EMU the key to City's future

THE MONDAY INTERVIEW; Ronaldo Schmitz: Wealth warning: The invasion of London by foreign banks has significantly raised the level of strategic influence they wield
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The Independent Online
The City will suffer if Britain stays out of European monetary union. The warning is delivered with a faint smile, but Ronaldo Schmitz's words carry cold calculation. "We would not anticipate a major shift of business out of London, at least not in the short term. But things will be much easier if the UK joins, because we shall not have to review our decisions, strategy and policies."

Mr Schmitz, 57, chairman of Deutsche Morgan Grenfell and board member of Deutsche Bank, is one of the growing band of senior foreign financiers who have lately adopted London as the centre of their investment banking operations. Their influence is for the most part still discreet, but increasingly powerful within the changing landscape of the City.

Deutsche's decision last year to centre its global investment banking operations in London around Morgan Grenfell, which it had bought at the end of the Eighties, marked a watershed for Germany's most powerful financial group. All the large German banks have followed suit.

A potent combination of fate, in the case of Barings, and remorseless competitive pressures from big-balance sheet houses, has seen an unprecedented number of British merchant banks, the leading broker and a fund manager, fall to the foreign invaders. Their significant investments have bolstered London's position as Europe's financial capital. But the size and speed of the shift in the balance towards foreign ownership has fuelled concerns about who controls the City's future, should circumstances change.

EMU could be one such event. Deutsche took its decision to focus on London well aware of Britain's Euro-angst, but confident that, as has usually happened in the past, it will not want to be left out. "I think the process under way in the City will also play a role in defining the UK's attitude towards EMU," says Mr Schmitz.

Deutsche put immense efforts into building up Frankfurt as its investment banking centre. But by 1994 it finally conceded it could not work, a decision whose implications reverberated throughout the German business establishment.

"Investment banking is, culturally speaking, an Anglo-Saxon business, driven by impulses from the most inventive financial culture in the world, New York. In building our operation, we realised the importance of using elements from an investment bank, Morgan Grenfell, and not those from the bureaucracy of commercial banking.

"It is also easier to speak English in London than Frankfurt, and to attract the talent that is crucial if you want to grow quickly."

With acquisitive foreigners still rustling their chequebooks around the City, those alarmed that Britain is losing control of its financial capital are unlikely to find comfort. But with that cultivated internationalism and fluent mid-Atlantic English typical of so many top German businessmen, Mr Schmitz, who spent several years in New York for his previous firm, the chemicals giant BASF, feels chauvinism has little place any more in truly global markets. "In the old days the customer paid a lot of attention to where a product came from. 'Made in Germany' was important. But the Japanese were the first to convince consumers that it is not important where something comes from, but the brand quality."

He added: "The great advantage of Britain is that it has traditionally been good at absorbing elements, capital or people, from the outside, and making them feel part of the establishment, integrating them for the benefit of the country. In 10 years, this latest foreigner influx into the City will have been shaped along Anglo-Saxon traditions and lines, and with it the influence emanating from London will increase."

But even if belatedly, corporate Germany has been changing too, waking up to the cost advantages of producing abroad and raising finance on international capital markets. This has forced once conservative banks like Deutsche to seek foreign pastures and inspiration.

Having sat around doing little with Morgan Grenfell for several years, Deutsche's decision finally to use London as the springboard for its ambitions to be in the premier league of global investment banking powerhouses unleashed a dash for growth that has frayed not a few tempers in the City. Since the beginning of the year, Deutsche Morgan Grenfell has hired 120 people, most of them in London, and many of them heavy hitters. Complaints from rivals about excessive chequebook poaching grew louder. "When we first made our announcement in October 1994 about investment banking, we could not have realistically entertained the ambition to hire 120 people. But then things in the market happened that tended to facilitate matters. When we saw the opportunity, we grabbed," said Mr Schmitz. "We strongly resist the chequebook accusation."

Not all has been sweetness and light back in Germany, as the big egos of the investment banking world, and their infinitely higher remuneration packages, clashed with the staid hierarchies of Frankfurt. Resentment was rife. But Deutsche had made its choice. "It was impossible to build an investment bank and maintain the German remuneration system, so we put the Frankfurt investment bankers on a more adequate compensation. But there were other shocks. You are not just talking about introducing different cultures, but also very different skill levels, people who are used to working at very high, demanding levels."

In its global ambitions, wanting to measure itself against the Wall Street giants, Deutsche is far from alone. Its domestic rival, Dresdner, wants to do the same with the help of Kleinwort Benson. Then there are SBC Warburg and UBS, ING Barings and ABN Amro, not forgetting the British contingent of NatWest Markets, BZW and HSBC.

All are regrouping in London for the assault. But they cannot all succeed in a such a ferociously competitive business.

"You need three things to win. A top rating, a strong capital base, and talent. Since we have the first two, we have been concentrating on skills."

Moreover, it is not a battle of equals in Mr Schmitz's view, because of the vital importance of the client base. "Deutsche Bank has traditionally been close to the big corporations of the world. We can tap into this strong position. The British banks, too, have traditionally had international corporate relationships. But the Swiss, the Dutch and the French don't have this. It is very tough to break into new clients."

John Eisenhammer