Bareknuckle Banking

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The 1980s were a time of feast and fear for the world's international banking system: an era of globalization and vigorous overseas expansion but also of sharp competitive thrust. Asian banks and increasing numbers of European ones hung OPEN FOR BUSINESS signs abroad, joining the U.S. multinationals that had dominated global finance for decades. Suddenly the Japanese, drawing on their huge national savings pool and enormous trading surpluses, appeared to be the new Masters of the Banking Universe, carving out richer slices of international market share with startling rapidity. The global banking business became an international free-for-all.

The boom-and-bust '80s may be history, but the banking rough-and-tumble is + now more pronounced than ever. In the U.S. the battered industry is selling assets to recapitalize itself after the debacles of Third World debt, the decay in value of high-risk junk bonds used for corporate buyouts and the collapse of the real estate market in several sections of the country. The mighty Japanese, now far and away the world's biggest banking players, are also being squeezed. Japanese banks face rising interest rates that boost their costs at home and new international capital-reserve requirements that curb their lending abroad. In Europe, considered the premier expansion market in the 1990s, the European Community's July 1 deregulation of financial flows across most members' borders is expected to accelerate the merger movement in the Continent's highly protected banking industry. West German banks are also preoccupied with the beckoning market of East Germany.

Predicts Mary Carryer, senior vice president of international trade services at San Francisco's Wells Fargo bank: "The world is going to shake out to a few large banks with worldwide coverage. By the time the dust settles, those of us who aren't one of those banks will have to form alliances."

If it is an anxious time to be a banker, nowhere is the level of nervousness higher than in the U.S. Depressed earnings at many of the country's largest lenders have raised questions about the health of the entire industry. Citicorp, the biggest U.S. banking company, announced last week that its profits for the second quarter fell 37%, to $248 million, from the same period a year ago. Citicorp attributed much of the decline to increased losses on real estate lending, particularly to developers in the troubled Northeast. Chase Manhattan, the No. 2 banking concern, reported second-quarter profits of $52 million, a 62% plunge from the same period a year ago.

Such results come at a time when the American public is reeling from a savings and loan crisis that the White House predicts will cost taxpayers $500 billion over the next 40 years. While no one expects a run of major bank failures, some experts fear that a U.S. economic downturn could push many overextended lenders toward the brink of collapse.

Overseas, says James McDermott of Keefe, Bruyette & Woods, one of Wall Street's leading analysts of the industry, American bankers "are retreating from the global marketplace with their tails between their legs." Their foreign ventures proved so traumatic, McDermott adds, that "they're going to be at home licking their wounds for a long time."