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Consolidation is necessary for smaller and undiversified retail banks which, faced with years of ultra-low interest rates and subdued volume growth, can barely eke out a profit. This has already occurred with Spain’s regional savings banks, or cajas, but is still a work-in-progress among second-tier banks in Italy and the many co-operative and savings banks in Germany.
Despite the ECB’s siren calls and the recent back-channel discussions, it remains unlikely that we will see large M&A transactions any time soon. If deals do emerge, a large dose of market concern is warranted. A few caveats come to mind:
First, banks must become more efficient to fend off competition. But the challenge is coming from new digital apps and business models.
Second, financial products have become increasingly commoditised.
Third, banks remain concerned about the regulatory and political treatment of cross-border mergers. The banking union is still viewed with suspicion by many European governments, even those of a non-populist persuasion.
Fourth, mergers do not necessarily reduce excess capacity. In France, a highly consolidated market, most banks exhibit a poor level of cost efficiency compared with other countries.