Cross-border consolidation does not necessarily mean better integration, a more competitive or more efficient banking sector but nor is it the only way of serving customers well. Chris De Noose looks at the viable alternatives.

Will more banking consolidation bring about increases in integration? The European Commission seems certain that it will. Yet European Savings Banks Group (ESBG) and World Savings Banks Institute (WSBI) research shows that there is no guarantee that more banking consolidation will lead to either a more efficient or a more competitive banking sector. Furthermore, cross-border consolidation might go to the detriment of the mid-sized banks that form the largest bulk of the banking sector.

Cross-border consolidation does not automatically lead to enhanced profits. Indeed costs remain, even with the removal of legal or prudential barriers, such as language, which naturally limits the synergies that can be obtained in cross-border deals. ‘Different product mixes’ is another explanation for lack of synergies in cross-border deals. It refers to habits, preferences or history that explain differences in financial products across countries, which limit the potential for product rationalisation in cross-border deals, as opposed to domestic merger and acquisition (M&A) deals.

Natural barriers

Thus two of the biggest barriers, according to the whole industry, are natural, non-removable ones that the commission can do very little about, and which are intrinsic to the banking business in the EU.

The ESBG also said that entering a foreign market is generally possible at present. There are plenty of examples of foreign banks in Europe acting in foreign markets (Citibank, BNP Paribas, Fortis, Erste Bank, La Caixa and Swedbank), having entered via either acquisition or subsidiaries.

The ESBG believes that consolidation in the banking sector represents a more challenging undertaking than consolidation in other sectors, not only because of the prudential supervision requirements, but also because of the potential impact of a bank failure on the overall stability of an economy. Merging two banks is not the same as merging, say, two supermarket chains.

Until there is an appreciation not only of what is similar, but also what is different about the banking sector compared with other sectors of the economy, any investigation into the lack of cross-border consolidation in the banking sector will be incomplete, in the ESBG’s view.

Alternatives on offer

Organic growth by opening up branches or setting up subsidiaries has proven its worth as an alternative to consolidation, not only in economic terms but also, and most importantly, in terms of providing effectively for consumers’ needs. Also, in a modern economy, consolidation-type effects can, from a business management and shareholder perspective, be achieved by concluding a commercial alliance between institutions (to provide access to or representation in markets, generally on a reciprocity basis), by outsourcing or in-sourcing back-office operations or by using distribution channels to resell products and services (white-labelled, or not) sourced from competitors. Creating infrastructures (for example, payment clearing and settlement systems) with competitors, and developing and implementing standards developed at (national and/or international) industry level are also valid alternatives.

Shareholder value

All these approaches are mutually non-exclusive and have the potential to create shareholder value either by enhancing market positions, decreasing the cost of doing business, leveraging existing capabilities or creating new revenue streams. The choice of any approach, or a combination, will be dependent on market situation, strategy considerations, product management aspects, technology decisions and intellectual property concerns.

These approaches also have the potential of bringing a range of benefits to end-customers, from access to wider ranges of products and services to lower costs and greater security.

Given the risks described above, regulators around the world would be well advised to take a careful approach when pushing for more consolidation. They should then ‘accompany’ consolidation processes so that their support in creating global or continental champions does not lead to disregard or even discrimination against the mid-sized proximity banking model. Such a policy might ultimately benefit the shareholders of large cross-border banks to the detriment of the other stakeholders, such as employees or customers.

Chris De Noose is chairman of the ESBG/WSBI management committee.

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