View from Frankfurt: A city with the gates half-open

SHORTLY after the close of trading on the Frankfurt stock exchange recently, the BHF bank announced an important capital increase. Only a few minutes earlier, just before the final trading bell sounded, a substantial sell order for BHF stock came through. The shares, which had been rising steadily all through the day, suddenly plummeted.

In New York or London, this sort of interesting coincidence would probably have had several watchdogs growling energetically. But in Frankfurt, there was not even the sign of a tail being wagged. Traders grumbled, and got on with business.

That this closed, clubby tradition is no longer acceptable in a financial centre with Frankfurt's aspirations has been recognised by the German powers-that-be. Tough anti- insider trading laws, wielded by a new federal supervisory body, should be on the statute books early in 1994, introducing for the first time the threat of prison sentences of up to three years. Taken together with the establishment in the new year of a centralised German stock exchange in Frankfurt, the beginning of a serious attempt to break the inward-looking grip of the regional exchange structure, these various steps point up the German government's keenness to see Frankfurt thrust into the big league of financial centres.

This is not just out of good, nationalist competitive spirit. There is a desire at official level to challenge London's perceived predominance in the financial markets, which means that whenever it comes to negotiating European norms, the 'Anglo- Saxon approach' is in effect the only one on the table.

These frustrations are shared by the Bundesbank. With its eye on the moves towards monetary union and the need to establish common central banking and money market procedures, the bank wants to make sure that it has more than an equal say in how things should be done.

To this end, a bolstering of Frankfurt's ability to compete as a European financial centre would strengthen the German negotiating hand. It is partly with this calculation in mind that the Bundesbank decided earlier this month to adopt two significant money market reforms: substantially reducing the minimum reserve requirements that commercial banks must hold with it; and extending the range of open-market instruments by offering short-term liquidity bills.

But the fact remains that the Bundesbank, unlike the government in Bonn, is still deeply unsure about just how competitive and open it wants Frankfurt to become.

The halving of the minimum reserve requirements on commercial banks' deposits to 2 per cent - liberating over DM30bn ( pounds 12.6bn) of reserves previously lodged interest-free with the Bundesbank - illustrates the ambivalence. The commercial banks welcomed the move as improving their ability to compete with other European centres where reserves are non-existent, as in Luxembourg, or much lower, as in London. By the end of last year it was estimated that German residents held between DM200bn and DM300bn in mark accounts outside the country. Substantially reducing the German banks' competitive disadvantage represents a step on the way to allowing a real money market to develop in Frankfurt.

But the sort of improved money market the Bundesbank appears to have in mind is one where it can have its cake and eat it. Underpinning its thinking are the prevailing misgivings among the central bankers about the mark winning too high a profile as an international reserve currency, with all the speculative risks this entails.

By improving the attractiveness of Finanzplatz Frankfurt, the Bundesbank is mainly interested in building up a money market in marks that it can control and manage, rather than leaving it to the vagaries of foreigners. It is still thinking very much in local terms.

This is hardly a prospect to make London quiver at the knees. For the real question about what to do with Frankfurt, about what sort of competitive centre it wants to be, has barely been posed, let alone answered: is Frankfurt prepared to transform itself into a truly internationalised market place for Europe?

The London market does not live off the pound; its trading volume is not that of the domestic economy but of the UK plus Europe and more. The mark is certainly a stronger currency, and the German economy more powerful - which partly explains why German banks still tend to be so domestically focused - but even a more determined internationalisation of the mark market would not place Frankfurt among the leaders.

For that, it would have to open itself as a centre for transactions of every sort, with no relation to the mark. But such a prospect raises questions that deeply furrow German brows, and not just at the Bundesbank. If Frankfurt were to go towards what Germans like to call the 'pure dealing' of a truly internationalised market, then what would happen to key traditions such as the long-term financing of industry? Would it be killed off by the bacillus of Anglo-Saxon short-termism?

'The over-riding question is whether it is desirable for Germany that Frankfurt should try to be as international as London,' said Rudolph Duttweiler, who recently left London after 10 years to head Commerzbank's global trading in Frankfurt. 'Until that is properly answered, the reticence that one feels, be it in the Bundesbank, the commercial banks or the big corporations, will persist.'

(Photograph omitted)