Europe stands on the brink of a major war. American forces have already been deployed, and the British are expected to join them soon. But the theatre of operations for this particular conflict will not be the Balkans, and neither the UN nor Nato is likely to become involved. What we are looking at is the battle for supremacy in the custody markets of Europe.
Whilst Bismarck predicted that “some damned silly thing” in the Balkans would spark a European war, it seems that, rather more prosaically, The Bank of New York’s (BoNY’s) acquisition of RBS Trust Bank will be the catalyst for any cross-border skirmishes amongst custodians.
Five years ago, most European investors would look completely blank if asked for their opinion of BoNY, the most common response being: “Which bank of New York?” BoNY was successful in obscure businesses: it dominated the American depositary receipt (ADR) market, for example, and was a leading provider of clearing services for broker/dealers. But its international profile changed when it acquired JP Morgan’s global custody business in 1995: suddenly it had to be taken seriously on both sides of the Atlantic.
Today BoNY is already a big noise in Europe, with an operations centre in Brussels that employs nearly 600 staff in addition to its London-based European sales and marketing teams. Its proposed deal to swallow up Trust Bank will take it to an entirely different level, however, as well as causing fall-out that will be felt by all the global custodians operating in Europe. Trust Bank will give BoNY a lot more than a strong franchise in the UK: it will also provide the platform from which to launch a major assault on continental pension funds and collective investment schemes.
BoNY’s push into Europe comes at a time when most of its major competitors have already started to think about how to capitalise on European pension reform and the shift from state to private sector provision. The major custodians – whether American or European – have been doing business in the UK, Benelux, Germany, Switzerland and the Nordic countries for many years, but these are all relatively well-developed markets compared with southern Europe. A lot of custodians feel that it is from these countries – Italy, Spain, Greece and the like – that real asset growth will ultimately come, and they need to be entrenched when it happens.
The main European global custodians – Deutsche, ABN Amro and Midland – are all thinking along similar lines. They can see that a dominant position in one market is simply not enough to sustain the type of growth rates they require; consequently, they are trying to work out how to export their expertise. It can be a painfully slow process, as some of the Americans can testify over their early experiences in the UK, but they at least start with the benefit of having no credible local competitors. Even in France, which likes to think of itself as having a very advanced investment and securities market, there are good opportunities for the global custodians to move in and sell their services to institutional investors disappointed by their domestic suppliers.
What will be particularly interesting about the battle for these new markets is the fact that the Europeans will be taking on the Americans on equal terms. When Chase and Citibank laid waste to the UK in the late 1980s, it was hardly a fair fight: the British custodians were comatose, drowning in paperwork and reeling from the Big Bang of 1986 and the following year’s crash. They never saw the Americans coming. Similarly, the Americans crept up behind ABN Amro in the Netherlands and picked off some of its juiciest accounts as it slumbered.
But that was then. The Europeans have re-armed and are alert to the threat posed from across the pond. In some cases, they have even engineered significant peace treaties: ABN Amro now has an alliance with Mellon Trust, whilst Deutsche will hope to leverage off the strengths of Bankers Trust (which, incidentally, already has an alliance with Credit Lyonnais). In a uniquely Gallic view, Paribas has recently been quoted as saying that European banks forming alliances with American providers are “selling their souls” – an opinion that neatly overlooks the fact that Paribas has based its securities services business on the European custody network it bought from JP Morgan in 1995.
This war will not be over quickly and there will be many casualties: it has taken well over 10 years for the UK market to settle down after the initial American invasion, and hostilities still haven’t ceased. For the newer European markets, the rules of engagement will be determined largely by the pace at which pension reforms are introduced. The major contenders are preparing for a long, arduous and expensive campaign: they believe that the prize, a major share of the resulting custody business, is worth the effort.

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