Following rumours that Commerzbank could be a takeover target, talk of European banking consolidation has kicked up into high gear, with three of Europe’s globally significant financial institutions, UniCredit, BNP Paribas and Crédit Agricole linked to the German lender. GlobalMarkets spoke to Bundesbank board member Andreas Dombret about the benefits, or otherwise, of big banks.
Dombret declined to comment on Commerzbank’s specific situation to GlobalMarkets, but said: “There are some markets which are global, in which scale is an advantage, but mortgages and some other products are more national markets. I’m a believer in banking markets with quite a number of banks with different scales and business focus. The German market has this sort of stability, though what’s not so positive is their profitability.”
He added: “Growing to a certain size allows these institutions to benefit from economies of scale. However, we have to keep the financial stability risks associated with very large institutions in check.”
M&A, for Dombret, cannot serve as a way of masking the problem of weak institutions.
“If you multiply two negative numbers you get a positive, but that’s not the case in banking. Two weak banks don’t give you a good bank”, and he said, pointing out that some banking mergers had been deeply unsuccessful.
Consolidation, in Dombret’s view, should be determined by market mechanisms. “As a supervisor, I am not in the business of attracting certain banks… where banks conduct their business and where they base their operations is not for me to decide or influence,” he said.
In Europe, though, the largest recent bank consolidation, Santander’s acquisition of Banco Popular Espanol was a direct result of supervisory action — the Single Supervisory Mechanism forced it into resolution, following the collapse of a non-performing loan sale and ensuing deposit run.
Competing with the US
Some see consolidation in the European bank market as essential to allow Europe’s banks to compete with their American peers, which dominate investment banking league tables today — and see having homegrown banks as valuable for Europe’s economy.
“Having a number of different investment banks in different countries is important to keep international competition among them alive,” said Dombret.
“Hosting some of them in the euro area can benefit the companies here. Local investment banks are more familiar with the specifics of our market and the needs of European companies, enabling them to more effectively assist European companies conducting business here.”
Profitability has been a major topic following a warning in the IMF’s financial stability report. But Dombret said: “It’s not for supervisors to have a RoA or RoE target. Profitability is for banks to figure out.