Watch Europe’s weakest lenders get left behind

The rise of social media has turned the fear of missing out — or FOMO — into a widespread anxiety. Those jitters may now strike parts of Europe’s banking sector with renewed anticipation for a wave of much-needed consolidation.
An unsolicited bid by Intesa Sanpaolo SpA for Unione di Banche Italiane SpA triggered hopes of a process that would help Europe’s financial system reduce its excess capacity. It is not yet clear whether the combination will actually go ahead. But the offer raises two important questions. The first is whether any future mergers and acquisitions would proceed purely along national lines, contributing to the balkanisation of the euro-area financial industry. The second is whether they would leave out weaker lenders, testing the appetite of increasingly powerless politicians for outright liquidations.
The surprise $5.3 billion all-share approach appears to have received an approving nod from the European Central Bank. Roberto Gualtieri, Italy’s finance minister, said he is in principle in favour of deals aimed at consolidating the market. It’s not hard to see why: Changes in consumers’ behaviour, competition from nimbler fintech companies and the prolonged era of low-interest rates have put Europe’s banking sector under immense pressure. And while lenders have made enormous progress in dealing with a gigantic mountain of non-performing loans, too few of them have exited the markets, unlike what’s happened in the US. What’s more, M&A deals have been far too rare: The
Intesa-Ubi deal would be the largest acquisition in Europe in over a decade.
Policy makers should hold back on the prosecco, however. For a start, the quest for a significant cross-border merger remains elusive in spite of efforts to create the conditions for that to happen. In the aftermath of the euro zone crisis, member states created a “banking union” to sever the link between a national government and its domestic financial system. The European Central Bank has since taken over as the main banking supervisor in the currency area, and large failing banks are in principle dealt with using a single rule book. However, banks continue to look domestically when they seek to expand, shunning the potential benefit of geographic diversification.
It would be easy to blame executives for their lack of vision as they choose to stick to their own backyard. Intesa, with its 11.8 million Italian customers, is doing just that. In 2017, it took over the assets of Veneto Banca SpA and Banca Popolare di Vicenza SpA, two mid-sized Italian lenders, as they entered liquidation. The bank will now further increase its exposure to Italy — a country with an enormous public debt and a near-stagnating economy.
However, bankers continue to pursue domestic mergers because they are more likely to produce the kind of cost synergies needed to justify a combination. Add to that the lack of a euro-region-wide joint deposit guarantee scheme, and regulatory uncertainty for deals across national borders, and you can see why the euro zone policy makers also have some soul-searching to do. The mooted merger between Intesa and Ubi shows that even if a wave of consolidation were to come to Europe, it could simply pass by those in the worst shape. The current EU framework makes it very hard for a government to prop up an ailing lender indefinitely.
Consolidation will not solve all of Europe’s banking problems. Whether they care about the creation of a true “banking union” or simply about the future of troubled lenders, policy makers should worry about those that are likely to miss out — and do something about it.
—Bloomberg