As fears of a banking crisis on the continent grow, are mega-mergers the way to fix Europe’s ailing banks?
Vicky Pryce, a CEBR board member and former joint head of the Government Economic Service, says Yes.
Despite concerns about banks perceived to be “too big to fail”, there has been considerable consolidation across the industry already. In Europe, Spanish banks have been reduced from some 50 in 2008 to just 14 by last year. Greek main banks have gone down from 19 to four over that period. In Italy, non-performing loans are a real threat to the viability of a number of large banks. The International Monetary Fund has estimated that there is still some €1 trillion of bad debts on the balance sheets of Europe’s banks, reflecting weak economic growth. Lending is subdued. Yes, small challenger banks are making some inroads, as is peer-to-peer lending and crowdfunding. But the world needs strong global banks with a balanced regional and sectoral portfolio and activities able to withstand domestic and international shocks. Of course, regulation will be important at the global level to avoid “casino” type activities. But in a globalised and interconnected world, bank consolidation is inevitable.
Tim Worstall, senior fellow of the Adam Smith Institute, says No.
We absolutely do not want mega-mergers as a method of saving the European banks. In fact, we do not want-mega mergers of banks full stop. Because we don’t want to have larger banks. One of our major financial market problems is that the largest banks are already “too big to fail”. In extremis, we cannot let them go bust because they will take the economy down with them. Thus, they will be bailed out – and that is a subsidy to them, enabling them to borrow more cheaply than without that implicit insurance. From that flows resource misallocation and an increase in moral hazard. (That is, why not play risky when you know you’ll be bailed out?) This is just not a good idea: so the only thing George Osborne got right is his original bank levy. Tax the largest banks for that implicit insurance and thus encourage them to shrink. Far from us wanting mergers to save the biggest European banks, we should really want to have de-mergers so that we can safely allow them to go bust.