Euro sparks merger mania as banks push for EU-wide markets

Date: 18/03/1999

By Peter Chapman

THE smash-and-grab raid by Banque Nationale de Paris for rivals Société Générale and Paribas marks the beginning of a euro-inspired merger wave, claim top industry experts.

This will, they say, enhance cross-border competition for financial services, so improving the chances of the European Commission granting regulatory clearance to the EU's biggest-ever national banking consolidation.

" You have reduced the need for individual countries to reject mergers on competition grounds," said James Barty, director of European economics at Deutsche Bank in London.

" Before, you might have had half a dozen banks in France, Spain and so on, and therefore you did not want that number to reduce. You now know that competition is going to come from elsewhere."

Analysts predict more of the same as the euro begins to force fat and over-staffed national market-leaders to transform themselves into leaner, efficient EU-wide players.

A new report from the Centre for Economic Policy Research (CEPR), a leading think-tank, concludes that national mergers and acquisitions will allow banks such as the French trio and recently merged Spanish banks Banco Santander and BCH to enlarge the stock of assets under management "to build volume".

This is vital, it states, because asset-management and investment banking involve economies of scale which are likely to become more important with the introduction of the single currency.

" It is clear why a European bank's first bids for growth by acquisitions would naturally be made nationally, where mergers are easier in terms of culture and regulation," says the report.

However, the CEPR warns that this could result in increases in local market power, leading to a temporary squeeze on small businesses which rely on local banks for access to the euro capital market.

But Barty insists there will be few anti-trust problems for banks which merge to take advantage of these economies of scale, because the euro will also increase competition from abroad.

" What you have done is lowered the barriers to entry to go inside one another's territory; if you are a German bank you can raise euro just as well as a French bank in France," he said, adding that competition would also come from other sources - particularly foreign firms setting up Internet and telephone banking operations.

These new products allow banks to achieve the same EU-wide coverage as they can with a merger. "I suspect we will see a far different industry in ten to 15 years. We are at the beginning," he added.

Barty said the French authorities had welcomed BNP's recent swoop, plus the earlier plans of Société Générale and Paribas to merge.

" It was the same in Spain for Banco Santander and BCH. Countries are saying 'we do not want to keep them separate. We must allow them to be as strong as possible'. I think this is going to go further," he added.

The Deutsche Bank expert said consolidation would go even further if factors putting a brake on the process either within a member state or across borders were offset.

" Labour market regulation could be a problem. In the UK, you can knock two banks together and save money through reducing the workforce," he said. "That is much harder in some other countries. When Paribas and Société Générale announced their merger, they said 'no job losses'. That reduces the scope for consolidation across Europe. That is still going to be a problem."

Analysts believe that the key markets which are likely to see the next wave of merger mania include the UK, where the dominance of the old 'big four' has been broken by the floating of a large number of building societies, and Italy.