Ask any British bank if it is prepared for Emu and the advent of the euro in 1999 and the answer will be a resounding “Yes”. However, the reality may tell a different story. A recent survey by Coopers & Lybrand shows that British banks are lagging well behind their European competitors in preparing for the euro and asserts that the banks will be putting their competitive position at risk if they do not start preparing for the single currency. “UK banks have a lot to do over the next five years,” says David Sayer, a partner in Coopers’ retail banking consultancy. “The euro will change the competitive map of banking across Europe.” Maybe so, but so far none of the big banks has shown any interest in offering retail euro products, while Barclays has specifically stated that it has no intention of doing so. Are they aware of the pitfalls that may be lurking down the road by turning their backs on Emu? “It is interesting to note,” says Guy Madewell, a partner at Price Waterhouse, “that we have a full house for a seminar organised for a bankers’ association on the euro. It suggests they don’t know it all.” Madewell argues that a lack of preparedness could, in time, bring serious repercussions not only for the banks, but for London’s position as the leading European financial services centre. It might, however, be unfair to condemn the British banks out of hand for failing to jump enthusiastically on to the Emu bandwagon. The costs involved pose a major disincentive to lavish spending on a venture that on the one hand does not directly involve Britain, and which might well end in tears for its founder members. Estimates vary wildly, but the best guess is that the big banks such as Barclays and NatWest will have to spend in the order of £250m to fully adapt to euro dealings, while some of the smaller players are looking at a £50m to £100m outlay – about 2% of the banks’ annual operating costs for each of the three years of implementation of the euro. It looks like Emu will require an expenditure of about twice what the banks have to pay to deal with the millennium bug. “Most of the banks haven’t made any provision for the euro,” says Hugh Pye, banking analyst at Robert Fleming Securities. “They are tackling the year 2000 systems problem first on the assumption that if Britain joins Emu it will be at a later date.” The government has failed to give a clear indication of when Britain would join, which can only happen after the country has given its approval in a referendum. The banks can adjust to an “in” or an “out” scenario, whereas “not for now” is clearly the least helpful option. As far as the referendum is concerned, it would be politically expedient to have it coincide with a general election, so on the surface of it there seems to be no urgency to convert all systems to euro compatibility. In fact, until the banks get a clear signal on timing from the government, there is not a great deal they can do to deal with the problem. “The banks are essentially faced with two major risks,” says Fleming’s Pye. “On the one hand the euro might be a raging success, in which case Britain would feel compelled to jump in quickly so as not to lose competitiveness. But there is the other scenario, in which it all runs into trouble from the outset due to tensions between the major partners over fudged national accounts or whatever. In that case the banks will have wasted a lot of money.” Some of the technical issues involved would encourage many a banker to slink off in dismay, hoping the problem will somehow go away. Deutsche Bank has identified nearly 4,000 different steps that need to be taken, ranging from the relatively straightforward jobs of changing customers’ statements and adjusting cash dispenser machines, to truly staggering tasks such as rounding out, since exchange rates between sterling and European currencies are sometimes rounded out to seven decimal points. A transitional dual-currency system poses a problem of accounting and settlements, as these need to be netted out instantly. All this, not to mention the massive changes required in stationery, cheque-books and staff training. Roger Brown, director of economics at the British Bankers’ Association (BBA), is optimistic: he says the banks are “gearing up well” and will be in a competitive position to service their “wholesale customers”. However, it is no secret that little if anything has been done to prepare for an eventual euro demand by retail or small business customers, who account for the bulk of all British banks’ business. Gearing up for a euro foreign exchange market is not an operational problem: basically all the banks need to do is create another currency, in this case the euro, on their foreign exchange systems and delete the lira, peseta and so on. But nearly half the banks within the EU, excluding Britain, believe the euro will bring a decline in operating costs, while tougher competition will push margins down, so the chief beneficiary will be the customer. It stands to reason that if a European bank has access to a cheaper source of funding in the euro interbank market, it can offer a range of savings products at more competitive rates and undercut its British rivals. With an aggressive advertising campaign, this fact could eventually filter through to the relatively sophisticated British retail customer and there is nothing to stop him shifting his account to any euro-denominated bank with operations in London. European commissioner for monetary affairs Yves-Thibault de Silguy has added urgency to the task of preparing for the euro with a proposal to bring forward the deadline for introducing the new notes and coins to autumn 2001 from 1 January 2002, and to reduce the transition period to a couple of weeks. With the countdown well under way, most bankers in Britain and abroad give European monetary union an 80% or better chance of happening, and on schedule. This leaves British bankers playing the outside odds.