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And why you shouldn t hold your breath waiting
MERGERS of euro-area banks from different countries, a banker jokes, are very
much like teenage sex. There s a lot of talk, but little action. And when it
does happen, there s a lot of disappointment. In recent months gossip has
linked each of France s three biggest banks (BNP Paribas, Cr dit Agricole and
Soci t G n rale), as well as UniCredit, Italy s largest, with Commerzbank,
Germany s second-biggest listed bank. Lately chatter has connected UniCredit
and Soci t G n rale. But no big, cross-border takeover is imminent.
A stream of deals in the 2000s notably UniCredit s purchase of HypoVereinsbank,
another leading German lender, in 2005 has slowed to a trickle (see chart, top
panel). Policymakers at both the European Commission and the European Central
Bank (ECB) would like the flow to revive. The euro area s banking markets are
still essentially national ones. European banking remains as fragmented today
as it was in 2012, notes Magdalena Stoklosa of Morgan Stanley. Domestic
lending still accounts for seven-eighths of the total (see lower panel).
Three-fifths of banks holdings of corporate and government bonds are from
their home countries.
Policymakers believe that pan-zonal banks would be more resilient because the
fates of lenders and national governments would be less tightly intertwined in
a doom loop . In Spain s property and banking crisis in 2008, an official
points out, internationally diversified Santander and BBVA fared far better
than purely domestic lenders. Cross-border mergers would bring scale without
harming competition within national borders. They would deepen the zone s
capital markets. And bigger euro-area banks would be better placed to take on
Wall Street s big five, which have come to dominate European investment-banking
league tables. Just one European bank is in the world s top ten by market
capitalisation: Britain s HSBC, which does half its business in Asia.
To the banks, the chief appeal of a merger is scale, as fixed costs are reduced
and spread across greater output. But as Jernej Omahen of Goldman Sachs notes,
banking is fully scalable, as long as it is within a single jurisdiction .
When banks cross borders, complexity increases quite sharply , offsetting the
benefits of greater scale.
Bankers say regulators need to do more of the groundwork first, by completing
Europe s banking union a single market, with a single set of rules. It is still
only part-built. The euro zone has a single supervisor, the ECB, watching over
its most important banks, and a single resolution board, to deal with failing
banks. But it still lacks a common scheme for insuring deposits, which would in
effect allow, say, German savings to be used to finance Italian loans, and is
unlikely to have one soon. Removing that obstacle would significantly change
the equation, says Nicolas V ron, of the Peterson Institute for International
Economics in Washington, DC, and Bruegel, a think-tank in Brussels. Mr V ron
says that the real bottleneck is banks concentrated exposure to their home
governments bonds. The euro zone lacks a common safe asset to break this doom
loop.
In fact, not even supervision and resolution are truly unified. Dani le Nouy,
the head of the ECB s supervisory arm, has complained that European rules allow
dozens of national exemptions from common standards. For example, 11 countries
(including Germany) have reserved the right to set their own rules for large
exposures to single borrowers. Variations in national bankruptcy laws mean that
different procedures can apply when winding up stricken banks in different
countries.
In addition, globally significant banks, of which the euro area has seven (of
the world s 30), face extra capital requirements under international rules.
Mergers, by making them bigger, may mean higher surcharges. The same rules
treat the euro zone s 19 members as separate jurisdictions, not as a single
one, which raises the minimum requirements for big cross-border banks (though
probably not by enough to halt a merger of healthy lenders). European finance
ministers would like those rules to be amended.
Yet even if all the regulatory obstacles were magicked away, banks might not
hurry to hook up. In domestic mergers, costs can be cut by closing neighbouring
branches and slimming down duplicated product lines. In recent retail-banking
takeovers in Italy and Spain, Ms Stoklosa says, buyers have identified savings
of 20-30% of the target institutions costs. It is much harder to find such
savings when branch networks do not overlap and differences in products,
accounting systems and languages cannot be avoided.
Friends, no benefits
Stuart Graham of Autonomous Research argues that the need to upgrade banks
old, cumbersome computing systems is another barrier. The last thing you want
to do is to redeploy your scarce tech people from developing whizzy apps for
customers to sort out different lots of legacy spaghetti, he says. And banks
in some countries are still weighed down by bad loans of uncertain quality,
making them hard to value as acquisition targets.
Domestic consolidation, moreover, is far from finished. Deutsche Bank may be a
likelier partner for Commerzbank than any foreigner is for either. Germany has
1,600 banks, most of them small publicly owned or co-operative lenders. Despite
a wave of mergers since the crisis, Spain still has some whittling to do. So
does Italy.
Meanwhile banks are making inroads into foreign territory without making big
purchases. Organic growth, or smaller deals, look more attractive for now. ING,
of the Netherlands, has become the third-biggest retail bank in Germany (by
number of customers) by building on a digital bank it bought in 1998, and has
set up online operations in Spain and elsewhere. BNP Paribas is nabbing
corporate clients in Germany without yet seeing a need to buy Commerzbank. Soci
t G n rale recently agreed to acquire Commerzbank s equity-markets and
commodities unit for an undisclosed sum.
For all that, one deal could spark another. Banks are herd animals, Mr Graham
says. If two banks join forces, others may respond (much gossip is rooted in
models of such defensive mergers). But the lack of a single market is a big
obstacle. Until it is cleared away, Europe s great banking merger wave will be
slow to get going.
This article appeared in the Finance and economics section of the print edition
under the headline "Fumbling in the dark"