Few European banks are equipped to take on the US banks globally.

In fact their own markets are being threatened, says Bob Crew

As the battle lines are drawn up for the global custody markets in the years ahead, European banks are going to have to get their act together if they are to take on their US competitors. Thus far - with a handful of notable exceptions - most domestic European banks don't have the global reach, the technology or perhaps even the commitment.

Two custodian banks in continental Europe appear to be bigger than the rest - Switzerland's UBS and Germany's Deutsche Bank, probably in that order. It's hard to say, because the former is tight-lipped about its assets under custody.

Deutsche has $457bn under custody for 2,600 institutional investors worldwide and $232bn of domestic custody in Germany. Its share of the global custody market has risen fourfold in the past five years but still looks small beer when compared with the US banks dominating the global market. These are headed up by Chase with $3.7trn and followed by Bank of New York (BoNY - $3trn), State Street ($2.9trn) and Bankers Trust ($1.7trn), say industry estimates.

Of course, when US banks talk in terms of trillions, it has instant financial sex appeal. But this is largely domestic dollar business, so it is necessary to look at their non-domestic trades to see how well they are shaping up against European banks. Even then, the business of US banks is still very impressive. For example, about $1trn of Chase's $3.7trn pot of gold is claimed to be non-domestic, of which $325bn is in Europe on behalf of 300 clients, 200 of them major accounts. Other US banks claim to have sizeable trades outside their domestic market, including Citibank with some $600bn worth of non-domestic funds, while BoNY and State Street have about $500bn and $400bn respectively.

This is why Deutsche, along with the UK's Midland - with around $500bn worth of assets under custody, of which some $80bn-96bn is non-UK European assets - and Royal Bank of Scotland ($277bn) are way behind in the race for the global markets, as are other European banks.



But what of ABN Amro(with more than $290bn under management), Paribas and ING? Whilst ABN Amro is beating ING hands down in its domestic market, where ING is still a relatively small player, in the global and emerging markets it is a different story. ING is certainly bigger than ABN Amro in the Far East (in former Barings markets), where it is also serious competition to Midland and its parent, Hongkong & Shanghai. According to Peter Shepard, ABN Amro's marketing manager, ABN Amro is head-to-head with ING in the global and emerging markets."

Although ABN Amro does not see itself as a major global competitor to the US banks, it believes it offers a good alternative in certain markets, not least in central and eastern Europe, where it is increasingly making inroads, and in South America. And with a strong presence in France and the US, it regards itself as a serious competitor to Deutsche. But it has some catching up to do, since Deutsche has been quicker off the mark and now has a big presence in London. Deutsche reports that it is aiming to double its custody business this year and next. It has Chase, Citibank and BoNY in its sights and has given warnings to the US banks that it intends to be number three in cross-border trades worldwide, ahead of BoNY.



Paribas is one of the major European players with enough clout to take on the US banks in EU custody markets with some $400bn under custody. But Deutsche's head of securities and custody Peter Grafunder says that he regards Paribas as being eventually able to meet the US pan-European challenge by having a base in all the key financial centres to serve as a sole point of contact for Euro transactions. He says that, together with Deutsche Bank, the other truly pan-European banks operating custody units in all EU member countries "will probably include Banque Paribas and possibly ABN Amro".

But you do not have to be a giant to be a global player. Private Swiss bank, Pictet is able to operate in 80 of the world's custody markets through a sub-custodian network. Pictet has always paid careful attention to custody and has now SFr83bn under custody-compared with Sfr65bn in 1993- mostly on behalf of pensions and mutual fund management.

Some domestic banks in Europe are entering into strategic alliances with US and international banks rather than attempting to turn themselves into global operations in their own right. The partnership between Credit Lyonnais and Bankers Trust in France - whereby the former handles domestic securities and the latter international securities - is one such example.

The attitude to foreign suppliers in continental European countries varies. In the Netherlands there is a mix of domestic and international custodian banks dealing in both domestic and international securities. In France, however, most of the domestic and international securities are handled by domestic banks, particularly the giant state-owned CDC.

But it is difficult to see how most European custodian banks can catch up globally with their US rivals unless they buy a US custodian bank.

Clients looking for asset safety above all else are likely to be attracted to those continental banks with big balance sheets - the Germans, Swiss and Dutch.

But European banks are being given a once in a lifetime opportunity and challenge on the custody side.

According to Alain Leclair, vice chairman of Paribas Asset Management in Paris, "We have to defend ourselves against the dramatic success of the US in Europe where the equity market is not yet the size of the US but will be soon". He adds: "The removal of investment barriers will make Europe the biggest asset market in the world and the purchasing power for domestic financial assets will be as big in Europe as it is in the US".

As Mark Tennant, managing director of Chase Investments in London, observes: "At the time when the US fund management and pensions industry started to go global, all the top fund management groups were British, so UK clearing banks had a real opportunity to enter the market in force, but they did not do so. US banks, by comparison,saw the opportunity and moved quickly, whilst the continental European banks did not move at all." We have been warned."

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