As two potential big bank mergers — both hostile, one cross-border — hang in the balance, Mario Draghi and the editorial boards of the FT and Bloomberg call for a fresh round of European bank consolidation.
The last time two large banks merged in Europe was in March 2023, when a reluctant UBS took over its failing domestic rival, Credit Suisse. The fast-moving fallout from the bank collapses in the US had tipped the chronically mismanaged Credit Suisse over the edge. The resulting shotgun merger was Europe’s first ever tie-up between two officially Too-Big-to-Fail lenders, and while it may have steadied the ship, for now, it also served as a timely reminder that, to quote Satyajit Das, strong capital and liquidity ratios count for little when panicked depositors take flight.
Fast forward to today, two proposed bank mergers — both hostile, one cross-border — hang in the balance. In the first, Italy’s second largest bank, Unicredit, is looking to take over Germany’s second largest, Commerzbank. Both lenders were in dire straits just a few years ago, with Unicredit even losing its status as a global systemically important bank (G-SIB), but appear to have more or less stabilised since then. In the second, Spain’s second largest bank, BBVA, seeks to buy out its domestic rival, Banco Sabadell.
Thinning the Herd
Both mergers have been tried before, with no success, but that doesn’t prevent them from being tried again. In the case of BBVA’s proposed takeover of Sabadell, it faces strong opposition from the national government in Madrid, but it has received the blessing of the European Central Bank, which has long favoured thinning the herd of banking players in the Euro Area. For its part, Unicredit has solicited ECB approval to own up to 30% of Commerzbank, potentially triggering a full buyout deal. The answer from the ECB is likely to be “yes”.
Senior ECB representatives have persistently sought to reduce the number of small and mid-sized banks in the Euro Area. In September 2017, Daniele Nouy, the then-Chair of the ECB’s Supervisory Board, partly blamed the low profitability of large lenders on the fierce competition from smaller banks. Rather than lots of competition between domestic banks, what Europe needs, Nouy said, are “brave banks” that are willing to traverse borders and conquer new territory.
Current ECB Vice President Luis de Guindos recently reiterated this position:
“We are looking for an integrated European market, we lack the single deposit guarantee fund, which we are in favour of. And I think that the less cracked and fragmented the system is, in terms of national barriers, the more economies of scale can increase, boosting competition. Having large European banks is a fundamental part of this. European integration is stagnant and I think this would help spur it along.”
It may just do that, but the consequences are likely to be dire for Europe’s sclerotic economies. As the German economist and small bank activist Richard Werner warns, economies with fewer and bigger banks will lend less and less to small firms, which tends to mean that productive credit creation that produces jobs, prosperity and no inflation, also declines, and credit creation for asset purchases, causing asset bubbles, or credit creation for consumption, causing inflation, become more dominant.”
In other words, more financialization, less productive activity. In the eurozone, more than 5,000 banks have already disappeared since the ECB started business a little over two decades ago, according to Werner. And the central bank is determined to continue, if not intensify, this process.
In his recent report for the Commission on the state of EU competitiveness, former ECB Governor Mario Draghi blames European banks’ lower profitability and lending capacity vis-a-vis their US counterparts on their lack of scale. And the main reason for that lack of scale, he says, is “the [EU’s] incomplete Banking Union.” Incidentally, other key recommendations of Draghi’s much-feted report include other forms of unfinished EU business, from banking union to eurobonds, to debt mutualisation, to common bank deposit insurance…
The document argues that “a minimal step towards completing the Banking Union would be to create a separate jurisdiction for European banks with substantial cross-border operations that would be ‘country blind’ from the regulatory, supervisory and crisis management viewpoints.”
In other words, a partial banking union for the EU’s largest cross-border lenders. According to Bloomberg columnist Paul j Davies, “It’s a minimal reform that would need single, EU-level deposit insurance and resolution schemes for just the top 20 or so lenders”.
The idea already enjoys the full-throated support of the Financial Times and Bloomberg. In an column on Wednesday, Bloomberg‘s editorial board averred that “UniCredit’s Takeover Bid Should Be Welcomed by Europe.” Such a merger, they claim, could pave the way to “the financial union both Germany and Europe desperately need,” creating a bank that will be among the largest on the continent, with a bigger balance sheet and domestic revenues than Deutsche bank. Faced with such a threat, Deutsche Bank has threatened to buy up part or all of the German State’s remaining shares of Commerzbank.
For its part, the FT published an editorial calling on Europe to “unleash its banking union”:
Unicredit’s announcement last week that it had built up a 9 per cent stake in Commerzbank sparked a rare giddiness among European bank watchers. In the continent’s highly fragmented banking system, mergers are often confined to entities from the same country and lending activity is largely home-biased. Onlookers hoped the Italian bank’s move could pave the way for a deeper tie-up between Italy and Germany’s second-largest listed lenders, and kick-start consolidation across the bloc.
Former Italian Prime Minister Mario Draghi’s report into Europe’s economy estimated last week that the bloc needed to raise capital expenditure by €800bn a year to remain competitive. But a significant impediment to boosting investment is the lack of scale among the EU’s private lenders. For measure, JPMorgan Chase, the largest US bank, has a market capitalisation greater than the 10 largest EU banks taken together. In the banking industry, size matters. Larger banks can spread risk and benefit from cost efficiencies, which helps to generate higher profits and, in turn, more financing opportunities.
The US’ banking system seems a bizarre choice of example to follow — unless, of course, seen from the perspective of Europe’s big bank executives. After all, nowhere else on planet Earth have banks reached such levels of economic heft, theft and impunity. Profits and pay have done nothing but rise and rise, even though Wall Street-inspired crises that have destroyed trillions of dollars of value and untold millions of jobs around the world…
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Nick Corbishley 