The stakes are high when banks get the urge to merge

MEPs argue about the merits of banking consolidation

European markets should be more open to cross-border mergers. But consolidation alone is not a panacea, says Joseph Muscat

I agree with what Commissioner Charlie McCreevy said during a European Parliament hearing. The question of whether Europe needs more cross-border consolidation is not one for policymakers to answer. Market forces should be the main players in determining the degree of consolidation. The job of policymakers should be to bring about a fair set of enabling and supervisory rules.

So will the roles of the Parliament and the European Commission simply be that of dismantling all possible barriers to consolidation as quickly as possible? I do not think it is such a straightforward task.

Let us start from the basic principle on which there seems to be broad agreement: European markets should be open for cross-border mergers. It is easier said than done, given that barriers to consolidation exist even between national players in a number of member states and given that some notable old member states seem to be much more resistant to change than the newcomers.

The results of a recent industry study by the Commission confirm the reasons that are repeatedly highlighted as obstacles to cross-border consolidation.

First of all, the current situation - including obstacles - is such that there are not economies of scale in cross-border mergers. Industry argues that the different supervisory regimes (which have a direct impact on fixed costs), the re-organisation of cross-border activities that increase cost and the different tax regimes make cross-border products less attractive. Thus, a substantial part of the industry wants policymakers to harmonise rules in order to enhance the added value of consolidation.

Then there is the perception of a generally negative political environment in relation to cross-border mergers. Industry feels that the political class interferes with consolidation. Industry mentions the retention of the defence mechanism in the mergers directive as a case in point.

Finally, there seems to be a certain reluctance by consumers and employees to accept consolidation. Consumers often have questions on the interests of 'foreign' institutions in local markets while employees relate mergers and acquisitions to a deterioration in their working conditions.

All these points put forward by the industry are extremely valid. Nevertheless, way too often, issues relating to financial services have been tackled almost exclusively from an industry point of view, with less importance being given to consumer and employee perspectives.

I submit that the main aim of policymakers in this and related areas should not be that of enhancing the creation of bigger and omnipresent conglomerates. Instead, it should be that of offering all consumers a better choice between the widest possible ranges of quality products. Consolidation is a means to this end, but it is not the only one.

In a number of cases, cross-border consolidation has offered consumers new financial products and services and a better deal in the relation between price and service. In other cases, it has taken the form of diminished, high quantity, low quality competition. In the smaller and more fragile economies one can also observe the symptoms of oligopoly. In some instances, the general perception is that industry has focused on the larger clients with small- and medium-sized enterprises finding it more difficult to gain access to credit.

When such things happen, it is difficult to dissuade public opinion from the view that cross-border consolidation is nothing but the milking of host economies. The public then presses its elected representatives for action, and they, in turn, come up with the resistance which industry itself identified as an obstacle.

When it comes to employee resistance, the best way to tackle it is through involvement. Workers are crucial stakeholders in the whole process. Employee representation and involvement helps come up with a strategy to tackle the change process in a realistic manner.

The next few months should be an exciting time since these will be some of the top issues on the European agenda.

• Maltese Socialist MEP Joseph Muscat is drafting a report for the European Parliament's economic and monetary affairs committee on banking consolidation.

Banking consolidation could benefit the big banks at the expense of the small - and customers would suffer, says Karsten Friedrich Hoppenstedt

With the successful completion of the huge legislative agenda of the Financial Services Action Plan, the main obstacles to a working and efficient single financial market have been removed. Some might feel that there is much more to be done, but we should concentrate on the obstacles which really block the road, and not on little stones which make our political journey less comfortable.

The priority is not to add new layers of regulation, but rather to make sure the new framework is correctly implemented and the rules are fully enforced. For example, an enhanced supervisory co-operation based on clear, diligent and transparent procedures and improved transparency. The cost-efficiency of supervision needs also to be improved. Putting in place common reporting requirements is a pragmatic objective. This is the 'Better Regulation' spirit which underpins the new policy initiatives: moving to qualitative policy-making by choosing the most appropriate approach with an obligation as to results.

We have seen few cross-border mergers and acquisitions in the European financial sector. Does the financial sector not contribute to the European economy? From whose perspective should the effectiveness and efficiency be judged? Should it be from the viewpoint of the banks, of the European Commission or of the customer? In my opinion, the effectiveness has still to be judged from the customer's point of view. The decisive factors are not the size of a bank, or its balance sheet total or its market capitalisation, but rather whether or not there is sufficient competition in the market and whether the financial services are comprehensive, customised and provided under favourable conditions, and finally whether the customer can choose between different types of banks. It is unclear why the banking sector is being earmarked as an 'underperforming' sector by the Commission in this context.

The objective is not to push for more cross-border consolidation just for the sake of it. Only large banks will benefit from a continued massive regulatory pressure. They can afford the costs arising from new regulation. Small banks, however, will be pushed out of the market.

I support increased integration of the European retail banking market, which means the market for services aimed at private clients and small- and medium-sized enterprises. I support efficient, competitive, sustainable markets that bring benefits to consumers.

Bridging the gap between Europe and its citizens means meeting their expectations in terms of adequate access to financial services, strengthening the sense of familiarity and ease that comes from proximity relationships in regional markets. The decisive advantage of retail banking is proximity banking and the close relationship of the customer with his or her bank. The Commission has itself implicitly recognised this central characteristic of retail banking, as shown, for instance, by the Consumer Credit Directive. At the heart of the latter is the realisation that proximity and trust play a key role in the relationship between lender and borrower.

I very much doubt that consumers want standardised products to be available across Europe. It strikes me as highly unlikely that standardisation would stimulate the demand for the cross-border financial services that the Commission is forever advocating. We are entitled to ask whether harmonisation is not ignoring consumers' needs and will not further alienate the Europeans from the EU.

Structural change and globalisation need not be synonymous with the hegemony of centralisation and large structures. On the contrary, they call for strong countervailing forces at local and regional level. Man is not the homo oeconomicus of theory; he remains an emotional being, seeking co-operation, solidarity and emotional ties. And it is when dealing with money - that most sensitive of goods - that trust, empathy, flexibility and individualised solutions are essential. It is precisely here that the pluralistic and regional structures of banks and the other decentralised sectors in Europe are timelier than ever.

• German centre-right MEP Karsten Friedrich Hoppenstedt is a member of the Parliament's economic and monetary affairs committee and shadow rapporteur for a report on banking consolidation.

Two MEPs argue about the merits of banking consolidation.