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FT editor Roula Khalaf selects her favorite stories in this weekly newsletter.
The writer is a founding partner of Veritum Partners
The United States and Europe are two of the largest financial blocs in the world and enjoy broadly similar GDP levels. So why do Europe’s top 50 banks only have the same combined stock valuation as America’s top five? And is the fact that profitability is higher for American banks proof that those in Europe need to merge to become more like their rivals across the pond?
If you were to ask Onur Genç, CEO of BBVA, or Andrea Orcel, CEO of UniCredit, the answer would probably be yes. Both banks are currently attempting to acquire control of their rivals, Sabadell and Commerzbank, respectively. The former is a more traditional domestic matter, while the fight between UniCredit and Commerzbank seems much closer to a hostile cross-border transaction. While German government officials have described it as “reckless”, if carried out it would be the largest transaction of its kind since the calamitous hostile takeover of ABN Amro by the Royal Bank of Scotland (RBS) in 2007, a a measure that contributed to the latter’s decision. collapse.
So should we worry? The drivers of recent banking transactions are many of those that have shaped the European banking industry over the past 15 years: weak revenue prospects as the rush of higher interest rates fades and rising costs as the IT-driven efficiency promise is continually offset by increased investment spending, in a context of fragmented market shares; “market” refers to the eurozone.
So it’s no surprise that investment bankers are reaching into their pitch books and that mergers and acquisitions are back on the agenda, despite decades of studies suggesting that half or more of deals destroy the value for shareholders.
But are bigger banks a good idea? One of the most important lessons of the financial crisis of the late 2000s was, as the then governor of the Bank of England, Mervyn King, said, “most large complex financial institutions are global, at least in life.” , if not in death.” The cost of the 2008 bailout of the globally active RBS fell entirely on the shoulders of UK taxpayers; Those in the United States did not have to pay a single dollar, even though RBS was one of the top 10 US banks whose failure would have had clear repercussions for the US economy.
And while today’s new rules mean that the cost of bailing out a bank theoretically falls on shareholders and debtholders rather than taxpayers, in practice it is clear that a large bank facing imminent collapse would not be allowed to simply go bankrupt once other providers of capital have been completely eliminated. outside. Does anyone believe that the Swiss government would have simply allowed Credit Suisse to fail if it had failed to force UBS to bail it out?
In reality, the theory that big banks are “too big to fail” appears to still be true. The larger the banks, the more problematic the issues become. While current economic and financial conditions, combined with significant strengthening of balance sheets, mean we are a long way from having to worry about bank failures, banking remains a highly cyclical, fantastically leveraged business with lurking dangers.
Some might argue that the formation of a European banking union means that a possible UniCredit-Commerzbank merger does not change the risks: since both Germany and Italy use the euro, any failure would in turn be the responsibility of the eurozone. But that is also a chimera. There is no eurozone-wide deposit guarantee system, which in practice means that if UniCredit were at risk of failing in the future, it would still be a problem that the Italian government and taxpayers would have to solve.
For many banks in Europe that look enviously at their American peers, growth may seem an attractive option to address current challenges and regain their place at the mega-cap table. However, this is not the case. These transactions are rarely good for shareholders and, more importantly, for European taxpayers and governments, who remain the lenders of last resort.