UK banks leave a gap for rivals

BARCLAYS CAPITAL, the debt arm of Barclays Bank, is the sole UK entity left flying the flag for Britain in the race to build up a business in euros.

British banks have all but lost out on the commercial prospects offered by the arrival of the euro, chiefly because they have sold out or dropped out of investment banking.

The vacuum created in the City by the end of a domestic investment banking business will be seized on by continental and US banks active in the City. Many are already courting large borrowers for deals in euros, with French bank, Paribas, leading the pack.

Although the nations participating in EMU were officially named yesterday, the single currency will not exist until 1 January 1999. But Paribas has already established itself as an issuing house for bond deals denominated in euros.

Despite the likes of NatWest, Lloyds TSB and Midland being left to pick up the crumbs, the prospects for banks based in the City may be bright. Graham Bishop, adviser on European financial affairs to Salomon Smith Barney, has been closely involved in the City's preparations for the euro, in part as chairman of the London Investment Banking Association's EMU Committee. He forecasts a "golden scenario" for London securities houses. The Eurobond market will take off, growing by three-quarters, he calculates. His conclusion is that EMU will open up "massive new opportunities to London-based investment houses".

When the euro arrives on 1 January it will be the biggest change to European financial markets since foreign exchange controls were lifted in the 1980s.

At a stroke, the German mark, French franc and other currencies disappear. Holdings of British pension funds in European currencies will convert to euros overnight. It will be a remarkable moment, which will have far- reaching consequences for the City and how it does business. For institutional investors, the country where a business is based will become less of a consideration than the quality of the business. Investment will become driven more by a sector and credit approach.

Robert de Metz, who heads Paribas's London operations,notes than in the US, two-thirds of companies' external funding comes from securities markets, including bonds and equities: banks only supply a third. In Europe it's the reverse: banks grab two-thirds of the market, and a third from equity and bond issues. Europe could shift to the US position because of EMU. "Unification of the currency will bring much greater liquidity to European debt and equity markets,"says Mr de Metz. The bank has structured its European equities research on a sector basis, rather than by country. He expects the changes to occur far faster than most people expect or are ready for.

While the majority of City firms have matters in hand for the changeover, the Securities and Futures Association, the City's watchdog, is concerned about the lack of progress at some medium-sized firms, including some institutional investors. The Bank of England also recently criticised some institutions for failing to prepare for the practicalities of the euro.