Banks discover a climate that nurtures financial growth

Luxembourg has been invaded once again. This time the encroachers are the international bankers, and they have been heartily welcomed by the Luxembourgers.

Some 108 banks now have offices in the Duchy, making Luxembourg a major banking capital of the world. In terms of Eurocurrency trading and bank assets, Luxembourg ranks only behind London. Foreign banks in London have about $280 billion on their balance sheets while Luxembourg banks have over $100 billion. In the case of the Eurocurrencies -- foreign currency assets placed on deposit and then lent in Luxembourg -- assets have risen by 34 percent per year compared with the average of 25 percent for the rest of Europe.

Not only have the banks brought in money to this tiny nation; they also provide 4,000 jobs, a vital contribution at a time when the domestic steel company is in trouble.

Indeed, the banking industry has become the largest corporate taxpayer in the duchy, providing some 75 percent of all corporate taxes paid. About 15 percent of the country's budget is met by these revenues.

The bankers have come to Luxembourg for a variety of reasons. Bank Commissioner Pierre Jaans thinks the attractions of the duchy have included its stable political environment, its good legal framework, and its "environment of credible supervision."

They certainly have not come because of lower taxes. Luxembourg is not a tax haven,

Such as some islands in the Caribbean. Rather, its tax rate at over 40 percent puts it behind Switzerland but in front of many other European banking tax rates.

The banks do not come here to tap the local banking market. Only one US bank has tried that -- and failed. There are about a dozen Luxembourg banks that meet the needs of the 350,000 residents. This has prompted Mr. Jaans to call the local banking market "possibly overbanked."

One attraction for the bankers has been the relatively easy bank regulatory climate. Constant Franssens, administrative head of Kredietbank and head of the local bankers association, notes, "The regulations have built up slowly and in a very understanding way, not the same as in the United Kingdom."

It's also been relatively easy to start a bank since the initial capital requirements are comparatively low. A bank need start with only $13 million in capital.

Probably the most important reason the banks have found the climate conducive to their business is the lack of reserve requirements on foreign deposits. The West German banks, which face substantial reserve requirements on foreign deposits. The West German banks, which face substantial reserve requirements in their homeland, have found Luxembourg particularly profitable.

Finally, the fact that foreign banks that set up in Luxembourg have been quite profitable has drawn new banks. By now most of the world's larger international banks have facilities here.

However, there are exceptions. The top five British banks have stayed out, perhaps to protect their business in London. Also, Bank of America and Citibank have offices in the duchy, but they are not very large operations. And, Chase Manhattan has closed down its office in the duchy.

Although most bankers here agree that the days of the rapid growth are over for the banking sector in Luxembourg, Mr. Franssens believes there are still some banks who will locate in the duchy. The Austrian, Dutch, and Swiss banks, for example, all have thought about opening new offices in Luxembourg. However, he admits it is "a mature market."

Locally owned banks like to point out that they themselves have profited from the growth of the international sector. For instance, Edmund Israel, a director of this nation's Banque Internationale, points out that the local banks have made some large loans, such as a recent $400 million loan (in duetschemarks) to Denmark, that they may not have won without the large international banking presence in the duchy.

Luxembourg bankers also note that the industry is shielded somewhat from what is expected to be a difficult period ahead for international bankers. This is mainly because twothirds of the loans booked in Luxembourg have been to the industrialized nations, not the less-developed countries. Loans to the poorer countries are expected to slow somewhat in the 1980s.

Almost everyone agrees that international banking got its start in Luxembourg when Dresdner Bank, a West German bank, arrived in the Duchy in 1967.

For Dresdner the move marked the first entrance of any German bank into the international bankig sector since World War II. Spurring the bank to look outside of its borders, says Volker Burghagen, managing director of Dresdner, was the realization that the German economy was export oriented, and the banks would have to expand internationally as well.

Dresdner picked Luxembourg, states Mr. Burghagen, "because we were looking for a location with the minimum of risk and resistance." There was no language barrier; Luxembourg was inexpensive compared with London; and it would be possible to withdraw easily if the venture did not work out.

But the venture turned out well, and Dresdner's profits acted as a lure for other German banks. At the same time, the West German mark gained in importance , and other banks moved to Luxembourg to deal directly with the Germans.

Earlier, in 1963, US authorities imposed an interest equalization tax that effectively blocked many foriegners from tapping the US markets for funds. West Germany, on the other hand, had tried to slow the inflow of funds. During the 1972 dollar crisis, the Germans actually banned the entrance of any new money into their country. "This pushed Luxembourg forward," recalled Mr. Burghagen, "and the rest of the banks in Germany said, 'We must go there." Luxembourgh then became the second largest center for Eurodollar and Euro-deutschemark dealings.

The Luxembourg government has provided "passive support" for the banks. Notes Mr. Burghagen, "They needed the industry because the steel sector was falling off. But they didn't do anything like a reduce taxes to attract it." The banks complain that they are at a disadvantage compared with such other Eurocurrency centers as Hong Kong, Singapore, and the Cayman Islands.

In reply, Mr. Jaans comments that everyone would like to be taxed less. Luxembourg's more than 40 percent tax rate is about the same -- if not lower -- than most of Europe.