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The failure of the proposed merger between Deutsche Bank and Dresdner Bank ought to have signaled the end of the merger mania among the world’s major banks and to have cautioned banks and other enterprises that big does not mean best. But the message does not seem to have seeped through to some people at the top of the banking world.

It has been long argued that Japan has too many banks, but Japan has many fewer banks than the United States. Japan may well have too many bank branches in a world where Internet and telephone banking will play an increasing role, but, more important than numbers of branches, the basic problem has been that Japanese banks made loans to companies without proper assessments of risk and without giving adequate thought to profitability.

The wave of Japanese bank mergers will only help solve Japan’s banking problems if those two problems are tackled. Mergers should lead to a reduction in the number of branches, but this will be difficult to achieve because it would inevitably lead to a high level of redundancies. Much of Japan’s retail banking can and should be left to the major regional banks, but they will need support from Japan’s city and trust banks. The current mergers among Japanese banks have yet to make any major impact on the regional banking scene.

Japanese banks face unfair competition from Japan’s spoiled and coddled postal savings system. There is a lot of opposition to the privatization of the British Post Office, but this is mainly because rural post offices have become increasingly important to country dwellers as other services and local shops have withdrawn from remote locations. This situation is quite different from that in Japan, where the Ministry of Post and Telecommunications appears to have a huge and inordinate influence on Japanese politicians and seems able to ignore the wider national interest (e.g., over fees for access to the NTT network), even when the Japanese prime minister goes to Washington to seek U.S. support for the Okinawa summit and should, in the interest of Japan’s information-technology development, make substantial concessions to U.S. demands (which are supported by the Europeans).

Japanese banks are understandably unpopular with the Japanese public. They have had to be rescued with resources provided by the Japanese taxpayer and have been publicly humiliated. They made serious mistakes (but the system run by the Ministry of Finance was a major contributor to and perhaps the main cause of the problems they encountered). Another important contributing factor has been the failure of Japanese corporate governance. The banks have rarely faced serious pressure from shareholders to achieve greater efficiency and clear up their malpractices. The “keiretsu” system of group shareholdings protected them from such pressure. The principle of most group companies seems to have been “we won’t interfere in your affairs if you continue to lend to us and don’t interfere in our affairs” or, to put it more crudely, “I’ll scratch your back if you’ll scratch mine.”

Fortunately, the keiretsu system seems to be breaking up, but it will be a long process, and Japanese banks still apparently don’t have to worry about shareholder value. Their main concerns appear to be keeping the authorities sweet and ensuring that the banks avoid nationalization and bankruptcy.

The American banks now seem to be dominant in the world financial scene, followed by the Swiss and the Germans, but hubris can lead to complacency, and history teaches that what goes up also comes down. After all, not so long ago Japanese banks in London seemed to dominate the European financial scene.

The British banks have been forced to concentrate to a considerable extent on the home scene. The big four have faced increasing competition from newcomers, including building societies and banking subsidiaries of insurance companies and supermarkets. There has also been significant growth in telephone and Internet banking, which has helped inject some very desirable competition. The major British banks have encountered much justified criticism for cartel-like practices, excessive charges, incompetence and arrogance.

National Westminster Bank, perceived as having lost its way, was forced to accept a takeover bid from the considerably smaller Royal Bank of Scotland. The costs of the battle between the Royal Bank of Scotland and the Bank of Scotland and of National Westminster Bank’s vain defense will have to be paid from shareholders’ funds, although shareholders had no real say in the battles. The only gainers will be the merchant banks and law firms who charged what in the view of many were excessive fees.

Lloyds TSB has managed, through mergers, to win a pension holiday of over 15 years. This means that it doesn’t have to contribute to the bank’s pension fund for many years to come. The trustees of the fund did not insist that part of the excess should be used to benefit the bank’s pensioners, but the trustees are for the most part employees of the bank and do not want to lose their jobs!

The British bank that has rightly drawn the greatest amount of criticism is Barclay’s. To most observers, Barclay’s has behaved with singular arrogance and insensitivity. Having taken the lead in increasing charges for ATM use, it then decided to shut down large numbers of rural branches without adequate consultation. These closures left many country villages without banking facilities. At the same time, it announced the payment of what to most ordinary people seemed obscenely large payments to its chairman (a former permanent secretary to the British Treasury) and its new Canadian chief executive. It also, with singular ineptness, launched an expensive advertising campaign claiming that Barclay’s was “Big” and that bigness was all.

Corporate governance in Britain still has a long way to go before it leads to democratic shareholder power, but in Japan, where things are gradually beginning to change, effective corporate governance seems even farther off.

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