A historical perspective on the changing world order in banking and the irresistible rise of banks from Asia, and China in particular
Over time, banks reflect the state of their home economies. Likewise, economies also mirror the effectiveness – or otherwise – of their banking sectors. This is not an argument for Keynesian solutions but an attempt to correlate the developments of banks and their economies and assess how they have evolved and are likely to emerge in the future.
The belief that ‘the West’ – essentially the US, Western Europe and Japan – ultimately knows best is now being challenged. A new era built around multiple sources is emerging, and the West’s dominance is receding as Asian countries – especially China – and others take up the challenge. Looking at this big picture from a historical perspective shows how banking has changed over the past 20 years and also provides trends and insights into the future.
There are many more than 1,000 commercial banks across the globe, but The Banker’s annual Top 1,000 listings capture the vast majority of the world’s major banks. In 1990, banks from the West were omnipresent, accounting for nearly 80 percent of overall capital and 80 percent of the Top 1,000. Led by Europe with 444 banks, the US with 222 and Japan with 112, the Western bloc accounted for 778 banks (800 the previous year) in the listing, with Asia (excluding Japan) accounting for only 93.
By 2000, new patterns were emerging with US banks asserting themselves in the Top 20 – Citigroup and BankAmerica Corporation headed the list and the total number of US institutions in the Top 20 had doubled to four. Japanese influence had fallen, it had seven representatives, whilst France, China and Switzerland each had two.
Although Western banks still dominated the Top 20, the overall global picture in 2000 was already shifting; the West’s position had declined significantly. US representation in the Top 1,000 slipped (from 222 in 1990 to 199), as did the number of European banks (dropping from 444 to 388 – 288 of which were European Union banks). The Japanese, meanwhile, rose slightly (up to 116), bringing the Western total to 703, a 9 percent decline, compared to 778 a decade earlier. Asian banks (excluding Japan) however, were clearly expanding, rising to 150 from 104 in 1990. Meanwhile the number of banks from BRIC countries (Brazil, Russia, India and China) was beginning to show an increase, from 33 in 1990 to 43 in 2000, with much more growth to come.
Ten years on, today’s ranking reflects both the continuing decline of the banks of the West along with the rise of those in Asia, particularly China. Down from 703 in 2000, the West had only 586 banks in the 2010 list while Asia had jumped from 150 in 2000 to 224, an increase of almost 50 percent. Within that, the number of Chinese institutions had risen from a modest 9 in 2000 to 84. In The Banker’s 2010 Top 20 banks, five were from the US, four from the UK, four from France and three from China.
The key conclusions we can draw from these trends are that the banks from the Western bloc are in decline, whilst Asian banks are expanding rapidly on the world stage. China is a growing banking force now that its economy has become the third largest in the world. Collectively, the BRICs are on a solid growth path – their combined representation rose from 33 in 1990 to 148 in 2010. In short, a new world order in banking is emerging with the traditional dominant players in the post-war period, the Western banks, no longer playing the role they were. Just as banks in Asia, China and the other BRIC states are on the rise, other regions are also growing and providing significant banking institutions. The oil-rich Middle East had 89 banks in the 2010 listing, up from 58 in 1990, and with the rapid growth of Islamic finance, banks from this region are on an upward path.
Likewise, in an increasingly globalised world other areas are expanding their influence. While Latin American banks decreased to 44 in 2010, down from 50 in 2000, banks from the rest of the world – from countries such as Nigeria, Kazakhstan and South Africa – have an increasing role to play in the rest of the world, and they accounted for 57 banks in 2010 compared to 20 in 2000. The financial balance in the world is shifting.
Looking ahead, the world’s structure will be quite different as the developing countries of the past are expected to move ahead and overtake – in some respects – today’s developed world. Credible forecasts suggest that by 2032 the share of global GDP of the BRICs will exceed that of the G7 (US, Canada, UK, Germany, France, Italy and Japan) while Asia’s population will remain around 60 percent of the global total.
The global financial crisis has clearly demonstrated the inadequacies of current systems, and the bubbles that have emerged have been blamed on regulators, governments, greed, bonuses, and just about everything else. And just as the recent fiasco over Dubai’s debt standstill and Greece’s debt has been described as a mess, the global financial crisis is a huge problem with few easy solutions. The International Monetary Fund noted recently that public sector gross debt is expected to explode from an average across advanced economies of 78 percent of national income in 2007 to 118 percent in 2014. The deficits and debts, and the structural impact of reduced tax revenues, as well as increased unemployment cannot be swept under the carpet. The advanced countries are in for a painful time ahead. The crisis has caused damage to emerging economies, the BRICs and China too. But because they have been less exposed and their economies less leveraged than those in the West, they don’t have as much debt and, with their high growth strategies, they have morecause for optimism.
The crisis has accelerated the new world order in a number of ways and will continue to do so. The West will decline as it has done, though probably at a faster rate. Helped to some extent by sustaining lesser damage in the crisis, the emerging economies will become stronger in a multiple-source world. The global financial system will not be dominated by the US and Western Europe as in the past but will have more sources of power and a larger number of serious players. The global game is changing significantly and the new world order represents a massive shift in structure.
So what will the listing in 2020 look like? Many of the banks in The Banker’s 2010 Top 20 will still be there in 2020, but the dominance of Western banks will be in further decline. The number of Western institutions in the Top 20 is likely to fall to 14 or less, with Japanese banks unlikely to be among them. Of those coming up, Agricultural Bank of China, Brazil’s Itau and Bradesco and Russia’s Sberbank are likely to be pushing for the Top 20 spots.
The 2020 Top 1,000 forecast will therefore represent a significant shift from West to East. These core assumptions indicate that the West’s share of the Top 1,000 will fall to 500 or just half the listing compared to nearly 80 percent of it in 1990. Asian banks will accelerate their influence providing a forecasted 300 banks in 2020, almost three times more than in 1990. China’s banks could be expected to number at least 100 with the BRIC bank’s total, forecast conservatively, to grow to 200.
Looking forward to 2030, it is likely that India’s banks will have expanded further and that Asian growth as a whole will have continued unabated. By then, the number of Western banks in the Top 1,000 is likely to have dropped to around 450 while Asia’s total could have risen to 350, providing much more of a balance between the two regions.