Risks outweigh rewards for very large EU bank mergers

Significance

The 2008-09 financial crisis led to consolidation of the EU banking sector through mergers and acquisitions (M&As) of mostly domestic banks. A few EU countries have highly concentrated banking sectors, but most do not, including Germany, the least concentrated in the EU. A prime motive for merging Deutsche and Commerzbank, the country’s first and second largest banks, was that Germany’s network of exporters requires access to competitive financing.

Impacts

• Defragmenting national banking markets and the drive for a European Banking Union (EBU) will encourage M&A approval.
• EU competition bodies are likely to thwart M&As among the eight to ten largest EU banks over systemic-risk fears.
• Successful M&As will need at least one of the partners to have a profitable core model; combining bad banks just makes a larger bad bank.