Since the GFC there simply have been too many banks in Europe, making too little money. A simple answer to this problem is merging banks. However, this is much tougher than it sounds. Bloomberg explores this in an insightful article.
1. How would mergers help?
Having cross-border banks is appealing because it breaks the “doom loop”, the vicious cycle between national governments and the banks that held their bonds. An example of this is Ireland, where local bank failures nearly bankrupted the country. Cross border banks are more capable of absorbing a sovereign default.
A second argument for merging is of course cost cutting and expanding revenue streams.
2. But isn’t Europe a single jurisdiction?
Here the Bloomberg article emphasizes that country still have significant discretion in governing their financial institutions.
3. What do banks want to see changed?
The foremost demand is the ability to move capital freely across borders. The writers note that a German unit of UniCredit can be stopped from wiring reserves to Italy by the German authorities. The European Commission is working on moving all remaining powers of local supervisors to the ECB.
4. Banks are also to blame for the lack of mergers.
Banks, especially in the southern countries, still have bad loans on their books, which make them unattractive, and without strength to buy rivalling banks themselves.
5. Can lawmakers make mergers more viable?
The biggest issues are inconsistent treatment by local tax authorities, and the differences in insolvency laws between countries.
6. Would joint deposit insurance help?
Obviously, it would, because it increases the confidence of depositors in banks. Germany however has so far rejected the idea of pooling deposit insurance across Europe, demanding that Southern European banks need to reduce their bad loans first, before the German depositors take on the risk of carrying losses of other countries.