The Promise of Bank Mergers

BARCELONA – The banking business has fallen on hard times. The combination of persistent low interest rates, increasing regulatory compliance costs, and the rise of new competitors taking advantage of financial technologies (fintech for short) has produced, in Europe in particular, excess capacity and low profitability – and a strong temptation to merge.

In a difficult market, mergers – by enabling banks to cut costs, share information-technology platforms, and increase market power, thereby relieving pressure on margins and rebuilding capital – make sense. And the banks know it. Witness the recent merger talks between Deutsche Bank and Commerzbank, both of which have faced huge declines in market capitalization.

So a wave of mergers may be on the way. The question is whether that approach really can solve banks’ problems and benefit society.

To be sure, mergers and acquisitions are not always a matter of escaping trouble. In fact, M&A activity – both the number and size of transactions – was picking up before the 2008 global financial crisis, including across borders within and beyond the eurozone. After peaking in 2007, such activity diminished, as domestic restructuring took precedence, particularly in countries such as Greece and Spain, which had to implement difficult adjustment programs.