or wherever, or you acquire a bank in Florida when that’s permitted and you fold everything you have into your bank – and you’re up and lending in Florida.’’

On the product side, the key areas still awaiting commercial bank penetration are insurance and securities. Insurance companies “are beginning to get into our pockets,” noted Douglass, “and we want to get into theirs.” The Douglass approach is to start overseas where the laws are more liberal. “If I can find something attractive enough, we could enter the business overseas, get our feet wet a little, begin to get a better feel for the industry and then be poised to jump in over here when our laws change.”

Discount brokerage is the thin end of the wedge into the securities industry, which Chase has already inserted with its purchase of Rose and Company in Chicago. Next? “I’ll bet my dollar on it,” enthused Douglass, “within a couple of years we’ll be offering bank-operated mutual funds.” He’s frustrated at the moment because “banks can offer only deposit-like products. What he wants to be able to offer is a Chinese menu of products: “Do you want to keep it in a bank-type product or what? We’ve got a growth fund, a mixed fund or an equity fund.” As the securities laws breaks down, he feels, “we’re natural for that business because banks have traditionally been regarded as the safe custodians and the conservative investors.”