The fuse is lit for Big Bang's second stage

John Eisenhammer recalls a traumatic year for the City; What followed were the rapid-fire takeovers of some of the City's household names

Nick Leeson lit the fuse of Big Bang Two. The explosion did not just sink one of the City's grandest merchant banking vessels, but unleashed shock waves that are still reverberating across the financial services sector.

They became caught up in other convulsions, in intense competitive pressures, in a surge for size through mergers and takeovers to maximise clout and cost-saving potential, in a push to serve a broad range of markets and products.

It is a very different City that exits 1995 from the one that entered; certainly it is more foreign, and the transformation is far from over. The shake up in investment banking still has to run its course. But it is to building societies, insurers, fund managers and retail banks that the focus of attention is more likely to turn. Big Bang Two looks like having several stages, and some have yet to begin in earnest.

Fate and fraud did for Barings. But however much the collapse was explained away as a freak happening, it crystallised the concerns in investment banking circles about whether the medium-sized houses which dominated the City had the resources to punch with the US and Continental giants. What followed were the rapid-fire takeovers of some of the City's household names by big balance-sheet foreign banks.

One of the sweeter ironies is that 1995's most spectacular failure ended the year as one of its successes. Dutch-based ING outwitted several of its better-known rivals to snatch Barings for pounds 1 and, with sensitivity, has refloated the wreck.

But where ING's absorption of Barings can already be judged a success, it is far too soon make such claims for Swiss Bank Corporation's takeover of Warburgs. The securities side, which is what SBC was really after, is thriving. But corporate finance, once the envy of City, is struggling, with morale in tatters amidst clashing cultures. One of the UK's finest franchises will look much poorer by the middle of 1996, as product takes precedence over relationships.

Warburg had tried, with insufficient resources, to take on the Wall Street behemoths, and failed. A sharp appreciation of this same dilemma prompted Kleinwort Benson to agree to being taken over by Dresdner Bank, Germany's second largest, and Smith New Court to vanish into Merrill Lynch of the US.

This leaves a heavy question mark over the remaining City independents, like Schroders, Flemings and Rothschilds. They have received plenty of expressions of interest, not least from NatWest Group, which is keen to build up its corporate finance and fund management clout, but which has missed out spectacularly on all the main deals so far.

But the sizeable family stakes give these remaining merchant banks a strong defence, and they may well thrive as focused and nimble international players among the giants, as long as they keep their hubris - and costs - under control.

Unlike Big Bang One, this has not been a top-down regulator's revolution, but rather one driven by the pressure of the street. It has been the year of the all-singing, all dancing financial services conglomerate. This has not just been in investment banking. In the retail sector, too, businesses have been merging across traditional boundaries, looking for size, clients and distribution, and the ability to offer products spanning banking, investment, pensions and insurance.

Lloyds Bank's takeover first of Cheltenham & Gloucester building society and then TSB bank was the sharpest pointer to the shape of things to come. Abbey National's hostile grapple for National & Provincial left all building societies, for so long cosseted in a world of tradition and mutuality, feeling vulnerable. Alliance & Leicester and Woolwich are expected in the New Year to abandon mutuality, converting to bank status in order to prepare for growth, while Prudential, is to move into banking. Norwich Union, in the insurance sector, appears headed in a similar direction.

The composites, led by Sun Alliance and Commercial Union, are also eyeing each other, but too many big egos are blocking the merger pathway. Perhaps, if the Lloyd's of London cloud of uncertainty hanging over the insurance sector is lifted by a settlement in the spring, then one of the giant Continental insurers, like Allianz or Axa, will finally make the long- expected move, setting the acquisition train rolling.

Even the Japanese are back, darkening the doors of City merchant banks with questions about picking up fund management businesses. The sale of Gartmore, almost certainly to a foreign house, is to be completed in the New Year and will not be the last.

The year 1995 in the City has marked by foreign invasion. But at least the surge of inward investment confirmed London's position as the world's most international financial centre, and the undisputed financial capital of Europe. For all the traumas, as the year closed, the City appeared to be thriving as rarely before.