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Publisher: Informa.
Price: £695.00

 

 

This report will help you:

Benefit from the opportunities and avoid the pitfalls arising from the introduction of the EMU

Understand the key issues involved and allows you to analyse key challenges resulting from EMU

Get to grips with the practical operational and strategic significance of EMU

Gain a strategic overview of the impact of EMU on financial flows, IT systems, capital markets, corporate business functions, and bank relations with customers and business partners

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"Competition will be very fierce and will increase during the transition period and beyond 2002 as a result of price transparency. EMU will interact with other established business trends, such as the development of electronic commerce, to present banks with major new opportunities as well as threats to their traditional activities. Disintermediation is only one factor in this mix of changes. Successive waves of mergers and acquisitions will affect banks and their corporate customers as a result of EMU. In the longer term the nature and role of corporate banking are likely to be transformed. Some of these potential changes can only be described as revolutionary."

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Strategic Focus on The Impact of EMU on Corporate Banks and their Customers

Executive brief

This report describes and explains a range of effects on corporate banks and their customers resulting from European Economic and Monetary Union (EMU). Its 10 chapters and 9 case studies analyse and illustrate these impacts in practical terms, including several action checklists for readers with executive responsibilities.



Fourteen conclusions summarise the key findings of this report for you and your organisation, as follows:



1. Economic integration will have a more far-reaching impact on corporate banks and their customers in Europe than the fact of monetary union alone. Economic union is a process which will continue long after the euro has been adopted by several more than the current 15 members of the European Union (EU). The euro zone is likely in time to embrace much of Eastern Europe in addition to the first wave of 11 countries which will introduce the new banknotes and coins on 1 January 2002. Cultural, linguistic, tax and political barriers between European countries will persist and may impede the development of the full potential of economic union for the foreseeable future. Nevertheless, the euro is likely to be widely used for business outside as well as inside Europe as a global reserve currency alongside the US dollar: this may develop quite rapidly, possibly before 2002.


2. The launch of the euro has been a success. Preparations for the start of EMU by central and commercial banks paid off over the ‘Big Bang’ conversion weekend at the beginning of January 1999. One of the biggest IT projects in world history passed off remarkably smoothly and successfully, despite a few teething troubles which have now largely been resolved. Trading in the euro and its value in world markets in the brief period since its launch have so far been calm and stable. A risk of volatility remains, but this is mainly due to global market factors, which have caused a relative slowdown in short-term European economic prospects. The real challenges for corporate banks and their customers remain to be faced more in terms of practical adaptation to the effects of EMU during what promises to be a turbulent transition period until 1 July 2002, when the old national currencies of the euro 11 will finally be withdrawn from circulation. The risk of catastrophic collapse of EMU, or simply of the ‘breakout’ of any particular participant, seems small.

 

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3. The immediate practical effects of EMU during the next year or two will be wide-ranging. For banks and their corporate customers these include, from the outset and just as a start:

  • Reduced transaction costs
  • Improved foreign exchange handling services
  • New opportunities for cross-border payments transmission and for pan-European and global cash management
  • Changing banking relationships

The abolition of 11 national currencies will have such a large immediate impact on European banks, in terms of their previous revenues from forex trading, that a rapid shake-out in the industry is expected. Larger corporate customers will require many fewer bank accounts and a reduced number of bank relationships as they gradually realise the benefits of EMU for their own operations. Banks and corporates will need to pay close attention to liquidity management across borders.

There remains massive scope for efficiency gains in automating paper-based systems, especially in those euro zone countries where the banking industry is overcrowded with traditional bureaucratic operations. Given the extent of overcapacity in European banking and other established business trends affecting the industry, the combined effect of EMU and other disintermediating factors over the next five years is estimated to result in a halving of the total number of banks across Europe.


4. Consolidation of the European banking industry is likely to see the six biggest banks of today transformed, by merger, to become just three or so ‘global aspirants’ within the next couple of years. The biggest banks may absorb one another or be taken over by US rivals who already have a dominant position in the emerging pan-European market. But the real battles may be over the euro payments business, which is rapidly being automated and commoditised, or for the business of the emerging ‘super league’ of European multinationals. The factors which will determine which of the biggest European banks survive as leaders in the euro zone beyond 2002 lie as much in their positions in markets outside Europe as inside.


5. At the same time, the restructuring of other industries across the whole European economy will be reinforced by EMU. This will have a range of further impacts on the banking industry as well as on their corporate customers, including:

  • The creation of a new dynamic of business threats which will prove lethal in many cases
  • New synergies in the way banks and other kinds of business combine and benefit from pan-European economies of scale and new developments such as electronic commerce

These dynamics are difficult to predict, and the speed of change in banking and every other European business sector is uncertain. It is likely to vary between countries and sectors across the euro zone. Between 50 and 100 of Europe’s leading multinationals are very much further ahead than any of their competitors in their EMU preparations and are particularly well positioned to take advantage of takeover opportunities – especially in fast-moving consumer goods – during the transition period.

Banks must be prepared for corporate customers choosing widely differing dates for converting to the euro as their base currency between 1999 and 2002. Under the ‘no compulsion, no prohibition’ rule firms may migrate different parts of their operations to the euro at varying speeds. The impact of euro take-up through their supply chains will also vary between industries. Many firms will go out of business as a result of the powerful effects of all these changes. Banks and larger corporates will also be able to make ever greater efficiency and cost gains by outsourcing consolidated transaction processing to shared service centres.



6. What may be good for the customer may be bad for corporate banking, in the short term.
This may cause a variety of tensions, well illustrated by European Commission raids in February 1999 on several banks suspected of failing to pass on the benefits of reduced euro transaction costs to their customers. As the transition period unfolds, corporates will be operating in a buyer’s market in relation to many banking services. The corporate customer’s new opportunities – especially in terms of business-to-business electronic transactions that simply bypass the banks – may be the biggest-ever threat to traditional European banking. The banker’s monopoly is coming to an end. In the longer term the most successful corporate banks may be the ones which realise their strengths in the field of electronic commerce and take a lead in developing new roles and new positions so that they cannot be bypassed, or so that their customers will find it easier to collaborate with than to disintermediate them.

 

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7. Banks and their corporate customers have a common long-term interest in reviewing their internal strategic and operational EMU impact assessments and strategies now that the euro has arrived.
This might take the form of a simple EMU ‘health check’ or may require a complete change in business strategy and operational priorities. Many banks and corporates have focused too much on technical changes to transaction processing systems and not enough on the impact of EMU on business strategy.

The need for an EMU review or update is urgent, in every kind of business. Too many banks and corporates, large and small, throughout Europe, have not prepared sufficiently, despite the major investments already made by the banks in particular in IT conversion programmes. The change programmes of too many large firms have incorporated serious mistakes which represent a timebomb for them and for their bankers. As just one example, there is evidence that up to a third of the largest European companies have converted or are planning to convert their IT systems in ways that are not properly capable of supporting the legal requirement for triangulation in calculating between legacy currency values and the euro. This seems likely to expose those businesses to significant unnecessary and avoidable risks and consequent financial liabilities which may in turn cause losses to their bankers. Moreover, even where a bank or large multinational company claims to have an EMU strategy in place, key business issues tend to be neglected, especially pricing, marketing and branding.


8. Corporate banks have three basic choices in the kind of business strategy they must pursue over the next three years and beyond, given the effects of EMU. These options are spelt out in Chapter 1 and developed and illustrated throughout the report. The strategic choices to be made by any bank will be determined by its current scale of operations in Europe, its share of corporate business in its domestic market (whether that is national, pan-European or global), and its particular strengths and weaknesses in meeting the needs of corporate clients.



Competition will be very fierce and will increase during the transition period and beyond 2002 as a result of price transparency. EMU will interact with other established business trends, such as the development of electronic commerce, to present banks with major new opportunities as well as threats to their traditional activities. Disintermediation is only one factor in this mix of changes. Successive waves of mergers and acquisitions will affect banks and their corporate customers as a result of EMU. In the longer term the nature and role of corporate banking are likely to be transformed. Some of these potential changes can only be described as revolutionary.



9. The arrival of the euro has already had a dramatic impact in reshaping European capital markets. This is most evident in government bonds, where euro bond markets are developing on a similar scale to the US bond market, although with some important differences. The biggest single impact of EMU for all sizes of business throughout the euro zone will be the opportunities presented for shifting from debt to equity finance, and from bank loans to euro bonds. The creation of a single pan-European capital market may well take significantly longer than the next three years, but if successful it would create an élite of pan-European companies traded by European traders appealing increasingly to pan-European investors. Investment banking and securities will be in great demand as these markets develop.

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10. The four EU countries still outside EMU are likely to join eventually. Greece is likely to adopt the euro by 2001 and Sweden possibly by 2002. Denmark’s inclusion in EMU is also a matter of ‘when’ rather than ‘if’. The politics of UK entry are more uncertain, although the role of the City of London in euro trading will remain significant, regardless of Britain’s decision on whether or not to enter EMU. Large and small companies trading into the euro zone from these or other countries outside it now face new business risks as a result of EMU. Many businesses in the UK, Greece, Denmark, Sweden and Switzerland, as well as throughout central and Eastern Europe, have yet to appreciate how fundamentally the euro could affect their operations.



11. Customer focus is critical to survival and success, both for banks and for corporates. This fact of business life will be reinforced by the combined impacts of EMU and other changes in the way business is conducted throughout Europe in the next few years. As trading in euros develops between corporates and their customers and suppliers, so the role of the banks in helping their customers to manage the transition will grow. Communications programmes are vital, internally and externally, for every business in Europe to prepare successfully for the final stages of EMU.


12. There are tensions and potentially growing cultural and ideological conflicts between different social and business models in Europe. The differences between the continental European ‘social market’ and the Anglo-American business model may not easily be resolved. The struggle to reconcile social Europe with competitive efficiency in a global market economy is likely to be a central feature of business and politics within the EU in the years ahead. This may well determine the success or failure of overdue reforms that must be made to EU institutions if eastward enlargement is to be workable, and the long-term success of EMU. Protectionism is clearly a risk given uncertain global market conditions, but the potential for successful synthesis and adapation by European banks and their corporate customers should not be underestimated. International business is well placed to play an influential role in leading Europe into the new millennium.


13. The arrival of the euro has signalled a new era for European corporate banks and their customers.
The combination of the effects of EMU and of the development of electronic commerce will not only reinforce previous trends in the European banking industry but create the potential for revolutionary change. Such developments may transform the nature and role of banks in comparison with other global businesses – and may make the distinctions between the two much less clear-cut in the longer term.


14. European banks and corporates should not rely on scale or share alone. Increasing the scale of a European business and developing its share of the market may be necessary preconditions for future success in the euro zone, but neither may be sufficient to guarantee survival. Another way may be to develop a competitive edge such as a specialism that meets the needs of customers better than any rival, however large or small a firm may be and wherever it may be based in the euro zone – or outside it. Every European company should position itself to take advantage of the prospective massive consolidation in banking and other industry sectors across Europe. Each organisation should make the most of the advice and experience of all its business partners, including corporate or private bankers. And everyone should get ready for some interesting surprises in the coming months and years as a result of EMU.

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