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European bank mergers are back on the agenda: UniCredit and Société Générale are reported to be exploring a cross-border merger and Barclays is looking at a possible domestic merger with, or acquisition of, Standard Chartered.
There are two trends behind a prospective bank consolidation wave in Europe, which was predicted with the move to the banking union. The first trend is cyclical: the European economy is in recovery mode and bank balance sheets in most EU countries have been cleaned up. As a result, bankers start to plan for the future. The second trend is structural: there is an overreliance on banking in Europe (Langfield and Pagano, 2016); the shift from banking to capital markets has already set in.
The share of institutional investors, who operate in capital markets, in total euro area (EA) financial intermediation has already increased from 30% to 40%.
Banks are thus consolidating to reduce overcapacity. Since withdrawal is near impossible in the regulated and protected banking sector, mergers and acquisitions are the main mechanism for bank consolidation.
The big question is whether the prospective merger wave will be domestic or cross-border. On the one hand, when cross-border consolidation has previously been predicted to follow integration events (such as the Single Market in 1993 and the Economic and Monetary Union in 1999) the major mergers remained domestic (Schoenmaker, 2015).The merger of ABN and AMRO in 1991 and the creation of the BNP Paribas Group from the merger of BNP and Paribas in 1999 are examples of such domestic banking mergers. By contrast, the lifting of the ban on cross-state mergers in the 1990s led to major cross-state consolidation in the United States (Stiroh and Strahan, 2003).
There are several perks that encourage cross-border mergers, such as credit risk diversification and the scaling-up of IT investments. Moreover, European policymakers prefer cross-border mergers as they deepen financial integration (e.g. Nouy, 2017).
But it remains to be seen whether these cross-border synergies will be exploited, as earlier consolidation episodes were primarily domestic. Banking policies are not yet fully attuned to the new banking union setting. National supervisors still have some – albeit waning – influence. Moreover, deposit insurance is still national, which is important for consumers. Cultural barriers and different tax and legal systems may also hamper cross-border consolidation.
Gonçalves Raposo and Wolff (2017) show that little has changed in merger and acquisition activity since the Banking Union was launched. They even signal a slight re-nationalisation of banking consolidation. Authors consider the reduction of overcapacity in European banking as the strongest force. This suggests that domestic mergers realise further cost savings. Some of the larger banking markets in Europe, such as those in Germany, France and Austria, are still relatively inefficient and not yet concentrated. Thus, there is much scope for domestic consolidation.