Banking on the right decision

July 18, 2001

British commercial banks acted wisely when they elected not to do business in central and eastern Europe (CEE) after communism collapsed more than a decade ago, according to a new ESRC-funded study.

The study asks whether British commercial banks were following an astute strategy or simply missing exciting opportunities when they failed to enter this new market. The findings of a three year comparative case study of banks such as ABN AMRO, RZB and Citibank operating in CEE suggests that, on balance, British banks took the right decision.

During the first ten years of transition in CEE, UK banks have stayed away as a group, while banks of other nationalities, particularly other European countries, have entered the markets, explains researcher Mrs Susan Scott-Green of the University of Leeds. In fact, HSBC is the only British commercial bank to have set up shop in the region. Mrs Scott-Green finds the decision of its competitors to stay away intriguing.

The British absence can be attributed to two factors, she believes. Firstly, Britain has no cultural or historical ties with CEE, as compared with Germany and Austria. So, it was natural for German and Austrian banks to move into their neighbouring markets, whereas for British banks the region was unfamiliar territory. "However, that alone is not sufficient to explain their absence," she argues. "The French also have few cultural ties with the region, but French banks have established operations there."

Secondly, as communism was collapsing in eastern Europe, British banks had neither the capital strength nor the appetite for more risk. Several major banks were in a period of introspection and retrenchment following huge losses on foreign operations in Europe and the US. Again, argues Mrs Scott-Green, this alone is no explanation of the British absence, as other banks were also suffering losses as CEE opened. Citibank, for example, was close to bankruptcy in the early 1990s, but still entered the region with enthusiasm. "The difference lay in the reaction of the banks to the losses," she points out. "British banks lacked the same strategic vision and managerial capability of Citibank to respond to losses in the same way."

Time has shown, however, the CEE to be a very difficult market. Competition has been greater than expected and existing banks have seen their profitability reduced by later entrants trying to break into the market. "Unpredictable host governments, political interference, intense competition, and the negative repercussions of the collapse of the Russian economy in 1998 have added to the difficulties of operating in this region," argues Mrs Scott-Green The experience of foreign banks in CEE shows that only a big vision, a full presence and a large scale operation can succeed.

"This market needs to be entered in a big way or not at all," she states. The British strategy of not entering at all was preferable to establishing a small and uncompetitive presence in a limited number of markets. Arguably, without the vision for a major regional presence, British commercial banks made the right decision to stay away. And entering the market now would be a mistake. "The risks have diminished but so have the rewards. It is clear that the British have missed opportunities, but on balance, it seems likely that they will not come to regret their absence from the region," she concludes.
For further information, contact Mrs Susan Scott-Green. Email: Fax: 01249 721191. Or, contact Lilian El-Doufani, Lesley Lilley or Karen Emerton in ESRC External Relations. Tel: 01793 413032, 01793 413119 or 01793 413122.


1. The ESRC is the UK's largest funding agency for research and postgraduate training relating to social and economic issues. It has a track record of providing high-quality, relevant research to business, the public sector and government. The ESRC invests more than £46 million every year in social science research. At any time, its range of funding schemes may be supporting 2,000 researchers within academic institutions and research policy institutes. It also funds postgraduate training within the social sciences, thereby nurturing the researchers of tomorrow. The ESRC website address is

2. REGARD is the ESRC's database of research. It provides a key source of information on ESRC social science research awards and all associated publications and products. The website can be found at

Economic & Social Research Council

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