Bankers all, but uneasy bedfellows just the same: Peter Rodgers looks at how three UK institutions are making an unlikely marriage of clearing and investment

BRITAIN'S banks are facing a culture clash as sober-suited clearing bankers are increasingly forced to live and lend cheek by jowl with high-living investment bankers.

The former make large loans to big companies and then spend their lives worrying about whether the customers will default, while the latter earn enormous fees for their banks - and bonuses for themselves - by arranging for big corporate clients to raise money from investors in the securities markets.

The conflict goes beyond style and earnings, although a top investment bank director will usually take home more than the chairman of the clearing bank that ultimately employs him.

As a senior executive in one of the clearing bank lending departments says: 'If I make a few wrong decisions on loans, I can cost this bank its capital when the bad debt provisions come in. If an investment banker raises the same amount for customers in the bond markets, the bank takes no risk but still keeps the fees even if things go wrong.'

The battle has intensified in recent months. Lending to large companies has become a buyers' market, with profit margins on loans cut to the bone. At the same time, customers are borrowing less from banks and far more from the securities markets.

Investment banking has become immensely profitable, especially when it includes all the other activities that generate fees rather than loans, such as foreign exchange, derivatives, advice on bids and deals as well as raising money for clients in the markets. Old-fashioned loans have become loss leaders to pull in ancillary business.

As a result, some of the biggest banks are experimenting with new management structures that will allow them to earn more investment banking fees without subverting their traditional corporate lending.

Bob Keen, marketing director of corporate and institutional banking at Midland, says that few, if any, international banks have made a profit from corporate banking over the past 30 years. Bad debts have wiped out the cumulative returns for all but a handful.

Not surprisingly, investment bankers are gaining more influence in bank boardrooms, raising fears on the part of some clearing bankers that if traditional lending becomes a loss leader, the resulting bad debts will come back to haunt the banks in a few years' time.

'If you get too close to the investment banking community, you could lose the expertise or even the will to maintain credit quality,' says one banker. This prompts the retort from investment bankers that lending specialists, for all their claims of expertise in ensuring loans only go to sound customers, have a terrible track record themselves - throwing billions at property and leveraged buyouts.

Each of the clearers has a different solution to this conundrum. NatWest's is the most radical. Eighteen months ago, it gave responsibility for lending to large corporate customers to NatWest Markets, its investment banking arm which also handles bonds, equities and foreign exchange. Hard on the heels of previous reorganisations, some clients complained of confusion.

Roger Byatt, deputy chief executive of NatWest Markets - and a key man in raising Eurotunnel's loans this week - says each business area regarded the other as trespassing on its patch which gave competitors an opportunity to step in. He says the new structure is a 'marriage of different cultures and philosophies that aren't natural bedfellows'. But he adds: 'We have found since we created NatWest Markets that we do feed off each other and there is a quite natural flow between the product units.' Examples of large integrated financings involving several parts of NWM include the UK cable franchises of Jones Cable Group of Leeds Holdings.

Nobody has succeeded in matching all these tensions and cultures in the past, he says. So the market is watching them closely to see if it works.

Barclays has ducked going the whole way. Last month, its chief executive Martin Taylor announced that the bank was setting up a new group to handle large customers. But it is headed by Graham Pimlott who was BZW managing director, leading to claims that it is a BZW takeover anyway.

Neil Harland, managing director of corporate banking at Barclays and a clearing banker before a 12-year spell in investment banking, rejects the idea.

'Five years ago it would be fair to say the (Barclays) commercial bank would have dominated BZW,' he says, 'but now both parties are equally strong so they come to it with less suspicion and concern on either side than some other banks have had when they've tried to do this kind of thing.'

As at NatWest, the safeguards are in the detail. One senior executive, who may be a clearing or investment banker, is responsible for the total exposure of the bank to each customer so it is evident where the buck stops.

Midland tried closer integration of investment and corporate banking before it was taken over by HSBC, but backed off, and now the clearing bank is firmly in the driving seat for large corporate business. With HSBC's backing, market share is growing rapidly.

Change is nevertheless on the cards. HSBC and Midland are looking at how to bring corporate and investment banking closer together.

Just how it will be done has not been decided, but the arguments could be fierce. There is a strong belief in Midland that experienced commercial bankers should keep the final say on lending.

Meanwhile, there is close co- ordination with investment banking, foreign exchange and also money transmission - another lucrative and low-risk area that has to be slotted into the jigsaw of managing corporate business.

Midland's corporate banking head, David Penketh, says the bank knows exactly what it earns from a client, what it expects to earn next year, and from which part of the bank. He believes the key is to organise bankers in strong specialist industry groupings who know their customers and can co-ordinate lending, investment banking and money transmission.

But not all clearers are agonising over these problems. Lloyds long ago decided against an investment banking arm and commercial bankers are unashamedly in charge.

David Harrison, head of corporate banking, says: 'I don't believe not being in investment banking has harmed our market share of the business we want to be in.'

So which of the other experiments does he find most significant? 'I will be watching Barclays with extreme interest,' he says.

(Photograph omitted)