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European banks and the risk of being sidelined

13/01/2016

From changes in the banking sector to new funding methods, the digital transformation, social commitments and corporate culture, Frédéric Oudéa will share his opinions on the bank and the company of tomorrow through regular posts on LinkedIn through the Influencer programme.

Can we let the European banking market lastingly fragment while large corporations consolidate?

Dow Chemical and DuPont made their merger official in December, thereby creating the world's second largest chemical group; Pfizer and Allergan gave rise to the pharmaceutical industry's No. 1 player; AB InBev and SAB Miller combined to make the world's largest brewery; Lafarge and Holcim joined forces; Air Liquide bought out Airgas… the list is long… In 2015, the number of industry-structuring deals multiplied on both sides of the Atlantic, setting a new record with the equivalent of approximately €4,000 billion in mergers and acquisitions. The banking sector - particularly in Europe - did not take part in this trend.

 With mega-mergers the order of the day and consolidation movements back in fashion, large corporations will be turning to massive financing arrangements in addition to their current needs to fund risk coverage, cash management and the development of their activity, notably on the international stage. These needs can only be met by major banks with broad shoulders able to take international action and act effectively and competitively on the financial markets. In Europe, only a handful of banks can play this role, yet they are facing daunting challenges.

 Firstly, a regulatory framework that is in many respects penalising large banks in terms of capital, supervision and reporting requirements, etc. Secondly, heightened competition, notably from US banks that enjoy a large oligopolistic market, a more dynamic economy compared to their European counterparts and more mature and powerful mechanisms for market financing and securitisation, primarily through the two government-backed public agencies Freddie Mac and Fanny Mae. And finally, a legal arsenal that makes it more complicated and restrictive for foreign banks to operate in the US than was the case in the past.

 Is this fragmentation and stagnation of the European banking sector here to stay, and at what price?

 If it were to last, we could be in for a long and painful process that would put the brakes on the necessary rationalisation of the banking landscape in Europe, combining the Darwinian elimination of small and mid-sized retail banks, unable to adapt to the twofold shock of low interest rates and technological advances, and the relative stasis of the few European champions, paralysed by the magnitude of the organic changes to be made. 

Of course, it is not a matter of returning to the banks pre-crisis race for balance sheet size, which is impossible anyway given the new regulatory constraints in play, but rather one of ensuring that there will still be some European banking institutions capable of meeting the needs of international clients operating around the world. To this end, government decision-makers must do more to take industry‑wide concerns into account. It is time to take a regulatory “breather”, considering that the European banking sector has just barely reached the end of the major regulatory transformation that swept the industry in the wake of the crisis.

 Thanks to the reforms that strengthened bank capital reserves and established the European bank resolution mechanism, the European banking sector is now more secure and more resilient. The legitimate concern about having banks that are “too big to fail” was addressed by a whole series of appropriate measures. Now that the fundamental financial security issue has been resolved, it is the issue of European growth and competitiveness that needs to be at the heart of the coming priorities. Giving banks a break in dealing with regulatory requirements would allow them to digest these changes and focus on the objectives of financing the economy and supporting business, primarily by developing access to the capital markets, which is what the regulators want.

However, various organisations, mostly European, continue to push in no discernible order for additional reform projects on the structure of banks, taxation - through the proposed tax on financial transactions - or yet further capital requirements. These measures would be counter-productive and especially harmful to large European banks and their ability to provide competitive financing and investment services. The banking sector runs the risk of becoming fragmented, which flies in the very face of the European movement towards consolidation. There is still time, though, to prevent these measures destined for failure and to define a truly strategic vision for the European banking sector. It is my profound belief that having banks capable of lending to European companies is a vital element of the economic sovereignty of the European Union. The champions of European industry would be severely handicapped if they were unable to access capital as easily as their US and Chinese counterparts.

 In today's consolidating business world, it makes no sense to work toward the fragmentation of the European banking market. We cannot allow ourselves to be sidelined! The very prosperity of Europe and its influence in the world are at stake.

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