EU’s banking giants shy away from cross-border mergers

By Aoife White

Date: 19/05/05

The consolidation of Europe's banking industry is lagging way behind the ambitions of policymakers.

Six years after the financial services action plan was launched, Europe's financial services industry is still largely fragmented along national and regional lines.

Market share in many countries has stabilised, leaving banks with few possibilities to expand within their own borders and few chances to open up national banking markets.

The Commission's annual financial integration report, to be published at the beginning of June, says only 20% of mergers and acquisitions in the financial industry between 1999 and 2004 matched firms from different countries, far lower than the average 45% seen in other sectors.

In theory, EU finance ministers have agreed that obstacles to takeovers in wholesale and retail banking should be removed. They instructed the Commission to identify what stops banks from taking the final step towards a merger.

A widespread consultation process is now under way. The Commission has launched an online questionnaire asking banks and regulators to tell it why there are so few mergers. It has also asked the London-based Committee of European Banking Supervisors (CEBS) to quiz banks on national regulatory hurdles. The results will be presented at an informal meeting of finance ministers in Manchester in September.

Charlie McCreevy, the Commissioner for the internal market has said he is personally convinced that more consolidation is necessary if EU banks are to become as profitable as US rivals. He cited Alan Greenspan, chairman of the Federal Reserve, as saying US consolidation was a vital factor in boosting bank profitability and financial stability. "This is a key element for finance ministers to consider, particularly in the context of EU financial stability. Stronger financial institutions can better withstand the shocks that happen from time to time," said McCreevy.

The Commission said last year that banks thinking about a merger often dropped the idea after their first brush with national banking authorities. Article 16 of the EU banking directive allows national regulators to block mergers on prudential grounds if they believe the deal could harm the country's financial system.

There is no EU guidance on how this rule should be applied and the very threat of its existence has prevented foreign banks from launching takeover bids for Italian banks.

McCreevy was obliged to crack down on the Bank of Italy governor Antonio Fazio after reports that he and the Italian Prime Minister Silvio Berlusconi had agreed to keep foreign stakes in Italian banks at 15%.

The Italian banking sector had become the focus of unwelcome interest from Spain's BBVA and ABN Amro of the Netherlands.

Europe's banks stress that there has to be a strong business case for a merger. The European Savings Banks Group says benefits from synergies in cross-border deals are less than on the domestic scene. In its response to the CEBS survey, it said that economies of scale were easier to achieve in wholesale than retail banking. Cost rationalisation, such as closing branches or eliminating similar products, were "not options". It also pointed to difficulties in managing and monitoring foreign branches, language and cultural difference as well as the unique needs of each country's financial market.

The European Banking Federation (FBE) said the patchwork of EU banking supervisory, consumer and company law as well as taxation and reporting regimes created huge problems. pan-Scandinavian and Baltic bank Nordea - itself the result of cross-border mergers - said VAT created a huge administrative burden which grew in direct proportion to the expansion of the company across Europe. It also highlights deposit guarantees, which it said could create a distortion of competition.

Cross-border banking mergers tend to be clustered between firms from neighbouring countries with similar cultures or languages. Spain's Banco Santander Central Hispano became a rare exception last year when it bought Britain's Abbey National. Another possible north-south deal between Franco-Belgian group Dexia and Italy's Sanpaolo IMI was abandoned in November 2004 when Dexia's shareholders declared they were against the tie-up.

Without a few more taboo-breaking bids, the aim of financial markets integration will remain unrealised.

According to the author the consolidation of Europe's banking industry was lagging way behind the ambitions of policymakers. Six years after the financial services action plan had been launched, Europe's financial services industry was still largely fragmented along national and regional lines.