If returns to scale are increasing in the banking industry and if the “too big to fail” argument is no longer credible, then there will be consolidation in the European banking sector and large pan-European banks will be created. If returns to scale are indeed increasing, given the importance of fixed costs in banking, then these large banks will be more profitable than European banks today, according to analysts at Natixis.
Key quotes
“A consolidation of the Eurozone banking sector may be triggered by the fact that at the euro-zone level, it is not highly concentrated; there are certainly now increasing returns in banking, given the development of fixed costs: risk analysis, KYC (know your customer), ethics (compliance), new payment technologies, the introduction of Artificial Intelligence, etc.; the existence of pan-European banks would facilitate capital market integration. A pan-European bank would benefit from the situation in healthy countries, would not lose capital, and would continue to lend in the troubled countries; the market valuation of Eurozone banks is very low, which makes it easier to buy a bank with a low valuation.”
“The remaining issue is that of ‘too big to fail’: normally, bank regulators and governments hate big banks because they have to bail them out if they fail. We do not see this ‘too big to fail’ argument as convincing. In reality, it already applies to mid-sized banks whose failure was seen to be unacceptable. The establishment of the SRM (Single Resolution Mechanism) and the SRF (Single Resolution Fund) brings the management of banking crises to the European level; if large banks are more efficient than mid-sized and small banks thanks to increasing returns to scale, they will be more profitable and therefore less fragile.”
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