The credit crisis hit Europe harder than any other continent. Both Greece and Ireland required bailouts from the European Union, while Spain and Portugal still have significant problems to overcome. In the UK, huge deficits need to be paid back, and Italy, France and the Benelux countries have also seen their economies struggle.
The credit crisis hit Europe harder than any other continent. Both Greece and Ireland required bailouts from the European Union, while Spain and Portugal still have significant problems to overcome. In the UK, huge deficits need to be paid back, and Italy, France and the Benelux countries have also seen their economies struggle.
In the banking sector, government intervention to the tune of tens of billions of euros has propped up ailing institutions. There has been no Lehman-style collapse of a European bank, although some German regional providers have fallen - but it was a close run thing. With many of the continent’s largest banks now partly or wholly state-owned, the focus has been on tightening controls while aiming to repay the huge debts they have run up.
For asset managers, however, the downturn has not been as tough as they may originally have expected. True, asset values in most European stocks fell, but in most cases, levels have pretty much returned to pre-crisis figures. The increased transparency required across all publicly traded businesses also means that managers now have more information available to them about a European firm’s balance sheet and prospects.
Providers
While there is some cross-border activity - most Dutch custodians will also work in Belgium, for example, with the same across Spain and Portugal and the Baltics and Nordic countries are often thought of as a single market, there is wide differentiation in the infrastructure of most countries and providers need to have a significant footprint in each country to be able to call themselves a European provider.
Some of the bigger players - BNP Paribas, Deutsche Bank and Northern Trust for example - are pretty close to offering a pan-European service although in most cases they will still require the services of sub-custodians in some of the smaller markets. But will new regulation change this?
There has long been a move within the European Union to harmonise financial regulation across the continent. But there have always been obstacles in the way - the UK, for example, has never been keen on anything that may harm its status as the dominant financial centre in the region.
The financial crisis, however, has brought countries closer together when it comes to agreeing on a regulatory infrastructure. While Dodd Frank and other legislation from outside the continent is going to have an impact, and Basel III is already being prepared for, moves are afoot to bring the EU countries closer in line. This isn’t going to happen overnight, and it won’t affect everyone - Norway and Switzerland, for example, are not in the European Union, but it seems that for the first time the political will is there for a harmonised regime.
Not everyone is so sure it will happen, however. “There is a possibility it will happen with the eurozone countries,” says one custodian, “but I can’t see it happening across the board. And I can also see that right now while the credit crisis is so fresh in people’s minds that there is an impetus to do something. But memories fade, and other priorities will come up over the years. I personally don’t think a harmonised regime will help European markets and I’m not losing any sleep over whether or not it will happen.”
Prospects
Europe is a mature market, and investors will continue to look for opportunities. But most agree that it’s not the environment in which large returns are going to consistently be made and the fast growing economies of Asia and Latin America are proving more attractive to asset managers.
But growth will continue, and the infrastructure of the markets keeps the countries as attractive propositions. There is still money to be made from the back office, although many experts predict that consolidation is going to continue.
State Street’s chief executive Jay Hooley is looking for further acquisitions in Europe after already snapping up the businesses of Bank of Ireland and Intesa Sanpaolo in Italy. With its European headquarters in London, and having recently won the custody and fund administration mandate from the government-run National Employment Savings Trust -a fund expected to be worth £100 billion within 30 years - Hooley says that there is plenty of opportunity.
“Most growth is tied to GDP growth and economic growth,” explains Hooley. “We’d like that, but we are also interested in the evolution of asset pools. As asset pools move from government to company sponsored pension plans... there are more things we can do.”
Hooley added that although the financial picture at the moment isn’t great, State Street is focusing on the long term, where increasing funds will see more opportunities for custodians. Margins here are slightly higher than in the US, making it a “more exciting” opportunity.
The UK
It’s the most advanced market in Europe, and probably the most competitive. But the travails of the financial markets have left parts of the UK’s financial services industry battered and bruised. With funds having to work harder to get returns, and less money in the market, the UK’s custody providers have had to up their games to gain value and remain established within the market.
Pretty much every global custodian is represented in the UK, with the largest players - the BNY Mellons, State Streets and Northern Trusts - all having large market share. There’s not a lot of room for the minnows.
Clients now have far greater focus on risk management and this is filtering down into the due diligence they place on firms. Although the downfall of Lehman wasn’t related to its custodial business, the collapse sent a shockwave through the industry and firms want to ensure their provider is financially secure and has the ability to invest in its systems and infrastructure.
But there is one potential spanner in the works. The UK’s position as the leading financial services centre in Europe - if not the world - is unlikely to be under threat in the near future, but there is an issue that has some bankers concerned. There are mutterings about a cap on bonuses in the banking sector, and already an added ‘banker’s tax’ on bonuses, which have already led to some firms complaining that they are unable to attract the highest calibre of staff.
Nordics
The separate markets of Norway, Finland, Sweden and Denmark have seen major changes since the crisis, chief amongst them being the introduction of a CCP, implemented in 2009 by EMCF and OMX Nasdaq Nordic.
“[This] has made the market more attractive from a cross border cost perspective,” Noren continues. “It might also have contributed to a safer and more predictable market even if all current European clearing models leaves a few things to be desired on that account. A related effect of CCP is that banks have developed more sophisticated and advanced risk management models, partly in response to the nature of a clearing environment but equally so in response to market supervisory powers requirements and own managements ditto for counterparty risk control. A surprising effect of the CCP introduction (even if apples not necessarily are compared with apples here)is the lowered settlement rates - an issue that is addressed by an informal CSD/Bank consultation process at this very moment.”
Nordic custodians are also having to deal with the introduction of the Target 2 Securities regulation, which aims to centralise the settlement of euro denominated securities on a single European platform by 2013. This could mean that competition for custody business will move from an inter-custodian battle to include CSDs as well - again reducing margins.
