In view of banks’ centrality to the structure of financial systems everywhere, it is useful to begin by providing a few brief data on the concentration pro- cess that has taken place in the banking sector, mainly by means of M&A operations. As can be seen in Tables 1.1, 1.2, 1.3 and 1.4, which summarise the main aspects of the phenomenon, the rate of M&A operations has been very high, in both Europe and the USA. Therefore, as well as a continuous reduction in the number of banks, which has been ongoing for at least two decades in both areas, there has also been an across-the-board increase in the industry’s levels of concentration. When it comes to the number of con- solidation operations, on the other hand, although the figure is constantly high, the trend is uneven, with phases of particularly intense growth alter- nating with periods of relative decline. This is substantially in line with the cyclical nature of M&A processes and the key importance of the unit size of
Table 1.1 Rates of concentration of the credit market in the USA and Europe – market share of five largest banks as % of total assets (CR5), 2003–8
Year CR5 USA1 CR5 Europe2
2003 36.0 39.7
2004 42.2 40.9
2005 45.0 42.1
2006 46.9 42.1
2007 49.0 44.4
2008 49.2 –
Notes: 1 USA: Large commercial banks with total assets of more than $300 million.
2 Europe: 27-member EU 27.
Sources: Own processing of Federal Reserve Board (2008) and European Central Bank (2008b), p. 38.
Country 2003 2004 2005 2006 2007
Germany 21.6 22.1 21.6 22.0 22.0
Spain 43.1 41.9 42.0 40.4 41.0
Belgium 83.5 84.3 85.3 84.4 83.4
France 46.7 49.2 51.9 52.3 51.8
Italy 27.5 26.4 26.8 26.2 33.1
Netherlands 84.2 84.0 84.5 85.1 86.3
United Kingdom 32.8 34.5 36.3 35.9 40.7
Source: Own processing of European Central Bank (2008b), p. 38.
Table 1.3 Number of M&A operations in the US banking sector, 1998–2003
Year Number of
operations
% of assets % of deposits % of branches
1994 475 3.8 4.4 5.1
1995 475 4.9 5.5 6.5
1996 446 7.5 8.4 8.5
1997 422 5.3 6.1 7.3
1998 493 13.3 14.7 14.3
1999 333 4.2 4.6 4.3
2000 255 2.8 2.2 3.3
2001 231 4.6 5.0 6.0
2002 203 1.8 1.8 2.3
2003 184 1.0 1.2 2.1
TOTAL 3,517
Source: Own processing of Pilloff (2004), p. 2 and following pages.
2000 2001 2002 2003 2004 2005 2006*
M&A operations
12-State Euro Area 58 45 69 68 45 58 16
25-State EU 70 65 74 73 61 65 21
12-State Euro Area 27 17 19 18 18 21 9
25-State EU 54 32 36 27 28 31 13
(Continued) Table 1.4 Number of M&A operations in the European banking sector, 2000–6
the operations undertaken, which means that in some periods an apparently small number of operations actually involve very large volumes, reflecting just a few large or very large mergers.
Leaving aside their structural differences, the drivers behind M&As in the two systems were very similar: the start of a phase of far-reaching deregula- tion in the financial sector, a wave of intensive innovation in technology and financial instruments, the consequent growth of competitive stresses between operators, the rising financial integration of the domestic and international markets and, finally, the general trend towards globalisation.
In the case of Europe, a significant role was also played by the introduction of the single currency and the gradual integration of the credit and financial markets, encouraged by the painstaking, hard-won harmonisation of the relative regulatory systems. Overall, the consolidation process took place initially at the domestic level, creating large, sometimes very large, banking groups strongly rooted in their countries of origin, appropriately known as ‘national champions’. Subsequently, the role of cross-border operations increased, also involving companies operating in sectors adjoining that of banking itself: insurance, investment banking, asset management, wealth management and private banking. This generated a further dimension of the process, which can be defined as cross-sector consolidation. Specifically, banks have increasingly extended their areas of interest to include an ever- expanding range of activities (such as global custody, cash management operations and pensions) and states (especially the emerging nations of the Far East and South America). Similarly, the types of operations carried out have also increased and become more complex, through the adoption of alternative models better suited to the individual contexts and markets (development of joint-ventures, acquisition of minority holdings and retail distribution agreements).
The crisis was inevitably followed by a slowdown in the rate of M&A operations, which in some cases took the form of a drastic review of growth polices and the substantial destructuring of some large banking groups. However, the serious difficulties in which some large groups found themselves actually provided a significant spur to M&A activities, giving rise M&A operations from non-EU states
12-State Euro Area 1 5 2 3 1 8 3
25-State EU 4 7 5 8 2 12 6
Note: *2006 data relate to the first six months.
Source: Own processing of European Central Bank (2006), p. 66.
favour further market consolidation was the disappearance of a large number of small banks, probably destined to become parts of larger groups.
As things now stand, since relatively little time has passed since the start of the processes triggered by the crisis, it is difficult to assess the extent and mechanisms of its influence on M&A activity in the financial sector, and, above all, what its definitive legacy might be in terms of concentration of the systems and changes in balances of competition.
In short, considering a long enough time-scale and accepting the uncer- tainties deriving from the extraordinarily difficult period generated by the recent crisis, we can state that on the one hand M&A activity has been the most significant phenomenon affecting the structure of the credit and financial systems during the last two decades, while on the other, it has also been the core process in the strategic growth of financial institutions, first and foremost those largest in size. This also raises a number of questions concerning the factors underlying the development of growth strategies based on operations of this kind.