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Reducing the number of banks in Europe will allow those remaining in the thinned herd to become more efficient and more profitable. This will in turn free them up to lend more to European companies, reducing the cost of capital and helping accelerate economic growth. But right now, the smart money is on politicians stepping in to stop the deal happening.
It is widely assumed that most mergers – and bank tie-ups in particular – destroy value and that allowing banks to get bigger ultimately creates headaches for governments when the next financial crisis inevitably hits. The first objection is an example of what the behavioural economists would call “recency bias”.
Sure, some of the bank mergers in the lead up to the financial crisis were hardly brilliant adverts. It doesn’t help that UniCredit’s boss Andrea Orcel was the banker who engineered Royal Bank of Scotland’s ill-fated acquisition of ABN Amro in 2007; Commerzbank’s own merger with Dresdner Bank in 2009 was a classic example of two drunks leaning against each in order to remain upright.
But Germany is absolutely lousy with banks: there were 13,359 German banks in 1957, 3,578 as recently as 1997 and still a cool 1,403 today. Surely no one is arguing this consolidation wasn’t a net positive for Germany.
And if the eurozone wants to pull itself out of the economic rut in which it currently resides, politicians will have to accept that the region’s banking industry is still way too fragmented. The US economy is fast heading towards becoming twice as big as the EU’s (GDP of $29 trillion [£22.2 trillion] compared to just over $19 trillion). However, JP Morgan, the largest bank in the US, is larger than the five biggest banks in the EU combined.
There are three points to be made about banks becoming too big to fail. The first is, too late, they already are. The second is that Commerzbank has spent much of the last decade lurching from crisis to crisis, burdened by high costs and struggling with feeble growth.
UniCredit, on the other hand, has done a good job of sorting out its bad debt problem and returning to profitability. It already owns HypoVereinsbank, a large German lender, so a well-handled merger should result in significant cost savings.
The third point is that European bank regulations are far tougher than they were before the financial crisis and the bloc’s lenders are much better capitalised (indeed this is one of the reasons why there has been close to zero loan growth in the eurozone over the past 15 years).
This is, in that wonderful evocative phrase, the stability of the graveyard. If you’re not going to loosen up capital adequacy rules you must let banks come up with other ways to become more efficient.
Sure, UniCredit has probably not done itself any favours in the way that it built up a stake in Commerzbank on the sly when it bought a big chunk of shares off the Germany government (which doesn’t seem to have been fully aware who it was selling them to).
Nevertheless, Chancellor Olaf Scholz’s claim that the Italian lender’s tactics amount to “an unfriendly attack” and Commerzbank’s warnings that a takeover will result in job losses (yes, that’s the point) smack more of wounded Teutonic pride and veiled appeals to protectionism than they do to cold, hard commercial logic.
Europe claims that it operates a single market and is therefore a trading bloc with the economic heft to hold its own against the US and China. But until it pays more than lip service to banking and capital markets union its large pools of savings will remain fragmented, the cost of doing business will be globally uncompetitive and the EU will continue to punch well below its weight.