European banks head to consolidation

With the current economic climate moving towards a less fragmented and more responsive financial landscape, a question arises about the future of European banks and a possible consolidation between them. Earlier this year we saw the acquisition of Credit Suisse by UBS, and Nationwide’s acquisition of Virgin Money this October. This article looks into the driving forces and obstacles behind commercial and investment bank consolidation in Europe, and possible implications for consumers. As Hyder Jumabhoy of White & Case states, ‘We are more bullish on bank M&A than we have been in the last 5 years … European lenders which had shelved transformational deals will need to act quickly, albeit carefully’.  

The fundamental drive for possible consolidation in the European banking sector is benefits from scale. Larger institutions tend to be more efficient than their smaller peers. This sort of efficiency may outweigh the increased risk a larger bank may take on. Considering that the role of a commercial bank is to match savers with excess savings to borrowers that seek loans means larger banks can match them more efficiently, leveraging upon their wider geographic reach.  

According to the ECB Banking Supervision there are longstanding issues such as low profitability and capacity in the European Banking Sector. The case of consolidation, be it cross-border or within the EU, would help ease the burden of a costly regulatory system for each bank. By achieving greater economies of scale, European banks could rival U.S. and Chinese counterparts in terms of lending capacity, profitability, and technology. In terms of investment banks, recently, we have also seen a trend toward faster settlement windows for securities, already adopted by markets like the U.S. and Canada which further underscores the need for European banks to consolidate and modernise.  

However, cross-border bank consolidation in Europe remains a contentious issue, mainly due to the region’s fragmented regulatory landscape. Different countries have different tax regimes, labour laws, and financial regulations, which complicate mergers that span national borders. ‘Hurdles to deals include banking regulations and broader fragmentation of rules across Europe such as lack of tax and product harmonisation’ Nicolas Charnay, managing director, S&P Global Ratings illustrates. ‘This makes it hard to generate economies of scale and therefore find economic sense in cross-border deals.’  

It is important to note that the topic of consolidation and whether bigger banks may benefit consumers as much as they benefit the banks still falls under debate. It is also possible that as banks grow large, they become more complicated to run in practice due to the cultural and operational integration of the merged entities that need to be addressed. There are real costs to increases in bank size, and they may not be able to attract more deposits as would be hoped. As a result, we could witness increased costs for both consumers and enterprises. Perhaps without the political will to break down regulatory barriers and create a unified financial framework, cross-border mergers may continue to face obstacles, limiting the full potential of consolidation in Europe.