Introduction
The hostile takeover bid launched by BBVA for Banco Sabadell a few weeks ago has once again put banking mergers in the spotlight of the public debate. That is why it is a good time to review the effects of these operations and their institutional safeguards at community level.
Effects of banking concentrations
A bank consolidation operation can be motivated by various reasons, and its effects can also be various. First, an institution with higher volume may have a more diversified loan portfolio, which may positively affect its risk of bankruptcy. Having a larger base of assets can also open the door to greater liquidity, since these assets can be offered as collateral to access financing mechanisms. From an operational point of view, a larger entity can also benefit from economies of scale and certain internal synergies, which can contain its costs and make operations more efficient, helping to reduce excess capacity and improve profitability levels.
From a geographical point of view, banking consolidations can also contribute to mitigating the specific risk linked to the economic cycle of each country. Thus, in the face of an economic shock that is relevant in a single State, the fact of having a base of assets and businesses in other geographies can mitigate its adverse effects. It can also contribute to the financial integration of the monetary union. Even so, the majority of concentration operations have occurred, and will predictably continue to occur, between banking entities in the same State. That is why there has always been a certain willingness of the community authorities to encourage transnational mergers in order to create alternative mechanisms to mitigate the risks. The ECB itself recognizes that “cross-border consolidation can contribute to greater diversification of risk and integrate financial markets”, but that “it is not its direct function to actively promote (or prevent) any form of banking consolidation”. A greater concentration in this sector can also mean that there are more entities that are considered systemic.
Institutional safeguards at community level
These elements mean that there are often conflicting interests between the monetary and/or financial supervisory authorities and the competition authorities. The function of the former is to ensure financial stability and minimize imbalances that lead to situations with a pronounced macroeconomic impact, such as what we observed during the economic crisis at the end of the first decade of this century. The function of the latter is to guarantee adequate levels of competition in the market and to avoid agreements between competitors as well as abuses of a dominant position. An excessive concentration in the banking sector can be detrimental to consumers, in the form of higher prices or less variety of products available.
The Banking Union and the future
It should be borne in mind that at community level the Banking Union has not yet materialized. While it is true that there are two fundamental pillars such as the single supervision and resolution mechanisms, which aim, respectively, to centralize the supervision of financial institutions and manage banking crises in an orderly manner, the last pillar still is to be built. In 2015, the Commission formulated a proposal on the establishment of a European Deposit Guarantee System at Community level. This initiative remained in a drawer, and for the moment it has not been reactivated. We will see if the new governing bodies emerging from the new community legislature that will start after the elections on June 9 will give it momentum again.