BANKING.

Throughout the twentieth century, banks have played a major role in Europe's economy, society, and politics. As companies banks have counted among the largest, while as financial intermediaries they have contributed decisively, though sometimes controversially, to economic development. Yet banking has displayed different features in each European country. For if a broad definition of a bank can easily be provided (taking deposits on the one hand and granting credit on the other), there have been multiple variations on this theme, in terms of type of banking activity (commercial or investment bank), ownership (private, joint stock, or state-owned), size (small, medium-size, large), and geographical expansion (local, regional, national, multinational). The combination of these different characteristics has varied between countries, contributing to their distinctive banking architecture, as well as over time.

By 1914 national banking systems had adopted their distinctive features, which were not entirely to disappear with the transformations of financial activities occurring in the course of the twentieth century, especially from the 1960s. Despite national idiosyncrasies, two main models have been dominant across Europe: the British model of deposit banking complemented by a more active capital market, and the German model of universal banking, with France combining some elements of the two. This entry will thus mainly concentrate on these three cases, Europe's three leading economies, while paying attention, when necessary, to other national experiences.

THE RISE OF THE BIG BANKS

By the eve of the First World War, the effects of the banking revolution of the nineteenth century—the emergence of the large joint-stock bank—were being fully felt, though in different degrees, in all European countries. The phenomenon was most pronounced in England, where twelve banks, based in London with a national or regional network of branches, controlled two-thirds of the country's deposits. The three largest—Lloyds, Midland, and Westminster—were among the world's top five, together with Crédit Lyonnais of France and Deutsche Bank of Germany (see table 1). Such powerful institutions were the result of an amalgamation movement starting in the mid-nineteenth century and leading to the complete disappearance of the private country banks and of most regional banks. The level of concentration was also high in France, with more than half of the resources of the registered banks in the hands of the four largest. Unlike England, however, over two thousand local banks survived in France, and although their importance cannot be assessed quantitatively, as they did not publish their balance sheet, recent historical research has revealed that they played a major role in supporting small and medium-size enterprises. The situation was still different in Germany, where the nine big Berlin banks collected barely 12 percent of the country's banking resources. There were still several hundred local and regional joint-stock banks, whose joint resources were more or less equal to those of the big banks, as well as a good thousand private banks that were not included in the Reichsbank's statistics. But the bulk of the deposits lay elsewhere: almost 75 percent was in the hands of savings banks, mortgage banks, banking cooperatives, and other specialized banks. Alongside the big banks, old established private banks—the haute banque, to use the evocative French terminology—had managed to retain an influential position, especially in international finance, thanks to their prestige and networks of relationships. Their position was particularly strong in London, then the world's financial center, less so in Paris and Berlin.

NATIONAL BANKING SYSTEMS

The strength of the London merchant banks—the English version of the haute banque, with such famous names as N. M. Rothschild, Baring Brothers, Morgan Grenfell, Schroders, or Kleinwort—was partly the result of the highly specialized nature of the English banking system. While German banks were specialized by type of customer (large companies for the big banks, small and medium-size firms for the local and regional banks, and so on), the English banking system was specialized by functions. However, in all countries central banks were starting to establish their role as lenders of last resort in order to ensure the stability of the financial system.

In Britain banking basically meant deposit banking. The golden rule of deposit banks, or clearing banks as they are usually called, was not to tie up in long-term investments the money deposited with them on a short-term basis. Assets thus had to be as liquid as possible, with self-liquidating bills of exchange being especially popular. Investments were in consols—the British national debt—or in other highly liquid securities, not in industrial securities; advances were granted on a short-term basis, whether in the form of loans (granted for a fixed sum and for a given period) or of overdrafts (which customers could use as they required, up to a limit agreed upon beforehand with the bank). For their long-term

requirements, companies could raise money on the capital markets, traditionally more developed than in continental Europe, though clearing banks did not issue securities on behalf of customers, a task left to company promoters.

International credit was provided by the merchant banks that accepted, or upon which were directly drawn, bills of exchange, generally for three months, which constituted the main instrument for financing international trade. These bills were negotiable instruments, and well before they reached their maturity dates they were discounted by other specialized banking firms, the discount houses, which then resold them to commercial banks. Merchant banks were also specialized in the most prestigious financial activity of the day, issuing loans on behalf of foreign companies and governments. In addition to being specialized by functions, banking was divided between international and national financial activities. Though more involved in the latter, the clearing banks provided the cash credit, in the form of day-today loans, to discount houses that discounted the bills of exchange accepted by the merchant banks, thus making the whole wheel of international trade financing turn. Finally, the overseas banks were English banks, insofar as their capital and management were English and their registered office was usually in London, but their sphere of activity was in the British Empire or abroad. Their goal was to finance trade with the regions in which they were established and to obtain exchange facilities. Among them were the Hong Kong and Shanghai Banking Corporation, the London and River Plate Bank, the Standard Bank of South Africa, and several others, all independent companies and not subsidiaries of big commercial banks.

In Germany, by contrast, universal banks undertook all types of operations: they collected deposits, granted short-term commercial credit as well as medium- and long-term industrial credit, discounted bills of exchange, and acted as brokers and as issuing houses. Bankers were also massively represented on the boards of other, especially industrial, companies. The German big banks were thus involved in both national industrial financing and large international banking and financial transactions, especially in issuing foreign loans. The French banking system is usually seen as standing roughly halfway between the British and German models. On the one hand, the French big commercial banks followed the principles of the English joint-stock banks, while more risky industrial financing was left to another type of bank, the banque d'affaires (banks akin to investment banks, mainly dealing in securities and holding controlling stakes in other companies), whose most famous representative was the Banque de Paris et des Pays-Bas. Overseas banks were also part of the German and French banking systems, though they were less numerous and had smaller networks of foreign branches than their British counterparts and, unlike the latter, were often subsidiaries of the large commercial banks. Elsewhere, Belgium, Switzerland, Italy, and Austria were close to the German model, Holland and the Scandinavian countries to the British one.

BANKING AND ECONOMIC DEVELOPMENT

There have been intense debates about the respective merits of these systems, in the first place the British and the German ones, particularly with respect to their contribution to economic development. A long historiographical tradition holds that the financial sector contributed to Britain's relative economic decline in the three or four decades before the First World War. British banks have been criticized for their reluctance to provide long-term industrial finance and the London capital market for directing overseas funds that could have been more beneficially invested in the British economy. A similar criticism has been directed at the French banks, especially as far as their preference for foreign investments is concerned. Such criticisms are not surprising given that Britain and France were the two largest capital exporters (with respectively 18.3 and 8.7 billion dollars of assets in foreign countries in 1913 out of a total of 44 billion dollars, as against 5.6 billion for Germany) and experienced slower economic growth than Germany during the three decades preceding the First World War. The German banking system, for its part, has often been seen as working in the long-term interest of the manufacturing industry, while some authors, most famously Rudolf Hilferding in Das Finanzkapital, published in 1910, have stressed the power of the banks, in particular the control they were in a position to exert over industry and, ultimately, over the entire German economy.

Historical evidence reveals a picture often at odds with such analyses. French banks have been absolved from the sin of "failing" industry. Recent research has shown that British banks were more involved in industrial finance than they had been credited for and that large industrial companies were able to make effective use of the flexibility of the capital markets. And German industrial companies have been shown to have been far more independent from the banks than Hilferding and his followers had assumed. As for capital exports, they barely affected the economies of centrally located countries. In the end, finance held a stronger position in Britain, as a result of the international position of the City of London, than in Germany, where the banks' power and prestige ultimately lay in their support of the country's industrialization.

THE FIRST WORLD WAR AND ITS
AFTERMATH

Banking prospers in times of peace, not in times of war. Indeed, for most bankers and financiers the First World War meant a marked decrease in their activities owing to disruptions in the trading of goods, services, and capital among countries, as well as to growing state intervention in economic and financial affairs. A large number of services traditionally offered by the banks were henceforth superfluous, like commercial credit or issuing syndicates, since governments at war tend to pay companies up front or borrow directly from savers. The London merchant banks, cornerstone of the international credit mechanism prior to 1914, suffered from the slump in their accepting and issuing businesses, while the commercial banks had to adjust to the part played from then on by financing the growing needs of the state: the assets of all big European banks mainly comprised Treasury bonds and similar stocks at that time.

However, despite the disruptions caused by war and monetary disorders in the early 1920s, the trend toward the strengthening of the large joint-stock banks and increased banking concentration continued during the 1920s. This trend was particularly strong in Britain, where the amalgamation movement reached its peak in 1918, before the war was over. Five mergers took place in that year, involving the country's ten largest banks and resulting in the formation of five huge banks that immediately came to be known as the "Big Five"—Barclays, Lloyds, Midland, National Provincial, and Westminster—and controlled 90 percent of the country's deposits. The "Big Five" emerged as the largest banks in the world, far ahead of their German and French counterparts (in 1929 the largest British bank was nearly four times larger than the largest German or French one), which encountered more difficulties in the early postwar years. French banks suffered from the devaluation of the franc and the absence of significant mergers. As for German banks, even though they expanded by taking over provincial banks, they were weakened by the devastation of war and hyperinflation: in 1924 the commercial banks' capital was valued at 30 percent of its prewar gold value, their assets at only 21 percent. However, they strengthened their position within the German banking system, with their share of the total assets of all German banks reaching 33 percent in 1929, a level not to be surpassed until the 1980s.

Business conditions somewhat altered in the 1920s. In Britain the clearing banks, with their enormous financial means, increasingly competed with the merchant banks in the accepting and issuing activities. Moreover, the former became involved in long-term industrial finance, though this policy was somewhat forced upon them rather than deliberately chosen. During the boom of 1919–1920 they granted large overdrafts, particularly to heavy industry, which with the downturn of the 1920s often had to be converted into frozen loans and nursed for the remainder of the period. In France the big banks had to face growing competition from the main provincial banks (Crédit du Nord, Société Nancéienne de Crédit, and others). And as Germany became a capital-importing country (having been stripped of its foreign assets and required to pay reparations by the Treaty of Versailles), the big banks and the leading private banks played an active role in these transfers, borrowing on a short-term basis abroad and then lending on a long-term basis to German companies, a risky strategy in the event of the influx of foreign capital coming to a stop. Furthermore, they had to deal with competition from foreign banks, especially American, which granted credit directly to German companies and took charge of issuing securities on their behalf on the New York market.

THE BANKING CRISIS OF THE 1930S

The Wall Street crash of October 1929 and the ensuing slump soon affected banking. The big Italian banks—Banca Commerciale Italiana, Banca di Roma, and Credito Italiano—went through serious difficulties in 1930 and were rescued in secrecy by the Bank of Italy and the Italian government, which undertook a thorough transformation of the banking system, leading, in particular, to the nationalization of the banks and the end of universal banking. In May 1931 the Credit-Anstalt in Vienna went bankrupt, and the crisis then moved to Berlin. On 13 July 1931 the Danat Bank, weakened by the collapse of the large textile trust company Nordwolle, closed its doors, provoking a run of depositors on the other banks, which decided to only pay 20 percent of the sums that their clients wanted to withdraw, in other words to suspend their payments. The German banks were initially penalized by the interruption, following the crash, of foreign capital inflows into Germany, on which the entire credit mechanism hinged. Then, with the prolongation of the crisis and international tensions, especially surrounding the payment of reparations, they had to contend with massive withdrawals of foreign funds. Finally, in July 1931, they were no longer able to obtain refinancing from the Reichsbank, whose gold and currency reserves shrank below their statutory minimum. The intervention of the German government put an end to the panic. It ordered the immediate closure of all banks for two days, during which the Dresdner Bank also declared itself bankrupt, and introduced exchange controls on 15 July. With state backing, the Reichsbank set up the Akzeptund Garantiebank to obtain credit for commercial banks and savings banks. Furthermore, the government undertook major restructuring of the big banks, resulting in their near nationalization; they were denationalized, however, during the Third Reich.

From Germany, the crisis moved to England. The big banks held out well, with no major English bank having to close its doors during this period. The merchant banks were hit harder by the contraction in international trade and especially the introduction of exchange controls in Germany, and some of the smaller houses had to be wound up. The real crisis was a crisis of the pound sterling, whose convertibility in gold was suspended by the British government on 21 September 1931—a turning point in monetary history, with the end of the gold standard, rather than in banking history.

The French banks were not spared. Between October 1929 and September 1937, 670 French banks became insolvent, the vast majority of them small local and regional banks. Among the big banks, the Banque Nationale de Crédit (BNC), the country's fourth-largest deposit bank, collapsed in 1931 and was built up again the following year, with help from the state, under the name of Banque Nationale pour le Commerce et l'Industrie (BNCI). The Banque de l'Union Parisienne, one of the main banques d'affaires, shaken by the crises in Germany and central Europe, experienced very serious difficulties that brought it to the brink of bankruptcy in 1932, but it was saved by the joint intervention of the Banque de France and the main Parisian banks.

Small countries were also affected by the crisis, including safe havens such as Switzerland, then Germany's fourth-largest creditor. The large Swiss banks suffered badly from the effects of German banking crisis, with their assets more than halving between 1930 and 1935. Only the two largest banks—Swiss Bank Corporation and Crédit Suisse—avoided large reductions of capital, while one of them—the Banque d'Escompte Suisse, Geneva—collapsed in 1934 and another—the Schweizerische Volksbank, Berne—was only saved by the intervention of the federal government.

The depression of the 1930s interrupted the forward march of the big banks that had started fifty years earlier, reinforcing the public and para-public banks. The shift was most spectacular in France, where by the late 1930s the share of the publicly owned institutions, in the first place the savings banks, far outstripped those of the commercial banks: between 1930 and 1937 deposits held by the former rose from 67 to 113 billion francs, while those held by the latter actually fell from 87 to 67 billion. In Germany, the share of the savings banks in the total assets of all banks increased from 31 percent in 1929 to 43 percent in 1938, while those of the commercial banks fell from 33 to 15 percent. Despite their rapid growth, savings banks and building societies never reached such a dominant position in Britain: by 1933 their assets represented 37 percent of those of the clearing banks, up from 17 percent in 1920.

SUPERVISION AND REGULATION

The bank bankruptcies and the crisis of confidence in financial institutions led governments to intervene in financial affairs, with the aim of ensuring the stability of both the financial system and the economy. Moreover, state regulation was encouraged by the prevailing ideology and growing distrust toward market mechanisms. The main issue was the risks involved in universal banking. Mention must be made here of the United States, the first country to legislate and the one that went the furthest in this field, in particular with the Glass-Steagall Act (from the names of the two promoters of the Banking Act passed in 1933), which decreed the complete separation of commercial banking activities (raising funds and loans) from investment banking activities (issuing, distributing, and trading securities). Similar measures were taken in a number of European countries, notably Belgium, where two decrees passed in 1934 and 1935 (and in fact largely inspired by bankers anxious to restore confidence) abolished universal banking and subjected all institutions having banking status to control by a new body, the Banking Commission. From then on, the SociétéGénérale de Belgique, Europe's oldest universal bank, founded in 1822, concentrated all of its commercial banking activities in a new institution, the Banque de la SociétéGénérale, later known under the name of Générale de Banque.

The universal bank survived in Germany, though its abolition was debated. The banking law of December 1934, enacted under the Nazis, attributed the crisis to individual failings rather than to any shortcoming of the system and made do with strengthening bank supervision and introducing some restrictions on long-term deposits and on banks' representation on the supervisory boards of other companies. But even though universal banking survived, the government considerably strengthened its hold over financial institutions. Other laws, of a more sinister nature, also transformed the banking landscape in Germany by excluding Jews from economic life.

In Switzerland the federal banking law of 1934 did not abolish universal banking, and its only effect was the Swiss Confederation's very mild interference in banking affairs arising from the establishment of a Federal Banking Commission to supervise the system. The law was above all famous for its Article 47 relating to banking secrecy. This article made those who were subject to it—bank employees, managers, directors, auditors, and supervisors—liable to fines or up to six months' imprisonment if they divulged information on the trend of the business market and, above all, the names of a bank's clients.

England, for its part, steered clear of the trend toward greater regulation of the banks, probably because there had not been any bank bankruptcies during the 1930s, and because the financial system was more specialized than elsewhere and effectively monitored by the Bank of England. France too left things as they were until 1941, when the Vichy government introduced a law, upheld and completed in 1944, that controlled and regulated banking activities that until then had been open to any newcomers. Henceforth, banks had to be registered according to their type of activity, with a clear distinction between banques d'affaires and deposit banks, as well as between banks and other specialized institutions such finance companies and discount houses.

WARTIME CONTROLS AND
RECONSTRUCTION

All banks, in all countries, were affected by the Second World War. As in the First World War, contributing to the war effort meant, as far as their business operations were concerned, a shift from commercial to government lending. Everywhere, including in the neutral countries, their assets became dominated by government securities. In Britain, by August 1945 government paper and cash amounted to over 82 percent of the deposits of the London clearing banks. The figure was just under 50 percent at Deutsche Bank, as well as at the Swiss Bank Corporation.

However, these were but temporary effects, even though banks did not return to fully normal business conditions until the early 1950s. More fundamental changes affected German and French banks. In Germany, the Allies' determination to decentralize the German economy led to the decision to divide each of the three big banks (Deutsche, Dresdner, and Commerz) into regional banks. The Deutsche Bank, for example, was succeeded in 1948 by ten separate institutions. Such measures, inspired by American banking legislation, were clearly at odds with German, and more generally European, banking traditions. They met with strong resistance from the German banking community, which immediately set about working toward reunification. As soon as 1949 bank representatives made proposals for a first regrouping on a wider regional basis, taking advantage of Britain's disagreement with the decentralization projects and the favorable conditions presented by the Cold War. The number of successor banks had already been reduced to three by 1952, and complete reunification took place in 1957 for Deutsche and Dresdner and the following year for Commerz. During this period the credit banks progressively returned to their traditional business practices, in particular their close links with large industrial companies, through both advances and interlocking directorships.

In France the main transformation was the complete control established by the state over the mechanism of credit. The Banque de France and the major deposit banks (Crédit Lyonnais, Société Générale, Comptoir National d'Escompte, Banque Nationale pour le Commerce et l'Industrie) were nationalized in 1945, to be added to a public sector already including the Caisse des Dépôts et Consignations (the recipient of most of the assets of the savings banks). However, the nationalized banks did not lose their corporate identity, while the banques d'affaires, including the Banque de Paris et des Pays-Bas, remained in private hands. The nationalized banks played only a modest role in the country's economic reconstruction and modernization and contented themselves with collecting short-term deposits and supporting Treasury issues. They hardly extended their network of branches and were happy to avoid competition in a cartelized sector. With the state now in the driving seat, it was the Treasury that financed the first of France's many five-year economic plans and the Caisse des Dépôts that financed local communities.

In Britain, only the Bank of England was nationalized in 1946, though the Big Five were under strict official control. They received precise instructions from the Treasury concerning not only their liquidity ratios but also their lending priorities, especially as far as manufacturing investment and the support of exports were concerned, leading John Maynard Keynes to comment that the clearing banks hardly needed to be nationalized. Official controls also had the effect of curbing competition. Despite their giant size, the Big Five were content to operate a price cartel that set interest rates and to remain strictly within the limits of deposit banking. Merchant banks, for their part, were working in a much less congenial economic environment: New York had become the world's undisputed financial center, the dollar was the main trading and reserve currency, and the pound suffered from not being fully convertible on current account until 1958. While they resumed their traditional activities, merchant banks increasingly turned their attention to domestic issues, preparing the ground for their later dominance of the field of corporate finance.

THE EMERGENCE OF THE EUROMARKETS

In the late 1950s and early 1960s, the emergence of the Euromarkets—Eurodollars, then Eurobonds and syndicated Eurocredits—marked a turning point in the history of international finance. As truly international capital markets, separate from the United States financial system and unregulated, they gave a new impetus to international capital flows.

Eurodollars are dollars deposited outside the United States. From the early 1950s, they started to accumulate in Europe, especially in London, partly because of the Cold War (the Soviet Union and Eastern European countries preferred to deposit their dollars in Europe rather than in the United States for fear of their being blocked in case of international tension) but mainly as a result of the United States' overseas investment—in the first place by multinational companies but also in foreign aid, as well as the country's growing payment deficit. Banking regulations also played their part, in particular the so-called Regulation Q, which dated back to the Banking Act of 1933 and enabled the Federal Reserve System to put a ceiling on the rate of interest that banks paid on domestic bank deposits. As British banks were able to offer a higher rate, funds were attracted to Britain, especially those earned overseas by American multinationals. With the ban on the use of sterling instruments for financing third-party trade imposed by the British government following the sterling crisis of 1957, London banks, unwilling to lose customers, began to use these dollars instead. The Eurodollar market was born. With the return to external convertibility of European currencies in 1959 and the relaxation of exchange controls on capital account from the early 1960s, the Eurodollar market was soon to provide world credit on an unprecedented scale, with banks as the main operators and deals usually for very large amounts. Eurodollars were mainly used in the interbank market (banks placing funds at other banks), usually, though not exclusively, for short periods. From 1.5 billion dollars in 1959, it reached 25 billion ten years later and over 130 billion in 1973.

The emergence of Eurodollars signaled the rebirth of the City of London, whose standing had been suffering from the pound's decline. The City soon established itself as the home of this new market, taking advantage of its long experience of international finance and its large pool of skilled personnel. The merchant banks' early role in initiating the market also helped to determine its location, together with the Bank of England's flexible system of control. Since the end of the war, major international financial operations could only be undertaken from New York. With the use of the Eurodollar, and to a lesser extent other Euro-currencies, such operations could once again be carried out from London. This was especially the case with one of the City's specialties: international issues.

The Eurodollar market led to the development of the Eurobond market—foreign dollar bonds issued in Europe—which provided longer-term loans than was usual with Eurodollars. The first Eurobond issue took place in London in 1963—a fifteen-million-dollar, 5.5 percent six-year loan to Autostrade Italiane, with the state-owned holding company IRI as guarantor, floated by S. G. Warburg and Co. Eurobonds quickly proved very popular, especially as they were bearer bonds and were not subject to withholding tax. And with the introduction later in 1963 of the Interest Equalization Tax by the American authorities (a tax on purchases of foreign securities by U.S. residents to check the outflow of capital), American multinationals increasingly borrowed outside the United States. From 258 million dollars in 1963, the Eurobond market grew to 4.2 billion dollars in 1973, catching up with the traditional foreign bonds (denominated in the currency of the country where they are issued) and overtaking them in the 1980s.

In addition to short-term Eurodollar deposits and long-term Eurobonds, medium-term loans (three to ten years) were also granted to industrial corporations, as well as to governments and public authorities. They usually took the form of syndicated loans (the funds were made available by a syndicate of thirty to forty international banks organized by a lead institution) with floating interest rates. From a mere two billion dollars in 1968, syndicated loans reached over twenty billion dollars in 1973 and played a major role in the recycling of "petrodollars" (dollars accumulated by oil-producing countries in the wake of the oil price increases of the 1970s) during the rest of the decade.

COOPERATION AND COMPETITION IN
INTERNATIONAL BANKING

The emergence of the Euromarkets heralded a new era in multinational banking (banks owning at least one branch in a foreign country). Major changes took place in three main areas: the location of foreign branches, the type of operations undertaken abroad, and the home country of the banks involved. Multinational banks shifted their attention from developing countries, where British overseas banks, in particular, had been active since the mid-nineteenth century, to the world's major financial centers: London, far and above, as home of the Euromarkets; New York, the world's leading financial center; but also Paris, Frankfurt, Luxembourg, Zurich, and others. These banks were much more involved in wholesale banking (transactions with other financial institutions and large companies involving huge deposits) than in retail banking. And the leading players, at least until the mid-1970s, were American banks, with their formidable expansion abroad, especially in Europe, being perceived as an "invasion" by some contemporaries. For if American banks did not pioneer Eurodollar transactions—the first such loans were granted by London merchant banks and British overseas banks—they were quick to join and soon captured the bulk of the market in dollars traded outside their home country. British multinational banks had to undergo a profound restructuring, and, with the exception of French banks (which had retained a network of foreign branches, mostly in France's colonial empire), other European banks only started to move abroad in the 1970s and did not form major multinational banking groups before the globalization of the 1980s.

International expansion might have been the order of the day, yet it was a costly and risky proposition, especially if it meant entering new markets requiring a large capital basis. In order to face the "American challenge," European banks, including British banks, chose to cooperate. The innovation of the 1960s was the formation of banking "clubs," designed to extend the services of their members throughout Western Europe without the need for direct representation in other countries. Closer collaboration was also encouraged by the formation in 1958 of the European Economic Community and the prospect of rapid monetary integration: there is no doubt that the founders of these "clubs" saw them as a first step toward pan-European mergers. Cooperation also included launching several joint ventures in various parts of the world. By the early 1970s four such clubs had been established: Associated Banks of Europe Corporation (ABECOR), Europartners, European Banks International Company (EBIC), and Inter Alpha. They included most leading European banks, each with no more than one bank per country—for example, Amsterdam-Rotterdam Bank, Deutsche Bank, SociétéGénérale de Banque, and Midland Bank were members of EBIC, later joined by SociétéGénérale and Creditanstalt-Bankverein. Consortium banks represented another form of international cooperation. They were joint ventures that enabled their shareholders to share the risks and the profits involved in operating in the Euromarkets. Most of them were based in London (there were as many as twenty-eight in 1974), some established by members of the banking clubs, several others including American and other non-European banks.

Despite significant achievements, cracks started to appear from the mid-1970s, and the entire cooperative project eventually collapsed in the following decade, usually through one bank buying its partners' share in the joint ventures. This eventual

failure occurred in part because a pan-European merger was no longer on the agenda, as European monetary union became an increasingly remote prospect in the wake of the monetary upheavals of the 1970s; because conflicts of interest between members increased; and especially because the partners wished to build their own international networks and be represented in their own name in the major financial centers.

TOWARD THE TWENTY-FIRST CENTURY

Five interrelated trends have characterized the course of European banking since the 1970s. The first has been the gradual liberalization and deregulation of financial institutions and markets, leading to the despecialization of banking activities, among other effects. In both Britain and France, commercial banks have become akin to universal banks, offering a variety of services, usually through subsidiary companies. Such services ranged from wholesale banking (competing for the deposits of large customers) to retail banking (credit cards, consumer credit, mortgage financing), as well as those usually associated with investment banks (corporate financial advice, capital issues facilities, etc.). A second trend has been toward increased financial disintermediation (companies raising funds through the capital markets rather than bank borrowing), forcing banks to offer a wider range of products and to combine with nonbank financial institutions. This development has not eradicated the differences between "bank-based" and "market-based" banking systems, and the debates on their respective merits have been reminiscent of those related to the British and German models in the early twentieth century.

A third trend has been the unprecedented role played by innovation, made possible by the formidable development of information technology and resulting in the continual appearance of ever more sophisticated financial products—derivatives (financial instruments based on dealings in an underlying asset, such as bonds, equities, commodities, currencies, and indices representing financial assets), with futures, options, and swaps being the most important among them. A fourth trend has been toward increased competition. With the relaxation of state regulation, the end of cartel agreements, and the technological revolution in banking, competition intensified or simply resumed, not only within commercial banking but also from outside the traditional world of banking, with savings banks and other public and semipublic institutions beginning to provide their customers with a complete, or near complete, range of banking services. On the other hand, international competition has stiffened in the major international financial centers with the globalization of financial activities, especially in London, where there were 481 foreign banks in 2000, as against 242 in Frankfurt and 187 in Paris. A fifth trend has been a renewed consolidation movement, in other words the domination of the banking system by a handful of giant institutions. Megamergers and acquisitions have played a role in the process: Algemene Bank Nederland (ABN) and Amsterdam-Rotterdam Bank (AMRO) in 1991, Midland and the Hong Kong and Shanghai Banking Corporation (HSBC) in 1993; Union Bank of Switzerland (UBS) and Swiss Bank Corporation (SBC) in 1998; Banque National de Paris (BNP) and Paribas, and Santander and Banco Central Hispanoamerico (BCH), in 1999; National Westminster and the Royal Bank of Scotland in 2000. Interestingly, these mergers have taken place within a national context. So far, and despite the advent of the single European currency in 1999, no merger between major European banks of different countries has yet taken place, even though they have all acquired other banks abroad, in the first place in the United States. In the event, the group of the fifteen largest commercial banks in Europe in 2003 (table 2) looked different than ninety years earlier, especially in the decline of the German banks and the progress of the Spanish and Swiss ones, though not radically so, with most changes being due to mergers rather than the advent of newcomers. The top position held by the HSBC Group (the second-largest bank in the world after Citigroup, of the United States), present in seventy-seven countries, is a reflection of the degree of internationalization of banking and finance at the turn of the twenty-first century.

See alsoCapitalism; Euro.

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Youssef Cassis