BIG BANK MERGERS IN BRITAIN

Dominion, Volume 12, Issue 44, 16 November 1918, Page 3

BIG BANK MERGERS IN BRITAIN

REASONS FOR. AMALGAMATIONS

INSTRUCTIVE STATEMENT BY SIR EDWARD HOLDEN

[From time to time the cablegrams from London have kept the public in touch with important de-. velopments in banking circles. The true significance of theso movements has never -been fully explained, although the general and obvious deduction to be drawn was_ that the consolidation by merger of the great banking interests in 'Britain was dictated by tho necessity cf presenting a solid and united' front to the difficulties and problems of the afterwar, period of reconstruction. In--terest should therefore attach to-the following survey of the financial outlook by Sir Edward Holden, chair- ■ man of the London City and Mid-' land Bank, and one of the leading authorities in finance, in his address to tho shareholders of the bank at an extraordinary meeting held for the purpose of approving the agreement for the amalgamation of the London Joint Stock Bank. Ltd., with tho London City and Midland Bank.] Sir Edward Holtlen said:— There has been a series of amalgamations during the 'last nine months between large banks, and the question is naturally asked: Why have the.'banks within such a short time effected such important amalgamations? As you are aware, the London City and Midland Bank have consistently pursued the/policy of amalgamation since the year 1888, and for us it is only a continuation of our policy to seek to 6btain a union with the London Joint, Stock Bank. Five years ago an attempt was made to.bring these two banks together, but it failed on the question of price. But, as regards, tho general question, several important leasohs may be advanced. In the first place, bankers are confronted with the problem of 'restoring the industries of the country after (he war to the condition. which they previously occupied.

The concerns which have been converted from peace production into munition factories will, have to bo reconverted to their original condition.

In : the case of a number of those branches of industry which have continued in their pre-war occupation, such as those' producing for. home consumption and for export, the plant and machinery have been allowed to run down, and it will be necessary to renovate them and bring them up to date, and even to a better condition than before the war. Large sums of money will have to be found for the purchase of raw material, and large sums will also be required to improve the trade position generally. It is estimated that no less than 300 millions sterling wilFbe required • for these purposes, and credit will in some way have to be .created for that amount. How this credit can be created I will deal with later, but large and ■powerful banks are indispensable for the purpose. German Banking. The second reason why these amalgamations have, taken place is that every effort should be made to retain' London as.the financial centre of the world. One of our principal competitors in the future will be Germany, and just as the CVsrmans. made great preparations for the war by increasing theiir armies and Bupplying themselves with large amounts of gold and munitions of war, so they are -at. the present time making their preparations for after-war trade. These .preparations take the form i.ot only of a continuation of the. Darlelniskassen, but also of :enlarging and strengthening their Joint Stock Banks by amalgamations and by the opening of new branches. ■ ' • • ..

As a result of their amalgamations it is estimated that- the Deutsche Bank at the present time have over 200 millions sterling of deposits,'the'Disconto-Gesell-Bchaft over £00 millions, ;ind the Dresduer over 170 millions, in addition to which it must be remembered that each of these three banks is affiliated with a* number of smaller banks over which they exercise direct control, and also a number of banks with which they are indirectly connected. For example, the Deutsche Bank is at the head of, and directly controls, a banking group consisting, of 25 banks with total deposits of about 450 millions, while, the group of the Discouto-Gesellschaft is made up of v 1-1 banks with total deposits of over SOO millions.

The Dresdner Bank also have a number of affiliations.,. Theso. aro the. three principal German banks with which we Bhall have to compete, and to do so successfully we must meet them on a fair equality of size.

By the amalgamations which, have taken place in this country our banks have grown at the present time, excluding affiliations, to . a magnitude measured by 300 millions'of deposits in the case of our own bank when this ment is completed, 243 millions for Lloyds Bank, 230 millions for the London County and Westminster and Parr's Bank, 212 millions for Barclays, and 17G millions ifor the National Provincial" and Union Bank of England. .- English Bankers' Attitude. It has of course.been alleged that we entered into this war without having made sufficient, preparation, but .the" bankers have' been determined, notwithstanding strenuous opposition, that it should not lie alleged against them that they have not made full preparations for meoang the international trade competition which will arise after the war, and that they have not done everything in their power to retain London as the financial centre of tho world. Criticism has been directed against the way in which the Joint Stocbßanks do their business through their svstem of branches, and if is further ulleged . that the industries do not get as much assistance os was.given by the private banks in the old days. Criticism of this kind cannot he adeouately met except by going somewhat in detail into the hiscory of the development of tho banking system of this country from the year 1800 to the present time. I think the facts of history will support me, that, notwithstanding the great difficulties through which we have passed, the hanks have been able to meet tho industrial and commercial demands made upon them, and their ability to do so has been m a \great measure owing to the system.of amalgamation. No one examining the effect of theso amalgamations can come to any other conclusion than that the banking system'x was strengthened by them, and was the more able to support the commerce and industry of the country. This record justifies me in saying 'that tho system of bank amalgamation has proved of tho greatest advantage to the- wholo of our industry and commerce. Our Trade Rivals. I now come to the present time, and 1 direct my view forward to the future. There, has never been, u parallel to tho present position in the world. Speaking of tho domestic sido of. the question, if this country is- to restore 'and gradually improve her financial and industrial position,' it can only be done by increasing her exports to a larger amount than they have ever been before. But just as we must put forward every oxertion to bring this about, we must not be unmindful that other countries will endeavour to do tho 6ame. Wo shall live in a world of keen competition for export trade. We shall only be m a position to win in tho struggle and to increase our trade if our banks are not less big and powerful than those of our trade rivals.

'' tarl-or in my observations I stated that I would deal later with the means to be adopted for creating the credit which will be required for the purposes of our domestic and foreign after-war trade. If we can import gold and use that gold as the basis oft which credit can be created our difficulties will not be so great, but, as most other countries will be in a position similar to ours, it follows that they may also require to use gold for the same purpose. Gold Production, At the present time America, 'Holland, 1 Japan, and Spain have- really more gold than they reauire, and at is concoivable

that some of their gold may gradually flow away to our country mid to countries «in a position like ours. In addition to the gold in foreign countries, which we might hope to draw upon, we have,-pi course, tho gold coming from the South African 'mines, amounting last year to about 38 millions, and the gold from other parts of the Empire amounting in 1917 to about 18 millions.

Tho total gold production of the world in 1917 amounted to 89 millions, against 91 minimis in 1916, nearly 97 millions in 1915, 9i!.V millions iii 1914, 9-11 millions in 1913, and 9G millions in 1912. There will undoubtedly bo a great demand for gold after the war, and when the South African gold is again offered for sale in London wo should nt all costs retain it .in this country and not allow other countries to take it from-us as was doiw before the war. Wo repeat that if gold can be .obtained matters may be arranged without much difficulty, but we must not overlook tho fact that tho output of gold is diminishing in consequence of ,tho increased^ cost of production, and wo may be called upon lo auopt some measures to, assist production and maintain the output at a high icvel.

If, gold cannot be obtained the currency note, Die Hank of England note, and the jjank of England balance wili have to be used to take tJia, piac« of gold, that is to say, large advances will have to be made by the banks, such advances .win create credits, and tho cash balances] which will have to be used as reserves for those credits, will not be gold, but will be the currency note, tlia Dank of England note and the Bank of England balance. Let us look at what is happening elsewhere. Other countries' havo created separate institutions which will be used to assist in meeting after-war difficulties by . creating, credit, such as the Darlehnsknssen of Germany and the War Finance. Corporation of tho United States. The capital of the latter institution, amounting .to 100 millions sterling, will be held by the Government, and the reserve to commence with will be an amount corresponding to the paidup capital, in addition to which they aro proposing to create loans and consequently credits to tho extent of 600 millions sterling. This institution has been created for the purpose of providing credit to assist in war finance, but if it should be necessary to extend its life for the purpose of assisting trade after the war, no doubt this will be done.

■ In our country we shall be faced with the. proposition of a Government bank Ming established or of relying exclusively on the largo joint stock banks to carry through after-war operations. It teems to me that, if the Joint Stock bankers will take a broad view of this question by making liberal advances to those firms which are managed with ability and honesty, and which produce good balance-sheets, we might be able to carrv our industries through the difficult times without the establishment of any Government institution. But we must not overlook the' fact that the balance-sheets of firms and companies 'and their profit and loss accounts will have to be carefully examined in the future, because there will be a great danger that a fall m the p'rico of commodities. may lead to the profit and loss accounts being in debit instead ..of in credit. In many of these cases" excess profits duty will have been paid on profits that wero really due to high prices, and proper consideration should be given to them if prices fall and profit and loss accounts begin to show debit. V Foreign Banking. At our annual" metings, before the outbreak of war, we called attention from time ,to time to the financial 'pr'epara'tions which Germany was making and to the manner in which she was accumulating gold. Now we call attention to the fact that the Germans are putting their banks together in order to. enable them to begin a financial war when the actual fighting ceases. Wo bankers see wihat they aro doing, and it has been a question whether we should continue in the position which we held before the war or whether we likewise should begin to make preparations similar to the preparations which Germany has made. Tliere'is a difference of opinion among English bankers on thi question of foreign banking. One class of banker believes that the proper course is to open abroad branches of their own bank, in' which case they'will compete with the foreign banks in their own country. Another class believes that the better policy is to work from London in conjunction with the foreign banker, and not to go into direct competition with him. In the former case, i.e., opening branches abroad, it might mean that the deposits of our English depositors, might be used to _ aid particular trades abroad which are in competition with our own people. ' ' y The Financial Centre, It is particularly questionable whether it is advisable at the present moment to open foreign branches which may .bo called upon to assist in the reconstruction of the countries in which they aro situated, at a time when we all know mat all our resources will be required at home to reconstruct our own industries and manufactures.

Which; policy is the better for. retaining London as the financial centre? Let me explain again what we mean by Lon-' don being the financial centre of the world. Traders of different countries have gradually come to the conclusion that tue trade of the world can be most economically financed by a kind of unwritten agreement that if they sell goods in any other country those goods should 'be paid for at ono centre, that is to say, as bills of exchange ai:o drawn against goods all those bills of exchange should •bo made payable at that agreed centre. Consequently you have the sellers of tho goods in different countries receiving payment at the central point, and tho buyers of the goods making payment at that, point.

London has been chosen as the centre, and the settlements are made, on tho one hand, by tho sellers drawing bills on London, and, on the other hand, by the 'buyers of goods buying bills on London. Consequently wherever the sellers of goods abroad require to sell bills there are always, except in extreme cases, buyers for these bills to be found.

1 would like-to say hare unit all the arrangements involved in these transactions aro made by the. foreign bankers and the bankers of- London, and our fear is that we may mako the foreign bankers unfriendly towards w by opening branches in their oirn countries in competition with them, and fnat wo may drive their business to Germany or New York. If this should ultimately happen, the opening of branches abroad by English banks will have acted prejudicially against Loudon retaining her position as tho financial centro. /■■ A Bill Transaction.Now let me take an example of one of these arrangements. The, foreign banker arranges with the English banker that either he himself or his customer may draw to an agreed extent on the London banker for tne purpose of financing 'tho imports into his country. Tho foreign banKcr, who has made tho arrangement witli the London tanker, enters into an undertaking that before such ibill becomes duo he will provide tho London banker with tho means to pay the bill, lie will probably do this by buying bills drawn on London. These bills may be drawn in respect of the exports of his, own country to London, or drawn against' goods exported to any other country, but payable in London. Thus tho transaction is completed.

Of course merchants abroad may sell goods to traders in another country and obtain payment by drawing a bill on the buyer without the intervention of a bank, but, in order that tho bills may become more easily negotiable, the trader in the purchasing country usually arranges with his 'banker to open a credit with a London banker against • whom bills may bo drawn. The seller of the goods thereupon draws on tho London banker, sells the bills to his own banker, and thus obtains tho purchaseprice of the goods. Tho London banker accepts and pays the bill it maturity on the undertaking that tho banker to whom ho has granted the credit will hold himself liable for the amount. ■

1 give this illustration to show tho extent to which London is used as the financial centre, and to show how London is supported in that position 'by the foreign banker, and how necessary it is to cultivate and maintain the good feeling of foreign 'bankers towards this country. I ask tho question: If the bankers of this country open branches in foreign countries in competition with the foreign bankers, will that procedure

tend to retain London as the financinl centre of the world, or will it tend to damage London's position? Further, it we retain the friendliness cf these foreign bankers, they will show greater interest in their clients dealing with traders in this country than they would show in case we became unfriendly by going into competition with them. We must remember that in retaining London as the financial centro we must be prepared after the war to meet any extra demands for the purposes of trade, which may be made on us by the foreign bankers, and that is one of thc\ most important reasons for seeking to make our banks much larger than they were before tho war. The feeling that it is necessary to increase the size of the banks is growing in all countries. Amalgamations, as I have said, aro taking place in all parts of tho world, notably in Germany, America, Sweden, Canada, and Australia. The cry in nil countries is "Make the banks larger and stronger.". This can only be done as it has been'done in our country, by amalgamations.

The Press, bankers, and business mqn of Germany, regard the amalgamations which have'been going oil in tho banking and commercial world of this country with disfavour, for tho reason that they see, as some cf their papers admit, that the bankers are shaking off their conservatism mid drawing lessons from tho experiences of the war, and the Gei'Maiv fear that the additional strength obtained by these amalgamations will enable our banks to build up British industries and make them more formidable competitors in tho markets of ' the world than hitherto. Manufacturers and Merchants, I come now to the domestic side of this question The Chambers of Commerce have been afraid that under the'system of amalgamation manufacturers and merchan'j; would not get the same assistance from the amalgamated bank that they got previously from the two separate institutions. We must remember tiliat banks have to make profits in the same ivav as any other business, and that the deposits 'of two banks which are amalgamating cannot be absolutely locked v.p They must he lent, otherwise the bans will liot make a profit, and in my opinion the one bank,- which has been made up of two banks, will be able to lend quite as much or even more money than the two banks lent individually. If the loans are continued by the joint banks to the extent that they were made by,.the separate banks before the amalgamation there can be no cause for complaint by the industries, but we are hoping that the industries will get even better accommodation 'if their demands legitimate. Experience has shown tlus to be the case. Criticisms Answered. It has been alleged very strenuously that amalgamations cause competition among the banks to become weaker. Any sucli statement is talse, and without any foundation whatever. To .prove this f say that already there are very few districts, if any, in which other banks have not taken steps to establish new branches where the number of banks lias been recently reduced by two banks going together, and I would venture to say that, instead of competition Jjeing weakened competition between the bauics in future will bo much more severe. There is no cause whatsoever for opposition to amalgamations on this account.

Following on the cry of decreased competition we have had the/cry of interlocking directorates. America has been pointed out as Ohe country where interlocking directorates have proved injurious, and the conclusion has been drawn that interlocking directorates will be created here and prove equally injurious. America is a great country. To develop it she has had to establish industries. She could not build up her industries- without establishing many new banks. She had not sufficient men who understood banking, and therefore these new banks had to be directed and managed by men engaged in the banks already established. In this waymeu became directors of scveraf different institutions, but such is noli the case here. tWe are a small country, and we arc an old country, and we can find gentlemen sufficiently qualified to be directors without, taking the directors of any other bank.

As to the clangers of a money trust, what precisely is meant by the term "Money Trust?" Presumably, as applied to banking, it is the concentration of deposits in the hands of ono bank, ■and the inference is that the directors of that bank will misuse the money which their depositors leave with them. This is a very serious statement to make. The directors of this bank will never go into any rings,, and they will never misuse the funds which are entrusted to them. Of course, we aro expected to make some profit from our trading! Seventy-soven millions of our advances are lent to our industries, and those who complain of tho.danger of a money trust will acknowledge that this money is pronerly lent. We hold nearly 40 millions' in "investments in Government securities. Is this indicative of a money trust? Euirther, we are lending an additional 50 million* to tho Government through the Bank of England or otherwise. Is. this lending indicative of a money trust? There is nothing in tho nature of a money trust in our establishment, and there never will be. Our business is legitimat8 j business, and the cry of "money trust'' as applied to our institution qr to tho other banks is absolute nonsense. Wo cannot have interlocking directorates in this country because it is against the practice of the banks for a director of one English bank to be a director'of nnodher English bank. Tho banks a:„ against rings. This bank particularly is against rings, and in no.circumstances would we bo induced to go into one. Will the ■ opponents of amalgamation raise the question that it is against the interest of tho country to have a concentration of resources? We must remember that we aro a small country, and that.we derive our deposits from a' population of 47 millions. America has 10a millions. Germany has a ponulation of 70 millions, and consequently they have a larger amount of deposits. The deposits of this country can bo more eilcctively lent if they are connenirnt»d than if they are scattered. By. being concentrated they can be traiisfr-rreil moro readily from those parts of the country where they are not wanted to those parts were they are required. It would be impossible to make these transfers if tho deposits were not concentrated.