concentration in the italian banking industry: future
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Corso di Laurea magistrale (ordinamento ex D.M. 270/2004) in Amministrazione, Finanza e Controllo
Tesi di Laurea
Concentration in the Italian banking industry: future prospects. Relatore Prof.ssa Francesca Checchinato Laureando Jacopo Maria Parise Matricola 816090 Anno Accademico 2012 / 2013
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C O N C E N T R A T I O N I N T H E I T A L I A N B A N K I N G
I N D U S T R Y : F U T U R E P R O S P E C T S
WRITTEN BY
Jacopo Maria Parise
RELATOR
Prof. Alain Chevalier
Paris, May 2013
iii
A B S T R A C T
English Version :
During the last 3 decades, the aggregation process among different financial intermediaries has
represented the most clear evolving feature of all the major financial markets. Even the credit
market of the European countries, initially fragmented and characterized - especially in some
countries - by structures and conditions often underdeveloped has been interested by deep
changes, heading towards a progressive integration, although incomplete. Under the lens of the
concentration process undertaken since the beginning of the 80’s of the previous century, this
paper aims to analyse and deepen the concentration process in the Italian banking industry, in
order to produce an univocal judgment over its state of health after the financial crisis and its
strategic perspectives for the future. The following analysis is directed to underline modality
and effects of these changes, with particular attention to their relevance in terms of competition
and efficiency in the national credit market; integration in the European market and, through it,
in the global one.
Keywords: Concentration in Banking, European Union, M&As in banking, Italy.
JEL Classification: G34, L22, N20.
Version Française:
Au cours des trente dernières années, le processus d'agrégation de différents intermédiaires
financiers représente le point d'évolution majeur dans les marchés financiers. Bien
qu'initialement fragmenté et caractérise par une structuration ancienne, le marché du crédit
européen également a subit un profond changement amenant à une intégration progressive,
bien que partiellement incomplète. En considérant le processus de concentration mis en œuvre à
partir des années quatre-vingt, le but de notre recherche sera d' analyser la concentration du
secteur bancaire en Italie afin de mieux en comprendre l'état actuel après la crise financière de
2007 et d'élaborer ses prospectives stratégiques futures. Ainsi, nous soulignerons les modalités
et les effets d'une telle mutation, en se penchant plus particulièrement sur le concept de
concurrence et efficience du marché national du crédit, ainsi que sur le concept d'intégration au
niveau du marché européen et, plus généralement, au niveau global.
Mots-clés: Concentration dans le secteur bancaire, Union Européenne, M&As bancaires, Italie.
Classification JEL: G34, L22, N20.
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Versione Italiana:
Durante gli ultimi trent'anni, il processo di aggregazione tra intermediari finanziari di diversa
natura ha rappresentato il tratto evolutivo più evidente in tutti i maggiori mercati finanziari.
Anche il mercato creditizio europeo, inizialmente frammentato e caratterizzato - specialmente
per alcuni Stati - da strutture e condizioni arretrate, è stato interessato da un profondo
cambiamento, portando ad una progressiva integrazione, sebbene incompleta. Sotto la lente del
processo di concentrazione intrapreso dagli inizi degli anni Ottanta del secolo scorso, la presente
ricerca intende analizzare e approfondire la concentrazione del settore bancario in Italia, in
modo da giungere ad un giudizio univoco sul suo stato di salute dopo la Crisi Finanziaria del
2007 e le sue prospettive strategiche future. La seguente analisi sarà rivolta a sottolineare
modalità ed effetti di questi cambiamenti, in particolare in relazione ai concetti di concorrenza e
efficienza del mercato creditizio nazionale; dell'integrazione nel Mercato Europeo e, attraverso
questo, in quello globale.
Parole chiave: Concentrazione bancaria, Unione Europea, M&As tra banche, Italia.
Classificazione JEL: G34, L22, N20.
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I N D E X
I N T R O D U C T I O N
A. Content of the research and analysis objective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
B. Methodology of the research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
C. Literature Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
C H A P T E R I - B A N K I N G C O N C E N T R A T I O N P R O C E S S
1.1 Environment evolution and competitive pressures: evidences from U.S.. . . . . . . . . . .13
1.2 Main determinants of banking concentration.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21
1.3 Effects on the structure of credit systems. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25
1.4 Effects on the stock performance of the banks involved. . . . . . . . . . . . . . . . . . . . . . . . . . . .29
1.5 Concluding remarks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
C H A P T E R II - T H E E U R O P E A N B A N K I N G I N D U S T R Y
2.1 Concentration of the banking sector in Europe: general evolution . . . . . . . . . . . . . . . . .35
2.2 Cross – border M&As in Europe before the financial crisis . . . . . . . . . . . . . . . . . . . . . . . . .45
2.3 The 2007 financial crisis and consequences in Europe. . . . . . . . . . . . . . . . . . . . . . . . . . . . .52
2.4 Concentration among companies and European regulation. . . . . . . . . . . . . . . . . . . . . . . .61
2.5 Concluding remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .65
vi
C H A P T E R III - T H E I T A L I A N B A N K I N G I N D U S T R Y
3.1 Evolutionary profiles of the concentration process in Italy. . . . . . . . . . . . . . . . . . . . . . . . .69
3.2 Characteristics of concentration in Italy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .81
3.3 Focus: Unicredit Group. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .88
3.4 The 2007 financial crisis and the sovereign debt crisis. . . . . . . . . . . . . . . . . . . . . . . . . . . . .92
3.5 Concluding remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .100
C H A P T E R IV - C O N C L U D I N G R E M A R K S
4.1 Final considerations and main implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .105
4.2 Suggestions for future research. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .113
R E F E R E N C E S
D. Books . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .i
E. Report and Researches. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .ii
F. Websites. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . viii
T A B L E O F P I C T U R E S
G. Charts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .ix
H. Tables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .x
Concentration in the Italian banking industry: future prospects
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I N T R O D U C T I O N
A. Content of the research and analysis objective
“I believe that banking institutions are more dangerous to our liberties than standing
armies” – Thomas Jefferson, 1809.1
By this famous sentence, the third President of United States intended to underline
the milestone role that banks – and more in general credit market – have had for the
development of any country. Connecting people with deficits and surpluses of capitals,
allowing the first to finance their activities and second to save their money, has been
considered the basis of modern economies. Nevertheless, the crucial importance taken on
by these intermediaries often has crashed into opportunistic behaviours that have led to
tremendous consequences, bringing policy makers to change regulations in order to
prevent such situations and increase financial stability.
History of the economic capitalistic systems has been often characterized by a
continuous tension between regulation and free market, within a process that have led
policy makers in front of a trade – off between financial stability and economic growth.
“Disorder breeds socialism. […] The controls of socialism do well when times are bad,
but they inhibit progress when times are good. Order therefore breeds capitalism2”.
In periods where the ideology of regulation prevailed, the grater relevance given to
stability justified a pervading intervention of the State in the economy while, at the
opposite, when economic growth became a priority, free market paved the way to financial
1 “Debate Over the Recharter of the Bank Bill”, (1809)
2 Peter Temin, (1989) p. 133
Concentration in the Italian banking industry: future prospects
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innovation, deregulation and globalization. Even if the real challenge is represented by a
stable equilibrium in the trade-off, in the course of time we have assisted to a regular
turnover between these opposed positions.
“It [trade-off] emerged in a so clear way to draw economic and political cycles starting
the day after an epochal crisis and finishing with the burst of further3”.
Even if different cycles exist, one pattern has remained constant in the last 40 years:
the concentration process undertaken among intermediaries operating in different fields of
financial markets. Again, banks have played a fundamental role, having been not only
vanguards but even the key-players in the markets.
Despite the concept of bank was developed in Europe at least 600 years ago, market
structure of the European banking industries has been for long time highly fragmented and
closed within national boundaries, with the existence of different sub-markets where few
players used their oligopolistic power in order to maximize profits. A turning point has
been represented by the growing integration that has taken place after the II World War,
when European countries started to experience – initially within their boundaries and then
among them – the aggregation of many industrial companies and financial institutions
thanks to the progressive creation of a single market, an unified currency and common
rules.
The aim of this research paper is to study and better deepen the concentration
process in the banking industry both in a theoretical way, by analysing the main literature
produced, and in an applied way, by looking at concrete experiences. In particular, the focus
of the research will be represented by the analysis of changes occurred in the Italian
banking sector thanks to the presence of features that will help readers to better
understand the impact of concentration process over an entire economy.
3D’Apice V., (2013), p. 2
Concentration in the Italian banking industry: future prospects
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The objective of the analysis is, thus, to demonstrate that creation of the European
single market – and the increased level of competition reached – have determined a shove
to concentrate in order to face the grown need of stability and efficiency, to increase
market share and to reach the appropriate size for competing in a renovate and
international environment.
Concentration in the Italian banking industry: future prospects
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B. Literature Review
Much has been written to explore the theory and the cases of concentration in
industrial and financial sectors, often presenting controversial results. This paper takes into
consideration different author’s perspectives with the aim of finding, to the extent possible,
common points of view above the topic.
In the last decades researchers have decided to deepen the perspectives through
which analyze banks, allowing economists and practitioners to have a broader view about
the concentration process in the banking industry, its determinants and implications not
only for credit market, but more in general for the entire economy. As of the early 1990s,
empirical researches on the effects of banking concentration and competition were mainly
interested in understanding whether the traditional structure-conduct-performance (SCP)
model could be applied to the banking industry. Researches were aimed to investigate if
bank concentration or normative impediments to competition could create a “dangerous”
environment for banks, with implications in terms of performance and stability of the
entire system. These studies were characterized by testing the assumptions through the
application of simple measures of concentration – such as the Herfindahl-Hirschman Index
(HHI) or non-firm concentration ratio (CRn) – by focusing on the examination of the United
States market thanks to the definition of Metropolitan Statistical Areas (MSAs) and by
considering all sizes and types of banks equal. Typical empirical studies of bank
concentration and competition of this period fund that U.S. banks in more concentrated
local markets charged higher interest rate on SME loans and pay lower interest rates on
retail deposits (Berger and Hannan, 1989; Hannan 1991) and that their deposit rates were
slow to respond to changes in open – market interest rates (Hannan and Berger, 1991;
Neumark and Sharpe, 1992).
With the progress of time, literature went beyond the SCP hypothesis and tested a
number of different models of competition with alternative measures of competitiveness,
including indicators of market structure that took into consideration the possibility that
Concentration in the Italian banking industry: future prospects
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different sizes and types of commercial banks could affect competitive conditions
differently. Analyses, thus, have expanded to include indicators of efficiency, service quality,
risk of the banks and consequences for the economy as a whole.
Since the early 1990s, progresses have been made on a high number of fronts.
Researchers have recognized the problems with SCP model and tried other methods. For
example, some studies tested the relation between X – efficiency or scale efficiency and
concentration and market share in local U.S. banking markets, achieving evidences that
support the effect of both market power and efficiency on profitability (Berger, 1995; Frame
and Kamerschen, 1997). Other studies broadened analysis of concentration in banking
industry including also indicators for entry restrictions, regulation and other legal
impediments to bank competition. These researches have shown that financial regulation,
creditor and shareholder rights, banking and openness trade and entry have an important
effects on competition among banks and between banks and financial markets, with
significant consequences for economic growth (La Porta et al., 1997, 1998).
More recent studies stopped to consider credit market as a uniform environment
composed by an unique typology of players, theorizing that different sizes of banks may
affect competitive conditions differently. Small banks are often considered to be
“community banks” with different competitive advantages than large banks. Relative to
large banks, small banks in developed nations tend to serve smaller, more local customers
and to provide more retail-oriented rather than wholesale-oriented financial services (De
Young, Hunter and Udell; 2004). Following researches, having considered previous findings
as a point of departure, investigated whether banks of different size could deliver their
services using different technologies. Banking groups may have a comparative advantages
in lending technologies such as credit scoring that are based on “hard” quantitative data.
Small banks, on the contrary, could have comparative advantage in technologies based on
“soft” information, that is those information more difficult to quantify and transmit through
the communication channels typical of large banking organization (Stein, 2002; Berger and
Udell, 2002). In accord with these arguments, banking groups have been found to lend
Concentration in the Italian banking industry: future prospects
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proportionately less of their assets to SMEs (Kashyap, Berger and Scalise; 1995), to lend to
larger, older and more financially secure SMEs (Haynes, Ou and Berney; 1999), to have
shorter and less exclusive relationships (Berger et al.; 2002) and to lend more on an
impersonal basis and at longer distances (Berger et al. 2002). These new papers generally
have an international orientation that includes developing nations, a significant change
from the vast majority of the studies in the precedent literature.
A further step in the analysis of the credit markets, financial markets and, more in
general, the banking environment, became established when other studies started
distinguishing between concentration and broader measure of competition, such as entry
restrictions and legal impediments to bank activities. Investigators have, thus, expanded
their research field to include analysis on the effect that competition and consolidation in
the banking industry produce on economic growth, credit availability to SMEs and
performance of non – financial industries. The empirical researches brought to mixed
findings. Some studies, in fact, have found unfavorable effects from high concentration and
other restrictions to competition, including less new firms concentration, expansion and
employment, less economic growth and slower exit of mature companies (Black and
Strahan, 2002; Cetorelli and Strahan, 2002; Cetorelli, 2003). Other studies, instead, have
found favorable effects of bank concentration, such as greater access to credit by new firms
and other SMEs and higher growth rates (Cetorelli and Gambera, 2001; Bonaccorsi di Patti
and Gobbi, 2001; Zarutskie, 2003). In particular, some authors (Boyd and Runkle, 1993;
Mishkin, 1999) have claimed that concentration is a destabilizing element (concentration-
fragility view) due to the likelihood that these larger intermediaries could take more risks
due to the implicit “too big to fail” policies. Some studies have deepened the effect of a bank
concentration on the stability of a national financial market, claiming that concentration
leads to stability (concentration-stability view) because few large banks should be more
profitable, easier to monitor and more diversified, allowing them to better resist in front of
a shock (Allen and Gale, 2000).
Concentration in the Italian banking industry: future prospects
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A certain number of papers have examined the different competitive effects of
foreign – owned and state – owned banks. Some researchers have suggested that foreign –
owned banks could compete in different ways from domestic institutions. Foreign – owned
banks are, in fact, part of large banking groups and so they might have many competitive
advantages and disadvantages over domestic operators in serving multinational customers,
access to capital, use of technology and so on. However these institutions may also have
disadvantages depending on distance, the existence of different economic environments
and so on. Evidences on efficiency and profitability, however, have permitted to claim that
advantages of foreign – owned banks outweigh the disadvantages in developed nations
(Classens, Demirgüç-Kunt and Huizinga; 2001). Building on this work, other studies (Levine,
2003) found that regulatory restrictions on the entry of foreign banks, rather than foreign –
owned banks, are robustly linked with higher banks’ interest margin. Other researches,
instead, have investigated the possibility that state – owned banks could compete
differently from private banks due to the difference in objectives: compared to the private
banks’ profit and value maximization, in fact, state objective are usually represented by the
development of specific geographical areas or industries, the assistance to new
entrepreneurs, the expansion of the economic activities and so on. Many researches have
shown that large concentration of state – owned banks determines a weaker competition
and, in in the time, less favorable economic consequences (Caprio, Levine and Barth, 2001,
2004; Berger, Hasan and Klapper, 2004).
Lately, the academic production has shifted its attention to other developed
countries or developing countries and on the international comparison between these
countries. Most of the non – United States studies, however, consider the entire nation as a
single market, while several nations have had a different history and, thus, should have a
different credit market. For example, studies on the European Union credit market often
consider it as a single market due to the regulatory changes promoted by European policy
makers in order to create a single market. These studies (Goddard, Molyneus and Wilson,
2001; Dermine, 2003) typically have found that differences in profitability and
performance among banks placed in different nations still remain due to the different credit
Concentration in the Italian banking industry: future prospects
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market structures and the complexity in harmonizing them in a single market driven by
common rules.
Far from the possibility to include all the researches and relations analyzed in the
last twenty five years, the aim of this part of the research has been to briefly summarize the
most important contributes developed by academics and practitioners to understand how
changes in the size and market power of banks can influence the economy of a country.
According to the previous views, when the concentration of banks is not followed by a
process of deregulation, the economic environment is weakened due to the increased
market power belonging to the banks. If, on the contrary, the consolidation is accompanied
by a regulation that increases the competition between these intermediaries, through the
removal of barriers to entry or other restrictions, the process of concentration can lead not
only to greater system stability financial but also to improve the supply of credit both for
people and for companies.
Concentration in the Italian banking industry: future prospects
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C. Methodology of the research
Methodology applied to the following paper is:
Analytical: through the analysis of articles and previous researches it investigates
how and why banks have started to integrate by taking over other intermediaries operating
in the same market, (horizontal integration) or through acquisitions of companies operating
in a different position of the value chain (vertical integration).
Quali – quantitative: the subject under investigation is too wide to be simply
summarized through a numerical approach and too technical to be supported only by
observatory evidences. So the descriptive part will be integrated by numerical evidences
with the aim of providing more detailed data and supporting findings and implications.
Numerical evidences derive from secondary data, obtained mainly from periodical reports
of international economic institutions (ECB, IMF, Bank of Italy) and from mandatory
disclosures that banks and other intermediaries are obliged to produce according to law.
Deductive: even if it seems reductive to define the outputs of this paper as simply
depending on a deductive approach, several economic theories can be applied in order to
justify the concentration process, as in industrial sectors as in the financial industry. Case
studies provided in the paper have the aim of confirming or denying the economic theories
that, in the end, will be applied to the Italian banking industry in order to inductively
predict future prospects. A contribution to the deductive analysis will be provided by
specialized press reviews, in order to show examples and to link theoretical knowledge
with information and episodes coming from the reality of financial markets.
The extensive use of M&As in the banking industry has spread in Europe in
conjunction with the emergence of a more competitive banking market and has found
fundament in casual factors that have established a common denominator in the evolution
of the banking industry at an international level. It refers to the interaction of the so-called
Concentration in the Italian banking industry: future prospects
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exogenous environmental factors, as the deregulation process, technological innovation,
markets globalisation and the introduction of a single currency (Euro), that between the
end of 1980s and the beginning of 1990s have weakened the entry barriers in the main
European markets, preparing the ground for the entrance of international players in
domestic markets. The progressive intensification of the competitive pressures and the
resulting danger of market share erosion have imposed, thus, to banks an intense
restructuring process with the aim of restoring efficiency and profitability.
In consideration of these premises, this research has the goal of deepening the
evolution of the concentration process since now registered in the Italian banking industry,
both in the domestic market and in the European one. The purpose is firstly to isolate
casual factors that have led to improve the level of competition in the market and the
determiners that have pushed banks to use these strategies of external growth and,
secondly, the most significant macro-economic effects produced by consolidation.
In this respect, it was decided to structure the present work in four chapters.
First chapter provides the main theoretical background by analysing the rationale of
concentration. Thanks to the vast amount of time series available for the United States
banking system and relevant amount of studies focused on it; American credit market will
be used in order to better explain how different determinants - ascribable mainly to the
deregulation process undertaken in the last 30 years of the previous century, the diffusion
of technological innovation and the gradual globalization of markets - have changed the
external environment and have brought banks to concentrate. Chapter ends with an
explanation of the main effects related with the concentration process, distinguishing
between the effect on the credit market and the effects on the performance of the
operators involved.
Second chapter, after having analysed factors considered responsible of the change
in the competitive environment through the constitution of the European single market
Concentration in the Italian banking industry: future prospects
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(1993) and the European Monetary Union (1999), focuses on the different effects produced
by banking concentration. In particular, analysis intends to deepen the macro-economic
perspective with the aim of investigating how structure of European credit markets has
changed. Financial crisis of 2007 is taken into consideration separately mainly for two
different reasons: from an institutional point of view, crisis has led international policy
makers to change direction, moving from the deregulation process to a new regulatory
framework – with strong implications over financial markets and banks in particular –
while from banks’ internal point of view crisis has laid the foundations for a strategic
rearrangement of financial businesses. Chapter ends through the analysis of the European
regulation on control of concentration among companies – Regulation CEE N° 139/2004 –
issued with the aim of homologating national norms due to the risk of applying within the
European single market different rules.
Third chapter focuses its attention on the M&A phenomenon in the Italian banking
industry, started only at the beginning of 1990s, in order to underline its distinctive
features. In particular, after having underlined the reasons for the delay in the
consolidation process - justifications related to the presence of a market that for several
decades has been characterized by a lack of competition and efficiency, being divided in
different regional sub-markets few connected among them – fundamental characteristics of
the M&A process are described both under a quantitative point of view (number of M&As
realized, temporal distribution, main modalities used from the Italian banks) and
qualitative (territorial distribution and size of the banks involved in this process).
Fourth and last chapter has the goal to provide, summarized, the main results
reported in previous chapters and to underline possible future strategies of European and
Italian intermediaries in order to face the growing interconnection of the national markets
and the increased level of competition due to the change in the environment.
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C H A P T E R I
B A N K I N G C O N C E N T R A T I O N P R O C E S S
1.1 Environmental evolution and competitive pressures: evidences from U.S
In the last 30 years, credit industry has been affected by a strong consolidation
process among banks, started in 1980s in United States and continued later in several other
developed countries. Fast expansion in M&As can be ascribed to the change in the
exogenous environmental factors that, from mid-1960s to the beginning of 1990s, have
interested the majority of the financial markets of the developed countries, deeply
transforming their structures and competitive dynamics: it refers to 1) the evolution in the
macro-economic environment, 2) the deregulation process undertaken in the financial
markets and 3) the technological evolution. These drivers, even if with different modalities
and intensities, have contributed to lower the entry barriers and, consequently, to increase
competitive pushes in the banking industries. In order to face this renovate environment,
banks started to pursue new strategies to bring back profitability to acceptable values. To
do that, banks adopted growth-based strategies, mainly ascribable to two different
categories: internal growth and external growth. Dynamics of internal growth consists in the
use of structures and resources already present inside the company in order to push the
growth while external growth is represented by the increase in company’s size thank to the
acquisition of one or more companies already operative. M&A operations – Merger and
Acquisition operations –became the more used means both from United States and
European banks, being considered the fastest way to acquire a larger dimension4.
In particular, according to the contingency theory, that claims the absence of the one
best way as theorized by Taylor and the existence of several different courses of action
depending from internal and external factors that influence any business activity, banks
4 Quarante U. (1990), p 37
Concentration in the Italian banking industry: future prospects
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have changed their business models in order to adapt themselves to a new and more
complex environment. First part of this chapter provides an analysis of the main
environmental changes taking into consideration United States financial market. Reason
underlying this choice are represented by the presence of a vast amount of time series
related to the American credit market that allow to have a numerical evidence around the
process of banking concentration.
Regarding the evolution of the macro-economic environment, a crucial role has been
played by inflation. The rise in inflation in the 1970s was strongly related with the
increases in oil prices engineered by OPEC. On 19 October 1973, the decision undertaken
by OPEC Gulf Members of a 5% monthly production cut until the total evacuation of Israeli
forces from all Arab territories occupied during the June 1967 war had taken place,
brought the oil price to rise from 3.65 $/barrel up to 11.65 $/barrel. The second oil price
rise came in 1979 with the Iranian revolution. During that period, price of Saudi Arabian
crude oil arrived at 28.00 $/barrel: inflation and unemployment rose in most countries5.
Chart 1 –Inflation in United States 1970 – 2012
Source: Federal Deposit Insurance Corporation - OECD
5 Kahn, (1985), p. 27
-
10,00
20,00
30,00
40,00
50,00
60,00
70,00
80,00
90,00
100,00
0,00%
5,00%
10,00%
15,00%
20,00%U.S Inflation Crude Oil Spot Price
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Higher inflation brought to increase interest rate. In that period banks were
constrained by several regulations, such as the Regulation Q6, that didn’t permit to adapt
the rates of interests in function of the specific level of inflation. Many investors became
more sensitive in front of the yield differentials on different assets and the result was a
disintermediation process, through which clients took their money out of banks and started
purchasing higher yielding assets, weakening banks.
The impact of regulation, which is considered the second factor heavy influencing
the competitive environment of any industry, banking system included, has a deep impact
on market structure and, thus, on strategies and organizations of players within that
market. Since 1970s, regulation has been used in order to limit competition, due to the
implicit assumption of policy makers that limiting competition among credit institutions
was the only way to limit risk taking and thus, to guarantee stability of the financial system.
There have been several motivations to impose regulatory restrictions to banks’ activities.
According with Edey and Hviding (1995), direct control was used to allocate financing to
specific industries according with the economic development plan of Governments, to
restrict market access and competition in order to guarantee more stability, to protect
savers and to use banks as instruments of macroeconomic management.
“The shortest way to characterize the transformation of the banking industry is to say
that the emphasis has gone from regulation to competition. Indeed, in the first period,
regulation rate, entry restriction and charter limitation of banks (including the separation of
commercial and investment banking) have been used by regulators to limit competition. Other
regulatory facilities, like the lender of last resort and the deposit insurance, have been widely
implemented in order to prevent runs and instability in the banking system”7.
In particular, until the early 1970s financial markets were characterized by several
restrictions, including interest rate controls, quantitative investment restrictions on
7 Cit. Vives (1999), p. 2
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financial institutions; line – of – business restrictions and regulations on ownership
linkages among financial institutions and restrictions on the entry of foreign financial
institutions.
Table 1 – Banking Industry regulation and deregulation in United States 1863 – 1999
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From mid – 1970s, a significant process of regulatory reform has been undertaken in
many developed countries. This process, based on a shift towards more market – oriented
forms of regulation, cannot be seen as an independent pattern due to the presence of inter-
related factors, such as the diminishing effectiveness of traditional controls due to financial
innovation and rapid technological development; the development of various types of
regulatory avoidance – just as example, the rise in out of balance sheet methods of financing
– and the increased competition between financial institutions under different regulatory
environments8.
Regulatory reforms have brought several different benefits by giving to financial
firms more freedom to adopt the most efficient practices and by allowing them to develop
new products and services able to compete against non – bank financial companies that had
beforehand benefitted from the disintermediation process caused by the rise of inflation.
Second, deregulation and the increased level of competition obliged banks to take under
control efficiency by forcing the exit of inefficient firms and by encouraging the
consolidation of the financial system.
The third factor that has influenced the competitive environment of banks has been
the technological evolution. The development of Information Technology in order to collect,
store, process and distribute data has influenced (and still influences) banking activities for
two reasons: first, IT has modified the way in which customers can have access to banks’
services and products, mainly through automated channels, grouped under the name of
remote banking. The application of this technological progress to the banking activity has
permitted to overcome temporal and spatial boundaries, allowing banks to sell services and
products independently from the opening times of their branches (temporal boundaries)
and in geographical areas not touched before (spatial boundaries).
On the other hand, IT has contributed to the reduction of the costs associated with
the management of information by replacing paper–based and labor–intensive methods
with automated processes. The possibility of achieving cost reductions especially in the
8 Biggar, Heimler, (2005), p. 5
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retail businesses, due to the reduction of labor force, the existence of scale and scope
economies, the rationalization of production and distribution structures, the
standardization of banking processes, the shorter response times and the improved
utilization of customer information have led banks to adopt these technologies.
According to the ECB (1999), however, technology cannot be considered the major
driving force for M&As among banks. Despite investments in IT are quite expansive, a
critical size in order to be able to amortize those costs and to remain competitive is not the
only solution banks have. Strategic alliances among banks currently exist, based on the
reciprocal incentives these operators may find in sharing IT development costs and in
providing interoperable systems, like common platforms for the use of ATMs, compatible
payment instruments and compatible technical standards. For the most part of the
literature that has analyzed the impact of technological development over financial and
non – financial industries, the focus of the research has been the cost side, claiming that
technological investments represent a possibility to lower costs and, thus, increase
efficiency. Under this perspective, banks should chose to invest in IT simply to have a
competitive advantage in front of direct competitors.
However, technological evolution has affected the competitive environment of
banks by increasing competition and allowing customers to better serve their interests
without passing through the banks. Edwards and Mishkin (1995), claimed that advance in
information and data processing technology have enabled non-bank competitors to
originate loans, transform these into marketable securities and sell them to obtain more
funding. Computer technology has destroyed the competitive advantage of banks by
lowering transaction costs and enabling non-bank financial institutions to evaluate credit
risk efficiently through the use of statistical method.
“When credit risk can be evaluated using statistical techniques, as in the case of
consumer and mortgage lending, banks have no longer an advantage in making loans. In
addition, these improvements have made easier for households corporations and financial
Concentration in the Italian banking industry: future prospects
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institutions to evaluate quality of securities, allowing business firms to borrow directly from
the public by issuing securities9”.
The advance in Information Technology, thus, before becoming an opportunity for
banks, has represented a threat caused by the increased number of competitors that have
weakened their supply of credit products and consequently profitability in their core
business.
To survive and maintain adequate profit levels, banks had to face different
alternatives, such as through the increase of lending activities towards riskier clients, by
providing other services not connected with interest rates and by pursuing new off –
balance sheet and derivatives activities. Both these possibilities have been strongly
criticized due to the excessive risk that banks may take.
Chart 2 – Rise in non-interest income for commercial banks in U.S 1970 - 2011
Source: Federal Deposit Insurance Corporation
Edward and Mishkin (1995) underlined that standard measure of commercial bank
profitability, such as ROE or ROA, don’t provide a clear picture of the state-of-health of this
industry. The reasons are mainly ascribable to the increase of non-traditional businesses of
banks.
9 Cit. Mishkin, (1995), p. 32
0,00%
5,00%
10,00%
15,00%
20,00%
25,00%
30,00%
35,00%
40,00%
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Chart 3 – Historical ROE and ROA for United States banks 1970 - 2012
Source: Federal Deposit Insurance Corporation
Nevertheless, in any industry the decline in profitability usually results in an exit
from that industry (often caused by defaults and bankruptcies) and in a transformation of
market share. This occurred in the United States during the 1980s through bank failures
and the beginning of a consolidation process of banking system.
Chart 4 – Bank failures in United States 1970 – 2012
Source: Federal Deposit Insurance Corporation
0,00%
2,00%
4,00%
6,00%
8,00%
10,00%
12,00%
14,00%
16,00%
0,00%
0,50%
1,00%
1,50%
2,00%
2,50%ROE ROAROA ROE
0
100
200
300
400
500
600
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Chart 5 –Credit Institute in United States 1970 - 2012
Source: Federal Deposit Insurance Corporation
In conclusion, the consolidation of the banking industry has started as an answer to
the changes in the environment that have led banks to lose part of their market share, all to
the good of non-banks intermediaries, and consequently part of their profitability. In order
to block the wave of defaults that have determined United States banking industry during
the 1980s and part of the 1990s, policy makers intervened through a deregulation process
that increased the opportunity for banks to grow and to restore a suitable level of
profitability. The reduction of constrains brought banks to extend their traditional
activities outside from their original boundaries, which can explain the M&A phenomenon
among banks operating in the same business or to differentiate into different business,
driven by goals of profitability or growth rate.
1.2 Main determinants of banking concentration.
Once understood as influences from outside are crucial in modifying business
performances, any player can have more than one justification in order to merge or
takeover other intermediaries. In particular, literature has classified several economic or
extra-economic reasons to explain why banks should conclude an M&A. Referring to the
multiple determinants that may drive a bank to aggregate itself with other banks, it proves
0
2 000
4 000
6 000
8 000
10 000
12 000
14 000
16 000
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to be difficult to arrive at a classification univocal, well defined and able to include all the
possible motivations that can lead a banking company to carry out these operations of
external growth. Motivations around these processes vary in fact from situation to
situation. Nevertheless, it is possible to group all justifications into two different
categories: business economics and extra-business economics motivations.
All those situations that lead a bank to takeover or merge with other institutions
with the aim of increasing shareholder value or the economic performance are called
Business economics motivations. These are:
1. An increase in efficiency: the improvement of the operative efficiency among the
banks interested by mergers can be achieved in different ways. It can happen through the
recourse to economies of scale, depending on the possibility of lowering the average cost of
production thanks to the new size reached, or economies of scope, that allow to produce
goods or services jointly at a lower price compared with separated productions. Academic
studies, as reported by Berger and Humphrey (1994), have determined that scale effects
account for 5 per cent of the costs in smaller banks, while in large banks constant average
costs or diseconomies of scale prevail, due to the increase in coordination & control costs.
Regarding economies of scope, Berger and Humphrey showed that jointly production can
bring to a cost reduction of 5 per cent. The same authors, however, underlined that
managerial ability in defining the more appropriate combination of inputs in order to
minimize costs and maximize revenues is considered much more important than
scale/scope economies: they refer to the so-called X-efficiency as theorized by Leibenstein
(1966).
“Scale and scope economies in banking are not found to be important, except for the
smallest banks. X-efficiency, or managerial ability to control costs, is of much greater
magnitude - at least 20% of banking costs”10.
10
Berger A. N., Humprhrey D. B. (1994), p 1
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2. Risk diversification: the creation of a stronger banking subject allows to better
diversify risks not only through a new and more complete portfolio of financial products
and services but even for the possibility of trading them in more sectors and geographical
areas. Hughes, Moon et. al (1999) showed that probability of default tended to decrease in
connection with consolidation strategies enhancing geographical diversification.
Nevertheless, consolidation can expose banks, such as other institutions, to managerial
moral hazard, being bank conglomerates too big to fail (Berger, 1998; De Nicolò, 2000;
Gorton and Winton, 2002).
3. An increase in the market power: studies conducted on the consolidation of the
banking industry in U.S in 1990s that have examined dynamic effects of bank M&As on
prices have found that mergers, and thus consolidation, have increased quality of banking
services thanks to superior branching networks, access to ATMs, etc. but even higher fees to
pay (Board of Governors of the Federal Reserve System, 2003). An Italian study of bank
M&As over the same topic has shown that in the short period banking services prices were
unfavorable to consumers while in the long term they became favorable. Panetta and
Focarelli (2004), authors of the research, considered as a possible justification of this
behavior the dominating effect of market power in the first period while, secondly,
efficiency allowed to lower prices. Berger and Hannan (1989) found that in more
concentrated local markets, banks charge higher rates on SME (Small and Medium
Enterprise) loans and pay lower rates on retail deposits. Neumark and Sharpe (1992)
obtained same results.
4. Investment opportunities (growth rate): growth rate can have an effect over the
concentration decision for two different reasons. Kocagil et al. (2002) empirically showed
that some banks with high growth rate experienced problems due to managerial and/or
structural inability to deal with high level of growth. Bidder banks, thus, may be interested
in purchasing these banks in order to better exploit their potential. On the other hand,
Moore (1996) found that banks could be interested in M&As even when the growth rate is
quite slow thanks to the possibility of increasing market value of the target.
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On the contrary, extra-business economics motivations are ascribable to interests and
purposes of the management. In particular:
5. Private and opportunistic reasons of managers: according to this view, agency costs
can have an impact over the consolidation strategy of a bank due to the managerial interest
of enhancing salaries and prestige, diversifying personal risks or protecting their working
positions through the construction of empires, at the expense of shareholders (Bliss and
Rosen, 2001; Hughes et al., 2003).
6. Protective/defensive purposes: size of a bank can be considered as a deterrent
against M&As for different reasons. Large banks are more difficult to be acquired due to the
higher liquidity necessary to conclude the deal. Focarelli (2002), found in the Italian
banking sector a negative and statistically significant correlation between size and
probability to be acquired, while Wheelock and Wilson (2000) reported that smaller banks
are more probable to be acquired than large ones. Other possible explications are
represented by the possibility for large banks to fight against hostile acquisitions thank to
the bigger amount of resources available and by the difficulty for bidder banks to integrate
big intermediaries in their organizations.
Before concluding, it is important to underline that M&As cannot be considered all
equal. According with Sapienza (2002), it is possible to distinguish between in – market
mergers and out – market mergers. The firsts are characterized by combining banks that
belong to the same local market while the latters are represented by operations undertaken
in order to penetrate a new market. Evidences have shown that effects on market structure
are different. In the first case (in – market mergers) banks can decrease the number of
competitors and acquire more market power and adopt a cooperative behaviour. The result
is a less competitive environment where players can reduce their output and rise prices. On
the other hand, these kinds of mergers may offer more opportunity for cost savings due to
the possibility to remove the least efficient operations when they overlap. On the other
hand, out – market mergers are considered able to rise competition among market players
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due to the interest of the bid company in penetrating the new market through the already
existing structure of the bank incorporated.
1.3 Effects on the structure of credit systems.
Focusing attention on one of the most widespread implication of the concentration
process just described, it leaps out the creation of a limited number of big financial groups
that tend to take on the role of key – actors in the events of the market, affecting
significantly the processes of transformation of the same.
Even if large – size bank has always existed (in relation with the specific historic
period), the impression is that this phenomenon has assumed innovative features in the
recent times in relation to:
- to the positions of domain taken by these subjects in many domestic markets, in
specific business areas and, in some cases, even in widely globalized activities;
- to the ever increasing internationalization of their activities and the dissemination of
distributive networks in a large number of countries in the world, not least the large
emerging markets;
- to the central position taken in the financial markets and in the wide range of
services and activities that these intermediaries provide in the markets.
These players take on a crucial importance in order to analyse and to understand the
processes of transformation of the credit structures and markets; and to direct the function
of government oversight, function become very sensitive in the context of globalization11.
In particular, according to the Group of Ten research (2001) conducted on the
Member Countries (Belgium, Canada, France, Italy, Japan, Netherlands , Sweden, United
11
Bottiglia R, (2009) p. 176
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Kingdom and United States), it is possible to consider the effect of concentration on 4
different aspects of the credit system: 1) financial risks; 2) monetary policy; 3) competition
and credit, 4) interbank payment systems.
Financial risk
Potential effects of the concentration process of the credit market on the risk
exposition of banks are various and the final outcome cannot be generalized. In any case, it
seems possible to underline some features common in the different countries taken into
consideration.
The reason for which consolidation seems better able to limit the business risk is
linked with the diversification, especially geographic, of activities. Even in this case,
however, risk reduction is not a sure result since profitable returns depend on the
composition of the bank’s portfolio. After consolidating, some institutions have modified
the composition of their portfolios towards riskier activities increasing in this way the
operational risk. Other issues could depend on the increased complexity of the managerial
structure. Systemic financial risk – that is the risk determined by interdependencies in a
system or market, where the failure of a single entity or cluster of entities can cause
a cascading failure – can be transmitted more likely through larger – value activities of
bigger intermediaries: consolidation may have increased the likelihood that situations of
business disruption can cause strong repercussion on the whole system.
Empirical evidences suggest that the interdependences among the major players of
the banking industry in the last two decades are strongly increased in United States, Japan
and Europe. Causes can be ascribed mainly to globalisation of the markets and to the
existence of few national – giants with a strong influence on the national credit market.
Among the areas when the interdependences have grown more there are interbank loans,
relation on the OTC markets and payment and settlement systems.
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Monetary policy
According to the Group of Ten (2001), consolidation process can have an impact on
the implementation on monetary policies due to the its impact on the interbank market or
the one used by Central Bank to modify the money supply. Consolidation may reduce the
level of competition on these markets, increasing the cost of liquidity for some banks and
hindering the process of arbitrage between the prevailing interest rates in the various
markets. Consolidation process may even alter the monetary transmission mechanism that
regulates Central Banks monetary decisions and operations towards the rest of the
economy. It can happen through the Monetary Channel – that is the transfer of changes in
interest rates controlled by the Central Bank to the other interest rates including rates on
deposits and bank lending – through an increase in the spread between active and passive
rates. The increase in the degree of concentration may also affect the delay with which
monetary policies are transmitted in two different ways:
- by reducing the delay, if these bigger players are able to process information more
rapidly thank to the improvement of the IT system;
- by increasing the delay, if banks are able to exploit the inertia of consumers in
response to changes in interests rates.
Concentration process may also affect the transmission mechanism through effects
on other 2 channels of monetary policy. These are primarily the Bank Lending Channel,
operating through monetary policy actions on the supply of bank loans, or through the
Channel of Financial Statements of companies, by modifying the value of collateral and the
availability of credit to lend.
Competition and credit
Effects of concentration on competition depend on specific condition of the demand
and supply of credit in the markets and in this juncture a relevant factor is represented by
Concentration in the Italian banking industry: future prospects
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the presence of barriers to entry. For retail banking products, empirical evidences on the
Group of Ten countries show that market are geographical segmented, with the prevalence
of few leading players with higher market power. Local markets usually coincide with
restricted areas of a country, such as Provinces, Regions, Metropolitan Cities or Cantons,
according with evidences that suggest families and SMEs benefit mainly from banking
services offered by companies located at a short distance.
Phenomenon just described may have negative repercussion on consumers, in
particular in the markets of SMEs loans, retail deposits and payment services. In particular,
SMEs make an important contribution to the economies of the countries surveyed: in agree
with the research conducted by The Group of Ten, in 1996, 66% of the total employment in
Europe depended on these companies while in United States the amount of employed was
around 50%. The reduction in the number of small banks, due to the consolidation, may
adversely affect credit availability for smaller customers. Bank resulting from the
consolidation process, in fact, could restructuring its portfolio through a credit expansion to
customers of larger size thanks to the greater amount of information available, capable of
reducing the information asymmetry between the parties and therefore the credit risk.
Insofar the credit relationships between small banks and SMEs are characterized by higher
information asymmetry, small companies must face an increasing difficulty in finding
financing. This problem is more serious in Europe because of the specific characteristics of
the credit market that, unlike the United States, has not been subjected to a
disintermediation process during the 1970s and 1980s.
Referring to wholesale banking products, investment banking services, currencies
market and derivatives, even if these markets usually have a national or international
dimension, consolidation process and the creation of bigger player may affect negatively
them due to the exercise of the grown market power.
Interbank payment systems
Bank consolidation has repercussion on the efficiency of the processes of payment
settlement and transfer of securities, on the level of competition between banks and market
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infrastructures, on financial and operational risks. It has also implications to the approach
taken by Central Banks in the oversight of the interbank payment systems. Consolidation,
in fact, has led to concentrate payment and settlement flows in a smaller number of
counterparts within the credit, and more in general financial, markets.
The emergence of multinational institutions and specialized providers of services
involved in a number of systems for payments settlement and securities transactions, as
well as the growing interdependence in terms of liquidity between different systems,
contribute to further accentuating the role that payment and settlement systems may have
in the transmission of the effects of a financial contagion. For this reason, in the last 10
years Central Banks have made considerable efforts to reduce the systemic risks arising
from liquidity problems, in particular through the adoption of systems for real – time gross
settlement and urging the introduction of effective measures to control the risk in the net
settlement systems: European Union experienced, in 2007, a shift from the interbank
payment system TARGET to the newest one TARGET 2 (Trans-European Automated Real-
Time Gross Settlement Express Transfer System).
1.4 Effects on the stock performance of the banks involved.
The analysis of the effects of stock market performance of the banks involved in an
M&A has the aim of investigating whether these operations are able or not to create value
for the bidder banks and their shareholders. Technique typically used in these situations is
called “Event Studies” and represents an empirical analysis that allow to measure the impact
of an event, such as the merger announces, on the value of a specific company. Through this
technique, share price is divided in two different components: one is called Normal Return
and reflects “the expected return without conditioning on the event taking place” while the
second part of the share value is given by the Abnormal Return, that is “the actual ex-post
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return of the security over the event minus the Normal Return of the firm over the same
period”12. For firm i and event date τ, the Abnormal Return (AR), is:
ARiτ = Riτ – E(Riτ|Xτ)
where Riτ is Actual Return, that is the share price at the observation date; E(Riτ|Xτ) is
the Normal Return. Xτ is the conditioning information for the normal return model. There
are two choices for modeling the Normal Return: the Constant Mean Return, which considers
Xτ is a constant and assumes that the mean return of a given security is constant through
time; and the Market Model, where Xτ is the market return, under the hypothesis of a stable
linear relation between the market return and the security return.
Abnormal Returns can be positive or negative. When positive, it means that market is
willing to bet on a value creation while, in the opposite, when Abnormal Return is negative,
it means that expected return from the event announced is consider to impact negatively on
the global performances of a company.
Unfortunately, literature does not permit to reach univocal conclusions about the
effect that M&As produce on economic performances of a company and, thus, on the share
price. Hannan and Wolken (1989), have shown that there is no clear evidence of a
production of new value, but only a redistribution of wealth among shareholders of the
acquired bank and sold. In particular, focusing on a total of 112 United States banks (43
buyers and 69 acquired) during the period from 1982 to 1987, researchers have shown
that, even if in presence of negative Abnormal Returns for bidder banks and positive for the
target ones during a period of +/- 15 days, outcomes have determined a null impact on the
creation of wealth for the shareholders involved in the deal.
The study conducted by Hawawini and Swary (1990) has come to slightly different
results, according to which the loss of value suffered by the bidder bank is more than offset
12
MacKinlay (1997), p 15
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by the positive Abnormal Returns registered by the acquired bank. According to this view,
M&A operations seem to create value, on the whole, for shareholders interested.
Among the most recent studies, it should be mentioned Ferretti (2000), who has
deepened the M&As’ stock performance referring only to bidder banks. The results have
permitted to claim that United States market reactions were not univocal, being observed
both positive and negative reactions. Nevertheless, according to the study, in the more
recent time negative reactions have prevailed over the positive, clear evidence that
investors consider mergers as a transfer of wealth from bidder bank to the target one.
Referring to the European market, studies investigating stock performances before
and after an M&A are quite lesser due to the primacy of United States in the process of
aggregation and because of the methodological difficulties in analysing the highly
fragmented European banking market. However, among the main studies conducted, Cybo,
Ottone and Murgia (2000) claimed that, after having analysed 54 European M&As, in the
majority of the situations reactions have been strongly positive, considering those
operations as a future value creation. Authors have, thus, underlined that in domestic
operations, that is operations between counterparts of the same country, banks have
benefitted from the aggregation process. This study, however, does not reach the same
answer when it considers the cross – border aggregations.
Beitel and Schiereck (2001) obtained the same result through a study based on a
sample of 98 cross – border M&As conducted by European banks over EU and extra-EU
intermediaries coming from different fields of the financial markets during the period 1985
– 2000: by analysing the reflection of banks mergers on shareholders, they concluded that
cross – border mergers destroy value.
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1.5 Concluding remarks
The aim of this first chapter is to provide the reader with the key-tools to understand
the process of concentration in the financial markets. Supported by evidences coming from
the U.S. market, it has been possible to verify how the concentration process among
banking intermediaries has been caused by changes in the external environmental. Rise of
inflation, mainly caused by the Vietnam War in the 1960s and the 2 oil shocks in the 1970s,
technological innovation, that permitted to non-banking intermediaries to enter in the
loan market by becoming able to evaluate credit risk, globalisation, which decreased the
entry barriers through a growing interconnection of national economies; and deregulation,
often required in front of overwhelming changes in a business ecosystem, have caused a
strong decline in banks’ core-business profitability, obliging them to find a way to restore
adequate level of profits.
Companies usually have 2 different possibilities to support the expansion of
activities: through the recourse to own resources (internal growth), or through the
acquisition of other companies (external growth). When a company merges or acquires
(M&A) another player, it means that it is financing its growth in an external way.
There are several factors that can explain the recourse of companies to M&As
operations. These can be grouped into 2 different categories: business economics
motivations, mainly ascribable to an increase in efficiency, risk diversification, an increase in
market power, investment opportunities; and extra-business economics motivations, that
refers to private and opportunistic reasons of managers or to protective/defensive purposes.
Changes in size and number of intermediaries in the credit markets can have severe
repercussions on the market itself under 4 different perspectives:
1) Financial risk: on one hand, geographical diversification allows banks to limit the impact
of systemic risk but not the operational risk, strongly related with the portfolio
Concentration in the Italian banking industry: future prospects
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composition. On the other hand, systemic risk can be transmitted with more intensity
through a single larger entity, increasing the likelihood of cascading failure.
2) Monetary policy: consolidation can have an impact on the way in which monetary policies
are implemented by Central Banks due to its impact on interbank market. Consolidation
may increase in fact the cost of liquidity and hinder the process of arbitrage between the
prevailing interest rates in the various markets.
3) Competition and credit: consolidation may have a negative impact on credit lending, in
particular for householders and SMEs. The reasons is manly ascribable to the intention of
large banking group to reduce the information asymmetry between the parts. Referring to
the wholesale market, concentration may affect negatively the environment due to the
increased market power.
4) Interbank payment system: consolidation reduces the number of payments in the
interbank system but increases the amount of each transfer. Concentration of payment
flows can increase the probability of contagion among intermediaries.
Consolidation process has been analysed even under the lens of the stock market
performance of the banks involved in the M&A operation. Through an Event Study, the
impact of the merge or acquisition is studied in order to quantify the Abnormal Return
over the share price Normal Return. A positive Abnormal Return means that investors
considers merge able to create value; a negative Abnormal Return, on the opposite, means
that value destruction is expected.
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C H A P T E R II
T H E E U R O P E A N B A N K I N G I N D U S T R Y
2.1 Concentration of the banking sector in Europe: general evolution
During the 1990s, financial systems of the major European countries have been
subjected to deep changes that, with particular reference to the credit industry, have
determined a substantial growth of competition, until then remained at very low levels. In
front of these competitive pressures, banking intermediaries have reacted with a broad
recourse to external growth with the aim of implementing their supply, increasing
efficiency and obtaining the operative dimension essential to compete in an renovate
environment.
It is possible to describe the evolution of European banking industry under the lens
of the chronological evolution of the European integration. After the II World War,
European countries realized that the only way to prevent other destructive conflicts was to
begin a process of economic, social and politic integration. The first effort in this direction
was represented by the establishment of the Coal and Steel Community (Treaty of Paris,
1951) followed by the will of future integration in other economic areas. A turning point in
the European integration has been represented by the signature, in 1957, of the Treaty of
Rome that led to the foundation of the European Economic Community (EEC) aimed to
allow freedom of providing goods, services, labour and capital across Member States
within the Community. Although several progresses were achieved in some areas,
including the creation of common customs, the abolition of quotas and the free movement
of workers, full integration remained incomplete.
Concentration in the Italian banking industry: future prospects
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In June 1973, European Council issued the Directive on “The abolition of restrictions
of banks and other financial institutions13” with the aim of insuring an equal regulatory and
supervisory treatment of all financial firms operating in the same country. Even though the
underlying principles of the directive were widely shared by the Member States of the EEC,
the objectives were quite far to be reached due to the resistance of the individual State to
accept the opening of the domestic market to the advantage of foreign companies, banks
included. Focusing in particular to the banking industry, international competition of cross
– border services was severely restricted by 2 different factors: by the national regulations
on capital flows, that had a strong impact on the costs of operating internationally; and by
the absence of any coordination in banking supervision.
Table 2 – European banking regulation in 1980
Belgium Germany Denmark Spain France Italy Netherlands Portugal
Control of interest rates
x x x x x x
x
Capital controls
x
x x x x
x
Branch restrictions
x x
x
Foreign bank entry restriction
x
x
x
Credit ceilings
x x x x
x
Mandatory investment requirements
x x
x x
Restrictions on insurance
x x x x
x x
Sources: Emerson (1988), Bröke (1989), European Commission (1997)
13
Directive 73/183, EEC.
Concentration in the Italian banking industry: future prospects
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The need of harmonization pushed Member States to adopt, in 1977, the First
Banking Directive14, “The coordination of laws, regulations, and administrative provisions
relating to the taking up and pursuit of credit institutions”, through which the principle of
home country control was established. This principle stated that responsibility for the
supervision of credit institutions should have passed, gradually, from the host country to
the home country of the parent bank15.
Nevertheless, according to Dermine (2002), different factors contributed to leave
European market fragmented, ranging from the mismatch between the supervision,
committed to the Supervisory Authority of the host country that often imposed constraints
on the activities of the foreign institution; to the need of considering foreign branches as
new institutions and, thus, to provide them enough capital; up to the restrictions on capital
flows. The inability to agree on a common set of rules brought to the definition of a new
approach toward European banking integration that culminated, in 1989, through the issue
of the Second Banking Directive16.
The main innovation was to allow foreign banks to establish branches and to
provide a set of services in a host country without waiting for further authorizations, being
considered enough to prove that a bank was authorized to provide such services in the
home State17. The removal of regulatory constraints that obstructed banking companies to
carry out cross - border activities, therefore, has meant that banks could compete in open
markets, both inside the national borders and outside from them. The recognition of the
Second Banking Directive, thus, has expanded the geographical boundaries of the
competitive arena in which banks operate, contributing to change widely the environment. 14
Directive 77/780, EEC. 15 Previously, in fact, authorization for the opening of branches in a country different from the one of
residence was assigned to the Supervisory Authority of the host country allowing, thus, to find several
justifications to limit the admission of foreign institutions. 16
Directive 89/646, EEC. 17
This innovation switched to the history under the name of “mutual recognition”.
Concentration in the Italian banking industry: future prospects
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Secondly, the Directive has permitted to freely offer services throughout the Community to
individuals and businesses. This provision was limited to a certain number of activities,
well defined European Commission18.
In order to complete the analysis of the main forces that have been considered
responsible of the evolution of the European environment, it is necessary to turn the
attention to changes happened due to the introduction of a single currency, the Euro. In the
late 1989, the Committee for the Study of Economic Monetary Union recommended, in the
famous Delors Report, a transition toward the European Monetary Unification (EMU)
through a three-phases process spread over 10 years. Starting from the movement
liberalization of capital flows and the coordination of national monetary policies in 1990,
the creation of the European Monetary Institute in 1994 (with the task of preparing the
monetary institutions and the creation of the European System of Central Banks), on
January 1st 1999 EMU became established. The constitution of the Economic Monetary
Union predicted fixed exchange rates among Member States and the movement of money
and capital markets into the new common currency (credit money) while retail markets
18
According to the Directive 89/646 EEC, the set of activities mutually recognised comprehend:
1.Deposit taking and other forms of borrowing ;
2.Lending (including in particular, consumer credit, mortgage lending, factoring and invoice
discounting and invoice discounting and trade financing) ;
3.Financial leasing ;
4.Money transmission services ;
5.Issuing and administering means of payment (credit card, travellers cheques and bankers drafts) ;
6.Guarantees and commitments
7. Trading for own account or for account of the customers in:
a. money market instruments (cheques, bills, CDs, etc.);
b. foreign exchange;
c. financial futures and option;
d. exchange and interest rate instruments;
e. securities;
8. Participation in securities issues and the provision of services related to such issues;
9. Money broking;
10.Portfolio management and advice;
11. Safekeeping of securities;
12. Credit reference services;
13. Safe custody services
Concentration in the Italian banking industry: future prospects
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continued to operate through national currencies. Only in 2002, Euro coins and notes
substituted national currencies.
During the 1990s, consolidation of the banking industry took place mainly at a
national level and included not only banks, but even other financial intermediaries, such as
securities and insurance companies. According to the report published by the Bank of
International Settlement (2002), M&As within national boundaries were preferred to cross-
border consolidation because it was less difficult for companies to merge in presence of a
more homogeneous corporate culture. Another possible explanation is represented by the
will of national institutions to gain size and strength in order to achieve a stronger national
position in preparation of the international competition. 19
Table 3 – Domestic banking M&A in Europe by sub-periods
Country
1990 - 1995
1996 - 2001 Number $ Billions Number $ Billions
Belgium
21
0,8
34
28,1
France
148
11,8
96
44,6
Germany
123
2,4
229
68,6
Italy
147
19,2
138
80,4
Netherlands
36
44,4
24
5,9
Spain
66
10,9
67
31,2
Sweden
44
5,9
17
6
UK
140
3,3
27
114,4
Total 725
98,7
632
379,2 Source: Thomson financial
19
Marquez – Ibanez D., Molyneux P., (2002), p. 23
Concentration in the Italian banking industry: future prospects
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One further reason is related to the political dimension: a fundamental belief in
Europe is that financial markets should not be controlled by foreigners and the national
flagship dimension has been considered of primarily importance.
“The primary response to the liberating EU Directives has so far been defensive:
domestic mergers are generally encouraged to protect national interests”. 20
According to Salgado21(2011), it is possible to group the entity resulted from the
M&A process in 3 different categories: the Bank – Insurance (as Allianz - Dresdner; ING;
KBC), incisive thanks to the possibility to develop synergies based on the nature of the
products commercialized or the proximity of the networks; the Pure – player in Investment
Banking (Deutsche Bank, Crédit Suisse), strongly specialized in expert advices, capital
markets (such as securities, derivatives, interest rates or exchange rates) and assets
management on behalf of institutional investors; and the Universal Bank (Société Génerale;
BNP Paribas, Unicredit; Intesa SanPaolo) that mixes its retail banking activities with other
specialized financial services (consumption credit, leasing, payment services). Today this
last model is considered being the predominant in Europe in particular thanks to the
benefits of diversifying the range of services. As a consequence of domestic consolidation,
several “national – champions” resulted.
Table 4 – Domestic M&As in Europe
Country Year Banks Involved BIDDER/TARGET
Resulting Bank Type of
operation
Beglium 1998
Kredietbank/ ABB-Insurance/ CERA Bank
KBC Bank Merger
2005
KBC Bank / Almanij Bank
KBC Groep NV Merger
20
Boot A. W. A., (1998), p. 3 21
(2011), p. 247
Concentration in the Italian banking industry: future prospects
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France 1997 SocGen/Crédit du Nord
SocGen Acquisition
1997 Crédit Agricole/
Banque Indosuez Crédit Agricole Acquisition
1999 BNP / Paribas
BNP Paribas Acquisition
2003
Crédit Agricole/ Crédit Lyonnais
Crédit Agricole Acquisition
Italy 1992
Banco di Roma/Cassa di Risparmio di Roma
Banca di Roma Merger
1995
Credito Italiano / Credito Romagnolo
Credito Italiano Acquisition
1997 Cariplo /Ambroveneto
Banca Intesa Merger
1998 Banca SanPaolo/IMI
SanPaolo IMI Acquisition
1998
Credito Italiano/ Unicredito
Unicredit Merger
1999 Carire / Bipop
Bipop - Carire Merger
1999 Banca Intesa/Comit
Banca Intesa BCI Merger
2002
Banca di Roma/ Bipop - Carire
Capitalia Merger
2007
Banca Intesa / SanPaolo IMI
Intesa SanPaolo Merger
2007 Unicredit/Capitalia
Unicredit Acquisition
2007
Montepaschi / Antonveneta
Montepaschi Acquisition
Concentration in the Italian banking industry: future prospects
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Germany 1998 BV/BHWB
HVB Merger
2001 Allianz/Dresdned Bank
Allianz Dresdner Assets
Managemnt Acquisition
Netherlands
1972
Coöperatieve Raiffeisen-Bank/
Coöperatieve Boerenleenbank
Rabobank (from 1980s)
Merger
1991 ABN Bank / AMRO Bank
ABN AMRO Merger
1991
Nationale Nederlande/ NMB Postbank
ING Merger
Spain 1988
Banco Bilbao/ Banco Vizcaya
BBV Merger
1990 Caja de Ahorros de Barcelona/ Caja de
Pensiones para la Vejez La Caixa Merger
1999 BBV / Argentaria
BBVA Merger
1999
Banco Santander/ Banco Central Hispano
BSCH Merger
Portugal 1995
Banco Comercial Português/ Banco
Português do Atlantico
Banco Comercial
Português Acquisition
2000
Banco Comercial Português/ BPSM
Banco Comercial Português
Acquisition
United Kingdom
1995 Lloyds Bank/ TSB
Lloyds TSB Merger
Concentration in the Italian banking industry: future prospects
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2000
Royal Bank of Scotland/ NatWest
RBS Acquisition
2000 Barclays/ Woolwich
Barclays Acquisition
2001
Bank of Scotland/ Halifax
HBOS Merger
Denmark
2001 Danske Bank/
Realkredit Danmark/ BG Bank
Danske Bank Acquisition
Source: Salgado (2011), Bottiglia (2009), Own elaboration
The introduction of a single currency has had a strong impact on the capital markets,
in particular equity markets and government and corporate bonds markets. Before the
introduction of Euro, in fact, capital markets were highly fragmented and few domestic
players dominated with high market shares both in the primary and secondary markets.
These intermediaries held a competitive advantage thanks to the presence of 4
different factors: the privileged relations that national institutions had with local
customers; the higher experience in evaluating national business risks, especially in
relation to securities pricing; the domestic currency denomination, that allowed banks to
better know how and when to place the issued securities and a higher comprehension of
the demand and supply of order flows; and the stronger expertise in the economic and
monetary environment, which permitted to collect essential information on the bond and
equity secondary markets.
Concentration in the Italian banking industry: future prospects
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Chart 6 – Assets of 5 largest banks as percentage of total Assets 1990 - 2007
Source: Bottiglia (2009)
With the introduction of a single currency, savers could diversify their portfolios
across European markets by investing in foreign securities without having to consider the
exchange risk. Thus, banks remained with smaller competitive advantages, namely the
historical relations with local customers and a better knowledge of the national
environment, in term of accounting, taxes and laws. In particular, whenever business risk
can be better evaluated by domestic players, national banks can control issue in the
primary market and trade in the secondary one. This situation is quite common with SMEs,
venture capital or real estate markets, where the small amount of information and the
knowledge of local market represent an important source of advantage to limit risks.
In front of large corporations with a strong international orientation any local
advantage is useless due to the importance of international expertise and placing power. It
is possible to claim that the introduction of Euro has led competition to a broader level,
making strategically relevant consolidation of activities in capital markets.
Another important implication depending from the introduction of Euro comes from
the Optimum Currency Area theory, that describes the optimal characteristics that an area
0,00%
25,00%
50,00%
75,00%
100,00%
Belgium Germany France Italy Spain Netherlands
Concentration in the Italian banking industry: future prospects
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or region should have in order to maximize the positive effects of a common currency: in
this circumstance, banks might suffer from asymmetric economic shocks because of the
impossibility of Central Bank to develop an expansive monetary policy in order to support
the economic recovery of that country among all the States that take part to the monetary
union. Asymmetric shocks are dangerous for banks because they increase credit risk, that is
the risk that the counterpart will be not able to fulfil his obligations. According to this
theory, banks operating in a single currency area should increase their portfolio
diversification in proportion to the likelihood that the home country can be subject to an
asymmetric shock. This goal can be achieved through an international diversification of the
loan portfolio or through cross – border mergers22.
2.2 Cross – border M&As in Europe.
Consolidation in the domestic market during the 1990s can be considered as the
prerequisite in order to increase domestic market share and become enough large and
strong to be able to compete in an international environment. Cross-border flows within
Europe have always been dominated by bank flows, reflecting the bank-based nature of
finance in Europe. The introduction of the two Banking Directive (1973; 1989), of Euro
(1999) has laid the foundations for the creation of a European common market free from
national barriers and homogeneous in terms of currency, that should have produced a
shove towards a broader integration under a European perspective.
Although a certain movement in the European environment started from the second
half of 1990s, as documented by the following chart, it is possible to claim that integration
process among European financial markets has remained incomplete until 2007, after that
it has blocked.
22
Darmine, (2002), p. 10
Concentration in the Italian banking industry: future prospects
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Table 5 – Main cross-border M&As in Europe
Bidder Bank Year Country Involved Type of operation
Fortis 1990 NL – AMEV; VBS
Merger B – AG
Deutsche Bank 1993 DE – Deutsche Bank
Acquisition I – Banco di Lecco
Dexia 1996 FR – Crédit Local de France
Merger B – Crédit Comm de Belgique
Danske Bank 1997 DK – Danske Bank
Acquisition S – OstGota Enskilda Bank
Nordea 1997
- 2000
SE – Nordbanken
Merger DK – Unibank
FI – Merita Bank
NO – ChristianiaBank
Fortis 1998 NL/B - Fortis
Acquisition B – Générale de Banque
ING 1998 NL – ING
Acquisition B – Banque Bruxelles Lambert
BSCH 1999 SP – BSCH
Acquisition P – Banco Totta&Azores
HVB 2000 DE – HVB
Acquisition A – Austria Creditanstalt
HSBC 2000 GB – HSBC
Acquisition F – CCF
BSCH 2004 E – BSCH
Acquisition GB – Abbey National
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Unicredit 2005 I – Unicredit
Acquisition DE – HVB
ABN AMRO 2006 NL – ABN AMRO
Acquisition I – Antonveneta
BNP Paribas 2006
FR – BNP Paribas Acquisition
I – BNL
RBS/ BSCH/ Fortis 2007
GB – RBS ABN AMRO Acquisition
and Break – up E – BSCH
NL – Fortis / ABN AMRO
Montepaschi 2007 I – Montapaschi
Acquisition from BSCH I – Antonveneta
Crédit Agricole 2007
FR – Crédit Agricole Acquisition
I – Cariparma, Friuladria
Danske Bank 2007
DK – Danske Bank Acquisition
F – Sampo Bank Source: Salgado (2011), Bottiglia (2009), Own elaboration
In particular, the harmonization of market infrastructures through a convergence of
the national ones into the uniform cross-border wholesale payment system (TARGET), has
encouraged – even through lower transaction costs – interbank loans and deposits rather
than securities and derivatives transactions, increasing in this way the financial integration
towards an European direction. Not only, the increased relation among European banks has
also transformed their balance sheets. Cross-border interbank loans between European
banks moved from 15.5% of total interbank loans in 1997 to 23.5% in 2008 while the debt
securities of European banks held by other European bank passed from 12.1% on 1997 to
31.3% in 200823. On the opposite, retail European banking market has remained quite
23
Allen F, Beck T et. Al., (2011), p.23
Concentration in the Italian banking industry: future prospects
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fragmented, with the prevalence of local domestic operators (Savings banks, Cooperative
Banks, National champions with a distribution network geographically segmented).
In relation to the retail market, a reason that might have blocked the development of
a common European market depends not only on the great difficulties encountered by
foreign banks in finding information to evaluate risk for small business and consumer loans
but even, until 2008, on a lack of common infrastructure for retail payments in the Euro
area.24 Economists and practitioners have found several other possible explications about
the low-intensity cross-border M&As’ activity in Europe. They range from differences in
credit risk strategies to the lack of coherence in capital structure and capitalization
decision. This gives support to difficulties in integration among institutions with different
strategic orientations. In addition, several studies have identified25 the presence of non-
financial barriers that may obstruct cross-border M&As. According to these views, national
regulators, in order to preserve competitive conditions and financial stability in their
national markets, may become a constrain blocking banking integration. Other problems
may arise due to the differences among countries in labour, corporate governance and
managerial practices.26
Nevertheless, since 2004 a renewed spirit expansionist outside national borders
came from the opening of the European Union to countries of Eastern Europe27, with
several west European banking groups that exploited the opportunity to expand their
activities outside the national borders. Countries that manifested the most intense interest
in the Eastern Europe markets were Austria, Germany, Belgium and Italy. In particular,
according to Chiaramonte (2006), in 2004 the first 5 banking groups in those markets were
24 The SEPA program (Single Euro Payments Area) has been launched for the first time in 2008, while TARGET
in 1999.
25
BGC (2009), McKinsey (2006). 26
Focarelli, Pozzolo (2008). 27 In May 2004, European Union moved from a 15 Member States composition to 25 with the entrance of
Cyprus, Estonia, Latvia, Malta, Poland, Czech Republic, Slovenia, Lithuania, Slovakia and Hungary.
Concentration in the Italian banking industry: future prospects
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represented by the German bank HVB, that accounted € 35,5 billion of assets; the 2 Austrian
banks Erste Bank and Reiffeisen Bank, respectively with € 33,3 and 28,4 billion, the Belgian
bank KBC with an amount of assets equal to € 32 billion and the Italian bank Unicredit with
€27,2 billion.
Chart 7 – Total Assets (€ billion) and market share foreign
banks in the Centre-East European countries
Source: Chiaramonte (2006)
Among the causes which could have led large banking groups to expand deeply in
the financial markets of Eastern Europe, a potential one would seem related to the will of
West European banks of following their national industrial clients during their business
expansion in those countries. Correspondence relationships with companies operating in
different geographical areas were not able to meet the needs of corporate customers and,
thus, a physical presence was strongly required. Second, the need to preserve the
exclusivity of the relationships with those clients, or in any case quality of its customer
relations by following its trades, its foreign investment and the choices of relocation of
production may have had an impact. However, the theoretical hypothesis “follow-the-client”
can only partly explains the expansive phenomenon to Eastern Europe.
0%
10%
20%
30%
40%
50%
60%
70%
80%
0
50
100
150
200
250
300
350
400
Assets held (€ billion) Market Share
Concentration in the Italian banking industry: future prospects
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Acquisitions in the new member states occurred perhaps because many Central and
Eastern European countries suffered banking crises in the early years of their
independence after the Soviet Union collapse and allowed their failed banks to be acquired
by foreign banks. Governments of that area seem to have encouraged bids by foreign
investors with the aim of restoring financial sectors that faced very serious troubles. In
particular, banking intermediaries to be privatized globally required a large capitals
contribution, while EU banking groups were able to buy at a lower price single companies.
In addition, foreign investors brought new and more advanced skills and knowledge in
terms of corporate governance, risk management, credit allocation and innovative products
and services supply with respect to the standards of that region.
In addition to the eastward expansion, some large European groups have adopted an
expansion strategy that has crossed European borders. Spanish banks, for example, took
advantage from the opportunity granted by the privatization process of different economic
sectors in Latin America for a deep internationalization. In particular, since 2000 BSCH
started acquiring participations in several South American banks, in particular in Brazil
(Banespa, the third biggest bank), Argentina (Grupo Finacerio Meridional,that already
controlled two Brazilian banks, Banco Meridional and Banco de Inversiones Bozano
Simonsen), Mexico (Grupo Finacerio Serfin), Cile (Banco Santiago) and Venezuela (Banco de
Caracas)28. The second major Spanish player BBVA, has increased its presence in South
America in particular in Colombia (Granahorrar bank), in Brazil (Hipotecaria Nacional and
Bradesco, one of the leading Brazilian bank), Cile (BHIF) and Mexico (Bancomer and
Probursa).
With regard to France, an important role in the international markets has been
covered by BNP Paribas, which since 2008 has increased its relations with Southeast of Asia
and North African countries. Among the main deals it is possible to remember the joint-
venture agreement with Vietcombank and Seabank in Vietnam for the distribution of
insurance and pension products; the acquisition of participations (19%) in the Libyan bank;
28
Bottiglia R., (2009), p. 444 – 445
Concentration in the Italian banking industry: future prospects
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the constitution of a strategic alliances with Saudi Investment Bank for assets management
activities in Saudi Arabia; the acquisition of a participation (27%) in Geojit, an Indian
investment consulting company, for the distribution of saving products in India29.
Another example of cross-border expansion extra – EU is represented by the
experiences of Germany and Switzerland in the United States. In this case focus of the M&As
has been mostly the acquisition of Investment banks, in order to increase in terms of size
and improve portfolio and skills diversification.
Table 6 – Swiss and German banking expansion in U.S
Bidder Bank Target Bank Typology Year
Switzerland
UBS
O' Connor & Ass Accountant and tax
advisors 1977
Dillon Read Investment bank 1997
Paine Webber Stock brokerage adn Asset management
firm 2000
Crédit Suisse
The First Boston Co. Investment bank 1988
Donaldson, Lufkin & Jenrette
Investment bank 2000
Germany Deutsche
Bank
Morgan Grenfell Investment bank 1995
Bankers Trust Investment bank 1999
Dresdner Bank
Kleinwort Benson
Investment bank 1995
Wasserstein Perella Investment bank 2000
Source: Bottiglia (2009)
29
Bottiglia R., (2009), p. 472 – 473
Concentration in the Italian banking industry: future prospects
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The outbreak of the 2007 financial crisis has temporarily blocked the process of
cross-border integration that since 2004 had begun to involve more persistently European
banking institutions. In Addition, crisis has showed how European institutions must work
hard yet in order to achieve the establishment of a fully harmonized Single Market.
2.3 The 2007 financial crisis and consequences in Europe.
Analysis carried out so far has deliberately left out the banking environment during
the most recent years due to the deep implications that 2007 financial crisis has had on the
financial market and its operators. Since the objective of this research is to better
investigate the dynamics of banking aggregations in Europe and Italy, crisis is considered
limited to this area as a more detailed analysis would go beyond the topic chosen. Before
considering the effect of financial crisis on the European banking industry it’s necessary just
to briefly summarized the main steps of the crisis since its beginning in 2007: each of them,
in fact, has had a deep repercussion on the banking performances and, thus, on financial
stability. The narrative of the financial crisis has been divided into 5 different phases,
starting from the bursting of the housing bubble in mid-2007 to the present day, where the
problems relate mainly to Europe.
Phase 1, the “Subprime crisis”
On July 30, 2007, the investment portfolio of Deutsche Industriebank (IKB), a traditional
lender to German SMEs, has been the first to collapse under the weight of the bursting bubble
in the U.S. residential real estate market. During the years that preceded the crisis, many
large European banking groups with a structural deposit surplus, opted to use it in order to
build investment portfolios based on European sovereign debts and structured credits, among
which RMBS (Residential Mortgage Backed Securities)30 and other financial instruments
30
RMBS are a type of bond whose cash flows come from residential debt such as mortgages or home-equity
loans. Holders of RMBS receive interests and principal payments from the holders of the residential debts. At
the peak of the bubble from 2004 to 2006, around 20% of all issued RMBS were sub-prime.
Concentration in the Italian banking industry: future prospects
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linked with the real estate market. Investors started to liquidate their RMBS portfolios
causing a significant drop both in RMBS prices and in trust among banks. As soon as the
interbank market froze, banks with a short-term and capital-market-oriented funding profile lost
access to liquidity requiring the BCE intervention through liquidity injections (€ 95 billion in August
2007, € 300 billion in September 2007).
Phase 2, the “Systemic crisis”
In September 2008, when Lehman Brothers collapsed, investors realized that large financial
institutions would not be always bailed out and started selling banking shares. Doing so,
crisis became systemic.
Chart 8 – Stock market performance. Dow Jones Stoxx Banks price index 2000 – 2013
Source: Euro Stoxx 50
With the interbank market blocked due to the lack of trust and the stock market falling,
liquidity disappeared and it became impossible for banks to find long or short term funds,
making essential interventions by the Central Banks through other liquidity injections. To
raise cash, banks opted for large – scale assets sales but nobody was willing to purchase
them due to the impossibility to evaluate in a correct way assets by now devoid of a
reference price. In order to avoid a global financial collapse, Central Banks and governments
0
100
200
300
400
500
600
Concentration in the Italian banking industry: future prospects
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intervened respectively through liquidity injections and by taking equity stake in failing
institutions and guaranteeing the new issued debt.
Phase 3, the “Economic crisis”
After the dramatic events of 2008, finished with massive bailouts and liquidity injections
worldwide, 2009 started with a relatively calm in financial markets that helped banks to
restore their balance sheets. While international policy makers were discussing new
international regulations in order to increase financial stability, real economies and public
finances started got worse under the weight of the rescue plans developed in the previous 2
years. Many countries, in fact, had approved stimulus packages to prevent a drop in their
economies and in order to avoid the risk of a depression. Although in the short–period these
interventions seemed a good solution to sustain weak economies, in the long – term the
increase in public expenditure and the drop in tax receipts worsened debt sustainability for
several European countries.
Chart 9 – Debt/GDP ratio in U.S and European countries 2000 - 2013
Source: www.tradingeconomics.com
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
US Italy France Germany Spain Greece
Concentration in the Italian banking industry: future prospects
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Phase 4, the “Sovereign crisis”
In 2011, the Euro area’s sovereign debt amounted to € 8.3 trillion (around 87% of the total
European GDP)31. Although this number is comparable to the sovereign debt level of the United
States and it is lower than the Japanese one, European problems came from the absence of a fiscal
union and from the deep differences among Member States in terms of debt. After the first round
of bailouts undertaken by national governments, banks started to be evaluated by market
participants through the merit of credit of the sovereign issuer and through the quantity
and quality of their sovereign exposures. It was therefore established a close
interconnection between banks and sovereign countries, creating a very dangerous vicious
circle: big banks in financial difficulties have put a strain on the finances of countries that
had the responsibility to support them (as in the case Ireland or Spain), while countries in
financial difficulties have negatively affected the standing of its banks and thus their ability
to enter the market (as in the case of Greece, Portugal and Italy). Due to the massive
intervention of banks in the debt crisis, from 2010 many institutional investors decided to
liquidate their stock in European banks claiming that these intermediaries were too
complex, insufficiently transparent and with uncertain future cash flows.32 Since banks
were under pressure again with problems to finance their daily activities, in December
2011 ECB decided to offer banks a three-year "Long-Term Refinancing Operations" (LTRO)
at 1.0% interest.. 523 banks signed up to €489 billion in the first round. A second round of
LTROs followed in February 2012, with 800 banks signing up for €529 billion. Despite the
large demand in both the ECB interventions, few European banks were able to sell again
their senior unsecured debt in the financial markets while, for the large majority of
European institutions, capital markets remained closed. Banks decided thus to change
strategy by deleveraging their balance sheet and by restricting credit supply. In addition,
these low-cost financing didn’t seem able to weaken the link between sovereign debt and
bank solvency, still considered one of the most dangerous problem in the Euro zone.
31 Liikanen, (2012), p. 7 32
Liikanen, (2012), p. 8
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Phase 5, the “Confidence crisis in Europe”
With the introduction of the euro, banks were encouraged to consider the euro area, and
the single market, such as their "domestic" market. The wave of bank mergers that
characterized the early part of the 2000s was a sign that the banks were adapting the size
and composition of their balance sheets to the new market reality. According to Andrea
Enria33, chairman of the European Banking Authority (EBA), cross-border banking groups
accounted for more than two-thirds of the assets of the European banking sector, but
continued to be controlled by national authorities and, in the event of a crisis, they had to
rely on the safety net of their country of origin. Crisis has brought to an interruption to the
European financial integration process and today the risk of a further fragmentation is
rising. In order to avoid sovereign crisis, EU financial fragmentation and macroeconomic
imbalances, in June 2012 European Council intervened through a formal request of a road-
map that defines step by step how to achieve the complete Monetary Union. In September
2012, then, European Commission presented a proposal for the establishment of a single
supervisory mechanism throughout Europe, considered as fundamental in order to achieve
the Banking Union.
The analysis of the different phases of the financial crisis is a crucial aspect in order
to understand how the macroeconomic environment has changed and which kind of
influence has had on financial stability in Europe. Given the severity of the crisis, as already
seen in the U.S during the 1980s, it is possible to expect the reorganization of the banking
industry through a reduction of capacity and an exit of weaker companies. This didn’t
happen during the crisis and the main reasons are ascribable to the significant liquidity
supports provided by Central Banks and to the State aids. The financial sector in Europe, in
fact, experienced significant losses during the different phases of the crisis and from
October 2008 to end of 2010 obliging European governments and ECB to use a total of € 4,5
trillion of state aids to support financial markets recovery.
33
(2013), p. 4
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Table 7 – EU parliamentary approved amounts of state aid 2008 – 2011
Guarantees
Liquidity Measures
Recapitalisation Impaired
Assets Total
Years € Billion € Billion € Billion € Billion € Billion % of GDP
2008 3.097 85 270 5 3.457 27,70%
2009 88 5 110 339 542 4,60%
2010 55 67 184 78 384 3,10%
2011 49 40 34 0 123 1,00%
2008/2011 3.290 198 598 421 4.506 36,70% Source: European Commission (2011a)
Among these funds, € 1.6 trillion, equal to 13.10% of the UE 27 GDP, were used to
help banking industry.
Chart 10 – Total aid used towards banks in EU 27 (€ trillion)
Source: Liikanen (2012)
It is possible to claim that the significant support to banks have prevented the
reorganisation of the banking sector to limit the financial instability that in the short – term
would have prevailed due to bankruptcies.
Since August 2013, there has been a considerable change in the attitude of the
markets towards banks of the European Union, and in particular to those of the Euro area
than in the previous months had been the subject to very negative assessments.
1,200
0,288
0,121
Gaurantee and other liquididty measures
Recapitalization
Assets relief intervention
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Chart 11 – CDS and Stock Indexes
Source: Bloomberg data
Spreads on senior credit default swaps (CDS) – which represent market assessment
on the probability of failure of banks – declined by about 60%, from 350 to 140 basis points
between December 2011 (shortly before the first operation of long-term funding – LTRO –
undertaken by ECB) and mid-January of this year. The cash spreads – that is the cost
incurred by banks for the issuance of senior debt – have plummeted even more sharply, by
about 70%, from 285 to 85 basis points.
These developments in financial markets have had many positive consequences.
Traditionally, in fact, banks finance their activities through two main sources: deposits by
households and companies and through wholesale market by issuing bonds, certificates of
deposit or other instruments. On average EU banks, especially large ones are critically
dependent on wholesale funding, which has been particularly volatile during the crisis.
Itraxx CDS Euro Financial (Senior 5y)
Euro Stoxx 600 banks
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Chart 12 – Short Term wholesale funding of EU and UK countries (€ billion)
Source: Liikanen (2012)
Following the market closure for bank deposits in the Euro area, the ECB's three-
year loan programs have helped to limit the problem of refinancing which had previously
forced banks to reduce size of their budget, thereby preventing a rapid and disorderly
reduction of leverage that could have aggravated beyond the economic downturn. The
recovery in wholesale markets, so even if partial and uncertain, may have helped to reduce
the risk of a credit crunch. The return of banks in the wholesale markets also involves a
lesser need to resort to borrowing from Central Banks and State guarantees. A second
positive consequence comes from the relative public sector ease of responsibilities in
contributing to finance banks. Access to private funding has already allowed various banks
to repay in advance the loans granted under the long-term refinancing operations with the
ECB (LTROs). In this way, a growing number of European banks can resume its medium-
term strategic planning, including the use of wholesale funding and actively managing the
maturities of their liabilities. In fact, in recent months it has become clear that large and
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diversified banks are not able to define their own strategies for long-term growth if they are
forced to rely on significant funding from ECB, rather than the normal collection on the
market. Serious funding problems intensify strategic uncertainties, and this can drive away
investors, counterparties or clients. Today this anomaly seems to have reduced its threat.
At the same time, it is important to remember that banks are now in a financial position
substantially different from that prevailing six months ago, in particular with regard to the
control of risks, asset restructuring and changing business models. In response to the crisis
and financial pressures, not lasts the implementation of the international regulations (such
as Basel III), banks have started to de-risk their business and to exit from non – strategic
market. The de-leveraging process can transform in a lack of lending to the real economy,
with strong repercussion to the economic recovery. The banks themselves have exposed
these concerns, arguing that regulatory reforms are too stringent and would entail a
considerable restriction of activities, and hence a reduced availability of financing for
households and companies. However, the downsizing of the balance sheets of banks is
necessary to remedy the excesses that led to the financial crisis and to restore the banks to
business models healthier and more stable34. The empirical evidence shows that European
banks have begun a process of deleveraging mainly by increasing the level of capital. It
appears clear that banks will increase restructuring in order to focus resources only in
profitable activities, disinvesting in businesses which are sub-scale and non-core.
In terms of financial integration, although banks have maintained their cross-border
presence, there are signs of declining of cross-border provision of banking services. The
sovereign debt crisis and the vicious circle between banks and their sovereigns have led to
a significant slowdown in European financial markets integration. The large cross-border
banking groups have slowed lending in other European Union countries: cross-border
interbank activities, which before the crisis were a significant source of short-term funding,
have slowed significantly and were almost completely disrupted during the sovereign debt
crisis, between 2010 and 2012. These developments have been driven by fears of the
34
Enria A., (2013), p. 16
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European large banks that there was a high risk of infection and by the growing uncertainty
about the future of the Euro. The excess liquidity, including that coming from the proceeds
of long-term refinancing operations, was largely deposited at ECB, in spite of this strategy
offered a very low or no profitability.
Retail banking integration seems to be less affected, but integration in the retail
market had in any case been limited, as banks decided to merge and increase their market
share in the national market before starting European M&As.
2.4 Concentration among companies and European regulation.
Over the last 20 years the major cross-border transactions between the European
banks contributed to the birth of subjects with a significant European orientation. On the
one hand the spread of such cross-border mergers and acquisitions has helped to create
large banking groups able to survive on an increasingly competitive market, while on the
other hand, the international nature of cross-border mergers has raised the attention of the
European legislator due to the risk of different national regulations applied in respect of the
same transaction (since it is integrations involving banks from different countries).
Differences in treatment by Member States of banks involved in the processes of cross-
border consolidation are still an issue of great interest, since it is considered to be among
the factors that have contributed to hampering the development of these operations across
national boundaries.
The need to have clear and effective rules throughout the European Union in order
to control those mergers involving companies in different countries led to the adoption, in
1989, of Regulation N° 4064/89 on the control of concentrations, which entered into force
on 21 December 1990. This measure was based on the principle of "one stop shop",
according to which cross-border transactions of large size had to be examined only by the
European Commission and shouldn’t be approved by any national jurisdiction. These
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Regulations ordered, in fact, that concentrations exciding the so-called "Community
dimension35" had first to be notified to the European Commission that, thanks to its powers
of investigation, assessed whether the merger could create or strengthen a dominant
position and thus reduce competition on the common market.
The use of “one stop shop” procedure was based on the belief that a single Member
State could not be sufficiently competent to examine all the implications that cross-border
transactions may have on the European economic environment. In addition, the principle of
"one stop shop" allowed to simplify administrative procedures and, thus, to minimize the
costs of merger control both for Supervision Authorities and companies. According to the
Regulations of 1989, the European Commission appeared to be in the best position to
assess mergers made between companies operating on markets larger than domestic, since
it had powers of investigation and of undertaking corrective actions more appropriate than
the limited resources of the national authorities which, thanks to a lower difficulty to collect
the necessary information on the domestic market, were in a better position to deal with
domestic M&As.
The provisions of EEC Regulation N° 4064/89 were applicable also with regard to the
specific case of M&As between banking firms, since the Community legislature had not
placed any exception regarding the criteria for the evaluation of bank mergers, to which
they had to apply the same principles and general criteria. The particularity of the credit
industry, however, had imposed the adaptation of the benchmark for verifying the
Community dimension, which as mentioned earlier, for businesses in general was identified
on the basis of revenues. Referring to the specific case of mergers implemented between
banks, Regulation N° 4064/89 had decided to consider these operations in relation to the
35
According to Regulation N° 4064/89, the Community dimension of an enterprise was expressed in terms of
annual turnover. In particular, a company was considered having a Community dimension if its global
revenues were higher than € 5 billion or its Communitarian revenues were higher than € 250 million. Below
the revenue thresholds above mentioned, merger control was exercised by the authorities of the Member
States in accordance with national legislation and no longer by the European Commission.
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asset size of the banks themselves. In doing so, however, were omitted items that, although
not part of the assets, expressed part of the banking activity36.
Regulation N° 1310/97 has provided to overcome this limitation by stating that, in
the case of mergers implemented between banks, the turnover parameter had to be
expressed by the concept of income, as defined by some income items relating to the annual
accounts of banks. The Regulations of 1997 has also approved an increase of cases on the
basis of which a merger between companies came to recruit a Community dimension37.
Regarding the ability of ensure effective control to communitarian dimension
mergers, both Regulation N° 4064/89 and N° 1310/97 had been able to achieve positive
results. Nevertheless, regulations required a review due to the growing concerns related to
the Euro, the enlargement of the European Community and the increasing trend towards
internationalization and globalization of business and markets.
For these reasons, on January 20, 2004 European Council approves the new
Regulation on the control of concentrations between companies – Regulation N° 139/2004 –
by repealing previous Regulations. In particular, there are mainly 3 areas where European
Council intervened and where differences are more intense:
1) the delimitation of jurisdictions between European Commission and national authorities.
One of the priorities of the reform was precisely to ensure, especially with regard to EU
enlargement, a more efficient division of responsibilities between the Commission and the
supervisory authorities of European countries, with particular reference to those
36
Chiaramonte, (2006), p. 137
37
According to the Regulation N° 1310/97, in fact, worldwide turnover was reduced by half, to € 2.5 billion,
and the same for the communitarian, to € 100 million. Beside these two thresholds, always starting from
1997, two completely new ones were added: the aggregate turnover of the companies involved in a M&A had
to be in each of at least three Member States, more than € 100 million, and that relating to aggregate turnover
of each of at least two of the companies involved, in each of at least three Member States, had to be more than
€ 25 million.
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concentrations lacking of Community dimension but able in any case to affect trades
between Member States.
2) More efficiency in the process of merger review. In this regard, the communitarian
legislator has introduced the principle of subsidiarity38, according to which each M&A
operation should be dealt by the authority most appropriate to determine whether the
operation has a communitarian dimension and if it is compatible with the common market,
that is, to check whether the concentration creates or strengthens a dominant position
impeding significantly the effective competition on the market. In particular, Regulation N°
139/2004 approves that a Member State may consult the Commission to entrust the
assessment of a merger operation to the antitrust authority of the Member State, although
the communitarian dimension, if this operation affects or threatens to affect significantly a
specific market within the Member State.
3) Modification of the so-called "substantive criterion" according to which the Commission
assessed the compatibility of the merger with the internal market and, therefore, his
eligibility. In the past, the criterion used was that of "dominant position", according to
which it was believed that one or more companies were in a dominant position if they had
the economic power to influence parameters of competition, in particular prices,
production or quality of production, distribution, innovation, significantly reducing
competition. Currently, with the entry into force of the new rules, “concentrations that
would significantly impede effective competition in the common market or in a substantial
part of it, in particular as a result of the creation or strengthening of a dominant position”39
38
Art. 1, c. 8, Regulation EEC 139/2004 : “The provisions to be adopted in this Regulation should apply to
significant structural changes, the impact of which on the market goes beyond the national borders of any one
Member State. Such concentrations should, as a general rule, be reviewed exclusively at Community level, in
application of a ‘one-stop shop’ system and in compliance with the principle of subsidiarity. Concentrations not
covered by this Regulation come, in principle, within the jurisdiction of the Member States”. 39
Art. 2, c. 1, Regulation EEC 139/2004: “Concentrations within the scope of this Regulation shall be appraised
in accordance with the objectives of this Regulation and the following provisions with a view to establishing
whether or not they are compatible with the common market. In making this appraisal, the Commission shall
take into account: (a) the need to maintain and develop effective competition within the common market in view
of, among other things, the structure of all the markets concerned and the actual or potential competition from
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are listed as incompatible with the common market. The new Regulation incorporates the
criterion of "dominant position" with a new one, namely that of the "substantial lessening of
competition", according to which is the impact on competition to become the central object
of the evaluation.
2.5 Concluding remarks.
Goal of this second chapter is to provide readers with the tools to understand the
main drivers that have contributed to the development of a Single Market in Europe and
what implications this fact has had on the European banking industry, in particular taking
into consideration the effect of the 2007 financial crisis.
Under a normative perspective, the introduction of the First banking Directive
(1977) and Second banking Directive (1989) has brought the abolition of entry barriers
allowing banks to establish branches or subsidiaries in foreign European countries and to
provide a range of credit activities. Under an economic perspective, the constitution of the
European Monetary Union (1999) and the introduction of a single currency (1999), the
Euro, gifted with a further homogenizing element, capable to remove the currency risk and
to improve transactions among European operators. Risk of contagion on European scale
contributed to the development of an efficient interbank payment system (TARGET) that
promoted interbank activities among European players.
Under an operative perspective, the first strong wave of M&As in Europe took place
during the 1990s almost exclusively within the national borders of Members States.
Among the reasons at the basis of this behaviour, national consolidation was considered
undertakings located either within or out with the Community; (b) the market position of the undertakings
concerned and their economic and financial power, the alternatives available to suppliers and users, their access
to supplies or markets, any legal or other barriers to entry, supply and demand trends for the relevant goods and
services, the interests of the intermediate and ultimate consumers, and the development of technical and
economic progress provided that it is to consumers' advantage and does not form an obstacle to competition”.
Concentration in the Italian banking industry: future prospects
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easier than cross-border due to the presence of homogeneous characteristics, such as
corporate culture and legal system. In addition, the need of gaining size and strength in the
national market was perceived as a prerequisite in order to compete in a wider market. As
result, several National Champions grew.
Although a certain movement in the European environment started from the second-
half of the 1990s, integration among European financial markets has remained incomplete
until 2007, after that it has blocked. Cross-border integration has verified mainly in the
wholesale market while retail banking market remained fragmented within national
boundaries. Reasons are different and range from differences in strategic orientation,
labour, corporate governance system or managerial practices.
The opening of the European Union borders to 10 new countries from Eastern
Europe in May 2004 has brought a renovate expansionistic spirit, culminated with the
massive entrance of West European banks in those markets. Other countries, such as Spain
and France, have opted for extra-EU cross-border M&As or joint-ventures, in particular in
Latin America, Southeast Asia, North Africa and India. Geographical diversification, within
or outside from Europe, has been followed by almost all European operators.
The 2007 financial crisis has had strong repercussion on the European banking
industry, weakening its operators and seriously threatening financial stability of the Euro
System. It is possible to identify 5 different waves; each of them has affected in a different
way European banking industries.
1) Subprime crisis: because of the portfolio composition of many European banks, built on
large percentage of structured credits based on residential mortgages, when the bubble on
U.S residential real estate market burst, Europe found itself infected. Assets value of banks
dropped and interbank markets blocked.
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2) Systemic crisis: after Lehman Brother demise, investors started selling banking shares
bringing value of many banks almost to the limit of insolvency. Only through liquidity
injections by European Central Banks, banking industry didn’t collapse.
3) Economic crisis: lack of liquidity transmitted immediately to the real economy causing
the beginning of an economic crisis not finished yet. Since the beginning, European
countries decided to face crisis through the development of expansionary policies (rise in
the public expenditure and/or taxes cut) that increased the level of foreign debt.
4) Sovereign crisis: due to the stimulus packages promoted by Members States in order to
avoid economic recession, the increased level of sovereign debt in some European countries
(Greece, Portugal, Ireland, Spain and Italy) worsened European economic conditions and
established a vicious circle between sovereign debt and banks. Big banks in financial
difficulties put a strain on the finances of countries that had the responsibility to support
them, while countries in financial difficulties negatively affected the standing of its banks
and thus their ability to enter the market. Liquidity injections and refinancing operations
seemed the best solution in order to block instability.
5) Confidence crisis: today, despite recession continues, European Union is facing a
problem of trust, mainly linked with the lack of international coordination among
Supervisors. European Union decided to improve common Authorities – the introduction of
the European Banking Authority (EBA) is an example – in order to remove this gap.
In terms of financial integration, although banks have maintained their cross-border
presence, but it is possible to see sings of decline in the wholesale market activities,
mainly ascribable to the luck of trust among European banks, which have preferred to
deposit capitals surplus at ECB, obtaining almost nothing. Retail banking integration seems
to be less affected.
II Chapter ends with a brief analysis of the European regulation about M&As in the
banking industry. Regulation 1310/97, which substituted the one issued in 1989, stated the
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principle of separation between M&As with a national effects from the ones with an
European effects, entrusting the latters to European authorities, more able to evaluate
merits and pitfalls of broad-scale operations. Regulation 139/2004 integrates the previous
regulatory bodies through the inclusion of principle of subsidiarity, according to which a
Member State may consult the Commission to entrust the assessment of a merger
operation; and the modification of the substantive criterion, according to which dominant
position is given not only in dependence on the capability of a company to influence market
determinants (prices, innovations etc.) but through broader measures that take into
account simply the effective level of competition.
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C H A P T E R III
T H E I T A L I A N B A N K I N G I N D U S T R Y
3.1 Evolutionary profiles of the concentration process in Italy.
Starting from the end of 1980s, and in line with the majority of the European
countries, Italian banking system has undergone broad transformations determined both
by the occurrence of factors common to the experience of the other European banking
systems and by peculiar factors that have individually characterized the Italian economic
and institutional system. In particular, as already claimed in Chapter I and Chapter II,
European deregulation, that led national barriers to fall allowing the creation of a common
market where intermediaries can freely establish branches or subsidiaries; the introduction
of the Euro, which eliminated the currency risk by making easier for banks to operate
outside national borders through a homogenized currency; the technological evolution, that
made possible the abolition of geographical and temporal barriers, have pushed operators
to deal with a completely different economic environment, more crowded and where
certainties in terms of market shares and profitability fell.
Italian banking industry has started its aggregation process with a slight delay
compared with other European banking systems40. To understand the reasons of such
slowness, it is useful to analyse the situation of the banking industry in Italy before the
1990s due to its peculiarities that still contribute to influence market structure. The
situation of the Italian banking market, until the end of the 1980s, has long been
characterized by a low competitiveness and by the presence of banks on average inefficient.
In particular, before the entry into forces of the new law on banking activities (TUB -
Consolidated Banking Act) in 1993, the Italian banking system remained essentially pegged
to the previous set of rules, drawn up during the Fascist period in 1936, in response to a
40
Bottiglia R., (2009), p. 365
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perceived need to establish a clear and unequivocal order to the credit market and its
intermediaries, especially in the aftermath of the Great Depression (1929-1933).
Regulatory reform of 1936 was aimed for maximum stability, through the definition
of a tightened and fragmented credit market and the recourse to highly skilled and
specialized operators locked in a set of activities of exclusive competence41. Under a
technical profile, Banking Law of 1936 introduced in the Italian credit system the principle
of banking specialization, based on maturity of the collecting activities: operations were
distinguished in “less than 18 months” and “over 18 months”. Specialization was intended
to prevent banking industry, which often gathered short-term savings and implemented
lending operations incompatible in terms of time. In particular, distinction depended on the
maturity of the collection, allowing short-term collection to National Interest Banks, Public
Institutions, Ordinary Banks, Saving and Rural Banks. On the opposite, only specific
intermediaries (Land Banks, Institutes for the Agricultural Credit, Credit Consortium for
Public Works, Institute of Ships Financing) were considered apt to operate in the long-term
line of activities.
Chart 13 – Ordinary Banks, Saving Banks and Cooperative and Popular Banks 1937 – 1965
Source: Banca d’Italia
41 La Francesa S., (2010), p. 122
0
200
400
Ordinary credit banks (corporation)
Popolar and Cooperative Banks
Savign Banks
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Table 8 – National Interest Banks and Public
Institutions after the 1936 Banking Law
Bank Constitution Name at constitution Passage
under IRI42
Type of bank after the 1936 Banking
Law
Banco di Roma
1922 Cassa di Risparmio di Roma/ Banco Santo
Spirito 1934 National Interest Bank
Banca
Commerciale Italiana
1894 Banca Commerciale
Italiana 1934 National Interest Bank
Credito Italiano
1870 Banco di Genova 1933 National Interest Bank
Banco di Napoli
1787 Banco Nazionale di
Napoli no Public Institution
Banco di Sicilia
1849 Banco delle Due Sicilie no Public Institution
Banca
Nazionale del Lavoro
1913 Istituto Nazionale per la Cooperazione ed il
Credito no Public Institution
Istituto San Paolo di Torino
1563 Compagnia di San
Paolo no Public Institution
Monte dei
Paschi di Siena
1472 Monte di Pietà di
Siena no Public Institution
Source: Historical data, Banca d’Italia; Own elaboration
42 In order to fight against economic Depression started in 1929, all the large national companies in
bankruptcies were nationalised and organized under a State – owned holding, Institute for the Industrial
Reconstruction (IRI). According to La Francesca (2010), in 1934, just one year after its establishment (1933),
companies controlled by IRI competed for national production to 23% in the mechanical sector, 80% in the
naval one, 45% in 'steel and 77% in cast iron. IRI remained a constant in the Italian economy since 1997 -
2000, while Italy started privatizing State – owned large companies, banks included. In 1980, IRI arrived to
employ more than half a million of workers (557’000), progressively dropped up to 263’000 in 1995.
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The 1936 Banking Act has been important for another reason too, linked to the
introduction of the supervision mechanisms created in order to control banking companies
and credit market. Bank of Italy was appointed Central Bank and obtained definitively the
function of issuing money and controlling the banking market. In line with the main
objective of national authorities – financial stability – supervisory tools used by Bank of
Italy to achieve this goal were grouped under the so-called “structural supervision”,
characterized to intervene directly on the market structure managing the number of
companies, market shares and fields of activity. Several strict local markets resulted. This
market structure remained in forces for more than 50 years with only few changes that,
however, didn’t modify the structure created. On the threshold of 1990, in fact, the
structure of the Italian banking market was still divided between ordinary credit banks,
authorized to collect deposits but that could operate with a maturity up to 18 months, and
special credit institutions, which collected funds through bond or other securities issues
and financed operations with maturity greater than 18 months.
Main changes in laws date back to the beginning of 1990s with the Second European
Banking Directive recognition (1992)43, the Amato Act44 (1990) and the Consolidate Banking
Act (1993) issue.
The Amato Act (1990) has represented an important turning point in the Italian
banking industry, as it has permitted to convert State-owned banks into private corporates.
Among the reasons that have brought Italian politics to approve the transformation process
in the State - owned banking industry, it appeared clear that the public nature of many
Italian banks did not permit them neither to be acquired by other private credit institutions
nor to merge. Secondly, privatisation was considered necessary because public economic
entities implied, with respect to those of private nature, a lower sensitivity to the objective 43 Analysis of implication coming from the national recognition of the European Banking Directives has been
consider as already developed, since they have been deepened in their essential profiles in Chapter II.
Analysis focuses on the effect of national regulatory changes. 44 Law N° 218/1990, regarding “Provisions for restructuring and consolidation of State-owned credit
institutions” named after the Italian Prime Minister Giuliano Amato (in charge from in 1990-1993 and 2000-
2001), promoter and presenter of the Law.
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of efficiency, which ended up with the goal of stability. Emerged the need to proceed with a
legislative reform, that allowed public banks to take the form of joint stock companies and
to participate to bank mergers without the limitation arising from their public nature.
Although the first partial divestment can be dated back to 1988, the exit of the State
from the banking industry has increased only in 1993, when started the general
privatization plan fostered by the promulgation of a new legislative framework (the
Consolidated Banking Act of 1993). Disposals of banking participations began through the
sale of 2 major Italian banks in terms of asset size (Credito Italiano and Banca Commerciale
Italiana) and a first tranche of special institutions with long-term funding (IMI and
Mediobanca). After a period of standstill, from mid-1997 to 1999, privatisations started
again with the sale of Banco di Napoli, and of the minority stakes in 2 other banks
(Compagnia SanPaolo di Torino and Banca di Roma). In 1998 BNL, Mediocredito and Banco
di Sicilia have been privatized. According to Marcella Mulino45 (2011), during the equity
transfers, Italian State had initially used instruments that allowed shares to be spread
among small investors – through the recourse to IPOs combined with underpricing policies
in order to facilitate the absorption of large quantities of shares by the market – with
results uncertain. Later, the State preferred to select a group of reference investors to which
Government could cede the controlling stake, reserving the right to join equity shares even
to other institutional investors (Italian and foreign), employees and small savers.
Table 9 – Main M&As in Italy 1990 - 2007
Year Bidder Bank/ Target Bank Resulting Bank Type of
operation
1990 Nuovo Banco Ambrosiano/
Banca Cattolica Veneta
Banco Ambrosiano
Veneto Merger
1995 Credito Romagnolo/ CariMonte Rolo Banca 1473 Merger
1997 Rolo Banca 1473/ Popular Bank
of Molise Rolo Banca 1473 Acquisition
45
Mulino M., (2011), p. 269.
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1998 Cariverona/ Saving Bank of Torino/ Cassamarca
Unicredito Merger
1998 Unicredito/ Credito Italiano Unicredito
Italiano Merger
1998 Banca SanPaolo di Torino/ IMI SanPaolo IMI Merger
1998 Cariplo/ Banco Ambrosiano
Veneto Gruppo Intesa Merger
1999 Cassa di Risparmio Reggio
Emilia (Carire)/ Banca Popolare of Brescia (Bipop)
Bipop Carire Merger
2001 Gruppo Intesa/ Banca
Commerciale Italiana Banca Intesa Merger
2002 Banca di Roma/ Bipopo Carire Capitalia Merger
2002 Unicredito Italiano/Rolo Banca
1473 Unicredito
Italiano Acquisition
2002 Banca Popolare di Verona/
Banca Popolare di Novara Banca Popolare di Verona e Novara
Merger
2002 SanPaolo IMI/ Banco di Napoli SanPaolo IMI Acquisition
2006 BNP Paribas/ BNL BNL - BNP Paribas
(ITA) Acquisition
2007 Banche Popolari Unite/ Banca
Lombarda UBI Banca Merger
2007 Unicredit/Capitalia Unicredit Merger
2007 SanPaolo IMI/ Banca Intesa Intesa SanPaolo Merger
2007 Monte dei Paschi di Siena/
Antonveneta Monte dei Paschi
di Siena Acquisition
2007 Banca Popolare di Verona e
Novara / Banco Popolare d’Italia Banco Popolare Merger
Source: Historical data Banca d’Italia, Own elaboration
Concentration in the Italian banking industry: future prospects
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In addition, the Amato Act foresaw the agencies liberalisation by removing
restrictions on the opening of new branches. Using this ploy, administrative controls on the
territorial distribution of banks were abolished effectively, leading to the creation of a
single national market.
A further important legislative measure that has contributed to increase the level of
competition on the Italian banking industry and that, in turn, has increased the incentive by
Italian banks to use strategies based on external growth, is represented by the Consolidated
Banking Act (TUB), part of the Legislative Decree of 1st September 1993, N° 385 which, as
well as incorporating many of the regulations mentioned above - the 2 European Banking
Directives and the Amato Law -, has put an end to the old Banking Act of 1936. The new
design of the credit system eliminated the principle of specialization and recognized – for
the first time in the Italian system46 – an extension of banking business towards those
financial activities admitted to mutual recognition in Europe. Year 1993, therefore,
introduced in Italy the principle of diversification of activities according to which bank
intermediaries could finally decide the range and mix of planned activities.
The transformed market structure following the deregulation started in 1990 raised
the problem, ignored until then, of banking efficiency. The removal of restrictions on the
activities and the freedom to establish branches in any part of the Peninsula, would have
notably increased competition between banks, endangering to damage seriously the
stability of the credit market if companies uncompetitive – as public banks and small
institutions strictly local were – failed and went out the market. Supervisory authorities,
thus, planned to move from a structural to a prudential supervision47, based on a micro-
46
Historically, the range of activities that Italian banks could play was rather limited, namely the traditional
activities of credit exercise and saving collection. 47
It’s important to remember that the transit to the prudential supervision framework depended mainly on
the Italian recognition of the Basel I agreement that predicted the institution of minimum capital
requirements for banks. Italy, thus, adjusted its legislative framework to national standards by introducing
this supervision mechanism.
Concentration in the Italian banking industry: future prospects
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level control on capital adequacy of intermediaries and on a macro-level control over the
general market.
Choices of Italian banks, however, weren’t limited simply to the activities they could
exercise since it was allowed them to define their organizational structure: Consolidate
Banking Act, in fact, gave to credit intermediaries the opportunity to organize themselves or
in the form of a universal bank48 or of a multi-functional banking group.
Table 10 – Universal Bank and Multi-functional group in comparison
Universal Bank Multi-functional banking group
MERITS MERITS
Absence of a duplication of costs connected with the management of those companies belonging to the group
Broad and diverse distribution channels, greater opportunities of raising funds
Opportunity to diversify activities by supporting lower cost and, thus, increasing efficiency
Greater flexibility in the choice of investments and strategic alliances
Unit of control, since the operative directions respond to a single decision centre
Greater ability to adapt in the environment
PITFALLS PITFALLS
Difficulties to integrate under the same corporate culture different activities,
Difficulty in reconciling particular characteristics of each individual entity within the overall strategy of the group
The strong diversification pushes banks to fit into operational areas other than the traditional banking business, bringing it to perform even riskier activities
The complex structure of the group increases operative costs and penalizes the flow of information
Source: Chiaramonte (2005), own elaboration
48
The introduction of universal bank as possible structure depends from the recognition by Italy of the II
Banking Directive of 1989 that defined it as model for the European banking industry.
Concentration in the Italian banking industry: future prospects
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In agreement with Chiaramonte (2005) in practice Italian banks are not conformed
to the model of pure universal bank or multi-functional banking group since structural
organization cannot be configured in an abstract way but depends strictly on the specific
environmental variables against which different intermediaries must confront. Examples
are the degree of competitiveness of the credit market, the level of diversification of
competitors or tax laws49.
The model originally adopted by the majority of credit institutions proved to be the
federal bank or federal multi-business group, in which the banking component was
characterized by the simultaneous presence of companies national-oriented and companies
deeply established in the territory: it was a model that stemmed from the need of banks to
pursue simultaneously efficiency while maintaining strong local position. In particular,
federal multi-business group was characterized by having a centralized type of organization
with significant powers conferred to the parent company. The latter was distinguished, in
turn, for the fact of taking mainly tasks of strategic direction, coordination and control, and
the ability of maintaining certain processes centralized, such as finance and treasury,
planning and control, risk management and coordination of employment policies.
Downstream from the holding position were placed instead ancillary companies, which
produced for the group a number of operational services, such as back office processes,
general services, data processing, logistics, real estate management staff training and so on.
The third level of the pyramid was represented by the federate banks, which jointed the
federation by dealing with their traditional activities on behalf of the parent company and
by selling in their portfolios products and services of the group.
It was noted50 that the function of unitary government and coordination by the
parent company was often obstructed by the differences in operative techniques and
sometimes by a radically different corporate culture among federated banks, with the result
49
Chiaramonte, (2006), p. 87 50
La Francesca, (2010), p. 145 – 146
Concentration in the Italian banking industry: future prospects
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that it wasn’t easy to foster the emergence of a common culture within the group. In
addition to this, often resistances arose by the members of the group to accept the
downsizing of their operational autonomy due to the centralization process put in place by
the holding.
Coming back to the deregulation process undertaken since the beginning of the
1990s, the last important step to consider refers to the issue in 1998 of the Consolidated Act
on Financial Intermediation51 (TUF), through which Italy adopted the European Directive N°
22/93 EEC about investment services in securities field. Its adoption further enlarged the
banks’ space of activity recognizing the opportunity to deal – prior authorization by the
Bank of Italy – with other financial products, typically investment services, in addition to
the traditional activities and those subject to mutual recognition.
In short, the Consolidated Banking Act of 1993 first and the Consolidated Act on
Financial Services then determined a gradual abatement of those barriers that separated
different segments of financial intermediation increasing the level of competition both
among operators belonging to the same segment or to different ones. Italian banking
system in the 1990s, thus, has been deeply transformed from a strict credit system to an
open and competitive one, causing a decline in profitability in traditional business: in
particular, between 1990 and 2005, spread between the lending and deposit average rates
declined by 1.5 percentage points, partly as a result of the process of convergence towards
the Euro (and therefore a single rate) and part because of the increased competition.
At the same time it was possible to see a change in revenues, depending on the
greater operational freedom accorded to banks. The decline in profitability in traditional
sectors has thus been filled through the recourse to more innovative fee-based financial
activities. This has decreased the amount of revenue from interests, to the benefit of an
increase in those from services: in the period 1990 – 2005, in fact, revenues from interest
have fallen from almost 80 per cent of the total revenues to something more than 50 per
51
Legislative Decree N° 58/1998
Concentration in the Italian banking industry: future prospects
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cent while revenues from services, and more in general fee-based activities, have
duplicated, moving from 23 per cent in 1990 to 45 per cent in 2005.
Chart 14 – Spread between rate on loans and on deposits in Italy
Source: Ruozi, Ferrari (2005)
Chart 15 – Composition of total revenue for Italian banks 1990 - 2005
Source: Ruozi, Ferrari (2005)
0%
2%
4%
6%
8%
10%
12%
Average rate on loans Average rate on deposits Spread
0,00%
20,00%
40,00%
60,00%
80,00%
Interest margin/ Intermediation margin Services margin/ Intermediation margin
Concentration in the Italian banking industry: future prospects
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Recently, the regulatory process regarding banks has been amended by the
introduction in 2006 of the New Saving Act52, through which skills and powers of antitrust
intervention of Bank of Italy in the credit market were partially donated to the new
Authority for Competition and Markets (AGCM), under the ideas of a functional division of
tasks and that the authority responsible for the maintenance of competition and stability in
the Italian domestic market, credit market included, is the Antitrust one. Then it’s this
authority, in agreement with Bank of Italy, that has today the burden of verifying whether
any consolidation activity can damage the Italian market and, in case of an affirmative
answer, to block it.
Table 11 – Main Italian regulation regarding credit market
Year Law Principles
1990 Amato Act Abolition of branches restrictions
Transformation of State-owned banks in joint stock companies
1992 II Banking Directive recognition Mutual recognition among European banks
Definition of a set of banks' activities
1993 Consolidated Banking Act Abolition of credit market segmentation
Rise in the number of operative structure that banks can choose
1998 Consolidated Act on Financial Services Further enlargement of banks' activities
towards investment services
2006 New Saving Act Shared appointment of competences on financial stability between Bank of Italy and the Authority for Competition and Markets
Source: Own elaboration
52
Law N° 262/2005, entered into force on January 12, 2006.
Concentration in the Italian banking industry: future prospects
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In a such competitive environment and on the wake of banks in major European
countries, Italian banks since the early 1990s decided to undertake external growth
strategies, since these were considered to be the only ones capable of allowing banks to be
more efficient and at the same time to be able to quickly reach those size that would have
enabled them to survive in the market.
3.2 Characteristics of concentration in Italy.
During the period 1990 - 2012, the number of banks operating in Italy has dropped
from 1156 to 723, with a reduction equal to 37,5 per cent.
Table 16 – Number of banks in Italy 1990 - 2012
Source: Banca d’Italia
In particular, reduction in the number of players has regarded all the different
categories of domestic operators involved. Banking groups, joint stock banks and
Cooperative and Saving banks have decreased probably due to the effect of the
consolidation process.
400
500
600
700
800
900
1000
1100
1200
Concentration in the Italian banking industry: future prospects
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Table 12 – Number and typology of banks in Italy 2004 – 2011
Type of intermediary 2004 2005 2006 2007 2008 2009 2010 2011
Banking Groups
83 85 87 82 81 75 76 77
Single Banks
778 784 793 806 799 788 760 740 of which
Joint stock Banks 242 243 245 249 247 247 233 214
Popular Banks 37 36 38 38 38 38 37 37
Cooperative and Saving Banks
439 439 436 440 432 421 415 411
Foreign branches 60 66 74 79 82 82 75 78 Source: Banca d’Italia
On the opposite, number of Foreign branches is
globally grown, although in the last 2 years there has
been a decline in attendance of about 5 per cent,
probably driven by the European – and in particular
Italian – events that followed the 2007 financial crisis.
From 1990 up to date, the aggregation process in
Italy has experienced 2 distinct phases: the first had its
origins in mid-1990, reached the peak in 2002 and then
fell in the following 2 years. In this phase Italian
banking intermediaries grew by resorting external
growth in order to increase their market shares at a
domestic level. National players resulted.
The second phase, instead, started in 2006 and reached
its peak 1 year later, when the M&A process brought to the constitutions of some large
banking group able to compete at an European level (Unicredit and Intesa SanPaolo).
0,7
0,75
0,8
0,85
Chart 17 – Gini Index in the Italian
Banking Industry 1999 - 2007
Source: Cerasi, Crosato (2009)
Concentration in the Italian banking industry: future prospects
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National champions resulted. A numerical confirmation comes through the Gini Index53
applied to the analysis of the concentration in the Italian banking sector from 1990 to 2007.
Looking at Gini Index, in fact, the increase in the overall concentration can be divided into 2
jumps roughly equivalent in value even if the first is distributed in 5 years while in the
second case is condensed in only 1 year. Gini Index identifies 3 stages in the process of
concentration: a first phase, from 1999 to 2004, characterized by an almost constant
increase in concentration; a second phase, from 2004 to 2006, instead characterized by a
substantial stability; and a third final phase, from 2006 to 2007, in which concentration
grows in a single year to the same extent of the previous 5 years-phase.
According to Cerasi and Crosato54 (2009), it’s possible to explain the variation in the
levels of banking concentration by analysing structural changes in the Italian credit market
in the period of time considered. In particular, from 1999 to 2004, the increase in
concentration is caused by M&As operations that led the transformation of medium-large
size groups in larger groups. Main operations that have brought to increase concentration in
the banking market can be attributed to:
- creation of several medium-large size groups starting from the aggregation of medium
size banks. As example, Banco di Sardegna (450 branches) became part of the Banca
Popolare dell’Emilia Romagna, which passed from 491 to 941 branches; Carime Banca
was incorporated by Banca Popolare del Commercio e dell’Industria (moving from 212 to
553 branches); Casse Venete Banca was incorporated by Cardine Group (which increased
53
Gini Index is a measure of statistical dispersion developed by the Italian statistician and sociologist Corrado
Gini in 1912. This coefficient measures the inequality of a frequency distribution and it is used in economic
studies to evaluate concentration in different fields, among which concentration in the financial sectors.
According to this procedure, result obtained ranged from 0 to 1.
- If result is 0, it means that the environment is characterized by perfect equality (equal distribution,
absence of concentration);
- If result is 1, it means that the environment is characterized by the highest level of concentration
(when 1 entity owns all and the others nothing).
54
Cerasi V., Crosato L., (2009), p. 10 – 11.
Concentration in the Italian banking industry: future prospects
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its branches from 252 to 753), Banca Regionale Europea (239 branches) merged with
Banca di Lombardia e Piemonte (which rose from 477 to 731 branches). Bipop Carire
merged with Banca di Roma becoming Capitalia (from 310 branches and 1.765
respectively to 2.077);
- consolidation among major groups: within this category, smaller groups were
incorporated by larger banks. For example: Banca Popolare del Credito e del Commercio
and Banca Popolare di Bergamo-Credito Varesino merged into the Unione Banche Popolari
(from 557 and 645 branches to 1.216); Banca Popolare di Novara and Banca Popolare di
Verona merged in Banca Popolare di Verona e Novara (from 533 and 601 to 1.146
branches); Banco di Napoli and Cardine Group were acquired by SanPaolo IMI (that
received respectively 731 and 837 branches).
During the period 2004 - 2006 there haven’t been registered operations that have
significantly affected the Italian competitive environment. The only exception is
represented by the acquisition of BNL by a foreign bidder, BNP Paribas. In addition, the
decrease in the Gini Index over the period can be attributed to the intervention of the
Antitrust Italian Authority which imposed to the largest banking groups to sell part of their
branches in order to maintain an adequate level of competition.
The increase in concentration from 2006 to 2007, instead, can be largely attributed
to mergers among the largest Italian banks, from which have come the first four Italian
banking groups by number of branches, namely:
- the incorporation of SanPaolo IMI by Intesa (Intesa SanPaolo), which rose from 3.030 to
5.666 branches, becoming the leading Italian banking group;
- the incorporation of Capitalia by Unicredito Italiano (Unicredit), growing from 3.056 to
5.069 branches and becomes the second largest group;
Concentration in the Italian banking industry: future prospects
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- the merger between Banco Popolare Italiano and Banca Popolare di Verona e Novara to
form Banco Popolare with 2.153 branches;
- the incorporation of Banca Lombarda e Piemontese by Unione Banche Italiane (UBI
Banca), which passed from 1.205 to 1.986 branches.
From the point of view of the spatial distribution of the banks involved in M&As,
according to the Authority for Competition and Markets55 (AGCM), over a period of 20 years
from 1990 to 2010 the majority of mergers and acquisitions implemented has involved
banks from the south and centre of Italy integrated in those from the north. In front of 290
operations of M&As occurred, in fact, more than 100 have been undertaken by banks
headquartered in northern Italy towards intermediaries operating in southern and central
Italy. The study, then, underlines that the majority of those operations have been developed
from 1990 to 2002, that is the period in which banking operators started to aggregate in
order to increase their dimension toward a national presence.
Consistently with what has just been reported, De Angeli56 (2005) identifies that the
Italian banking industry has preferred mergers by incorporating the target bank rather
than through a “union of equal”. Acquisition represents, therefore, a preparatory phase for
the following incorporations, since it allows banks to maintain brands of the counterparties
involved, to not destroy an intangible value, such as customer relations, and also it
appeared more appropriate in cases in which the combination involves entities operatively
and culturally very different.
It may be noted, therefore, that while banks of northern Italy - and to a lesser extent
those from the centre - have adopted a development perspective addressed throughout the
country, banks from southern Italy remained closely anchored to their local dimension,
55
AGCM, (2011)
56
De Angeli S., (2005), p. 95
Concentration in the Italian banking industry: future prospects
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neglecting the important process of deregulation that led financial intermediaries to
compete on a broader area.
Before concluding the analysis of the Italian banking system in an overall
perspective, it’s important to take into consideration even the topic of banking industry
efficiency. The main measure used in order to evaluate efficiency is represented by the cost-
income ratio, a measure that shows company’s costs in function of its income.
This ratio should give a clear vision of how efficiently a company – in this case the
analysis is at an aggregated level and thus it takes into consideration the total income and
operative costs supported by the banking industry – is managed. The lower the ratio is, the
more company is efficient, because it means that costs cover a lower percentage of
revenues. Changes in the ratio can also highlight potential problems: if the ratio rises from
one period to the next, it means that costs are rising at a higher rate than income, which
could suggest a decrease in efficiency and thus, a worsening of the operative conditions of
the intermediary (industry) under analysis.
Chart 18 - Operational efficiency in the Italian banking system 1990 – 2005 (COST-INCOME RATIO57)
Source: Banca d’Italia
57
Data in the period between 1990 and 2005 are all related to the entire Italian banking system.
50,00%
55,00%
60,00%
65,00%
70,00%
Concentration in the Italian banking industry: future prospects
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Looking at the cost-income ratio of Italian banking system during a span of time
larger enough, it is possible to see that banks have lost around 6 per cent in efficiency from
1990. Nevertheless, it is necessary to divide the period taken into consideration in two
different spans of time: the first one is represented by the period from 1990 to 2007, where
in the long-term banks had gained 2 per cent in efficiency, moving from 61,54 per cent to
59,40 per cent. In particular, it is possible to claim that this positive result comes from both
an increase in profitability – depending mostly on the increase in activities that banks have
been allow to exercise – and a reduction in cost, especially related with personnel (Chart 19
and 20).
The second period relates with the last 4 years where the effects of financial crisis
and economic recession have affected negatively profitability of banks, causing an increase
in the cost-income ratio of 8 per cent. It seems reasonable, thus, not to consider the last 4
years as a representative of the structural dynamics that characterize the Italian banking
market.
Chart 19 – Personnel cost on total operative cost (per cent) in Italian banking industry
1990 - 2011
Source: Banca d’Italia
50,00%
52,00%
54,00%
56,00%
58,00%
60,00%
62,00%
64,00%
66,00%
Concentration in the Italian banking industry: future prospects
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Chart 20 - Intermediation margin in the Italian baking industry 1990 - 2011
Source: Banca d’Italia
Nevertheless, simply looking at the period from 1990 to 2007 it is possible to
confirm what has been said by Berger and Humphrey (1994)58, who determined that scale
economies, and more in general the size of a bank, have an impact quite limited on banking
efficiency.
3.3 Focus: Unicredit Group
In order to better analyse the Italian banking industry, it is important to turn the
attention not only to the specific characteristics of the credit market and its evolution, but
even to the main players. In particular, far from the possibility to include all the banking
companies operating into the national market, attention will be focused on the major group,
Unicredit.
58
See Chapter I, p. 20
0
20 000
40 000
60 000
80 000
100 000
120 000
Concentration in the Italian banking industry: future prospects
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Unicredit Group came into existence in October 1998, after the merger between the
national group Credito Italiano and Unicredito. Credito Italiano59, historical bank founded in
1870, was privatized in 1993 when government sold its controlling stake, after it was
nationalized under the Fascism in order to support the country recovery during the
economic recession caused by the Great Depression of 1929. Unicredito, instead, was
founded in 1997 through the merger of 3 different saving banks operating in the northern
Italy: Cassa di Risparmio di Torino S.p.A (CRT Bank), Cassa di Risparmio di Verona, Vicenza e
Belluno (Cariverona S.p.A) and Cassa di Risparmio della Marca Trevigiana (Cassamarca). The
new bank derived from the merger, Unicredito Italiano, showed since the beginning a strong
inclination towards expansion within and outside national borders.
From the aggregation, resulted a leading group able to compete on the whole
national territory, even if deep-rooted in the north of Italy. Unicredito Italiano, however,
decided to increase its presence even outside from the Italian boundaries, starting a project
of expansion towards both eastern and western Europe. International expansion began in
1999, year in which the Italian banking group developed a network of investments through
the acquisition of local banks in Poland (Bank Pekao in 1999), Slovenia (Pol’nobanca in
1999), Bulgaria (Bulbank in 2000), Croatia (Splitska Banka in 2000 and Zegrebacka Banka
in 2002), Romania (Dermirbank in 2002) and Czech Republic (Zivnistenska Banka in 2002).
From 2005, then, Unicredito Italiano entered in the Turkish market through the acquisition
of 2 banks (Yapi Bankasi and Kredi Bankasi).
In the mid-2005, after lengthy negotiations, Unicredito Italiano concluded the deal
for merging with the German banking group HypoVereinsBank (HVB Group), that had
already entered in foreign credit markets: in Austria with the acquisition of the ownership
of one of the leading banks (Bank Austria Creditanstalt) and in East Europe, competing with
the Italian bank in terms of market shares in several ex – URSS countries. The strategic
59
Credito Italiano wasn’t the name at foundation. In 1870, in fact, it was called Banca di Genova. When in 1907
the headquarter moved to Milan, name was changed.
Concentration in the Italian banking industry: future prospects
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interest of Unicredit in increasing its eastern market shares and the economic difficulties60
of HVB Group brought to conclude the deal and to create the first truly pan-European
banking subject.
In 2007, in order to increase its presence in centre and south Italy, Unicredito
Italiano acquired – and then merged – the medium – large bank Capitalia, and changed its
name from Unicredito Italiano to Unicredit Group.
Table 13 - Constitution of Unicredit Group
Source: www.unicreditgroup.eu, Own elaboration
The 2007 financial crisis has deeply affected Unicredit Group that, in a short time, has
seen share value to fall of almost 29 per cent in few weeks during September 2008. Reason
of this deep fall can be ascribed to the process of M&As undertaken by Unicredit in the
60
According to Chiaramonte (2006, p. 216), HVB Group suffered losses equal to € 1,99 million in 2005 and €
2,4 million in 2004 due to adjustments to the value of the loans portfolio.
Concentration in the Italian banking industry: future prospects
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previous years: the majority of those operation have been acquisitions by cash and this has
had an impact on the group liquidity, leaving Unicredit in a weak position.
In an interview with Bloomberg TV, CEO of the banking group Alessandro Profumo
has acknowledged that the group had acquired several competitors' at the top of the
market.
"In the first half of 2007, when everything seemed in pink we conducted acquisitions,
capital was used. Think of Ukraine, Kazakhstan, and minorities to HVB and Bank Austria and
at the same Capitalia. In hindsight it might have been better to wait. 61"
Chart 21 - Unicredit S.p.A share price 2006 -2013
Source: https://www.unicreditgroup.eu/it/investors
Few weeks later a capital increase of € 3 billion was decided in order to increase
liquidity. Nevertheless, during the period 2007 – 2011 Unicredit Shareholders’ meeting
approved 3 different capital increases: in 2009 € 4 billion were added to equity in order to
61 Cit. from La Stampa.it, article published on-line the 6th October 2008. Source: http://www1.lastampa.it/redazione/cmsSezioni/economia/200810articoli/37103girata.asp
Concentration in the Italian banking industry: future prospects
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align company to the international standards. In 2010, Unicredit passed the stress test on
financial strength made by the Committee on European Banking Supervision (CEBS).
Year 2011, then, was one of the strongest year: due to an impairment test on the
value of goodwill and of other intangibles, Unicredit had to record a devaluation of € 9,6
billion, that, together with the negative economic performance, brought to an accounting
loss of € 10,6 billion. After the third capital increase approved for an amount of € 7,5
billion, the CEO Alessandro Profumo was discouraged.
According with BanksDaily.com62, today Unicredit is ranked first Italian bank in terms
of assets, equal to € 0,927 billion, and thirteenth at an European level. Nevertheless, in the
period from 2007 to 2011, shareholders approved 3 different capital increases (€ 3 billion
in 2008; € 4 billion in 2009; € 7,5 billion 2011). Devaluation registered in the intangibles (€
9,5 billion), that determined a drop in Unicredit value perceived by financial market
operators, can be largely ascribed to the wrong strategy pursued in terms of market
consolidation.
3.4 The 2007 financial crisis and the sovereign debt crisis.
The financial crisis of 2007, that at the beginning had affected mainly financial
institutions with a strong inclination towards innovative finance, has had a tremendous
impact on banking liquidity markets. The Italian banking system, although affected by the
turbulence from foreign banking systems, in the first period reacted better than others:
according to IMF, it is possible to include among the main reasons a brokerage model based
on close relationships with customers, an adequate system of protection of deposits and an
extensive network of branches that provide a source of stable funding from households and
companies to Italian banks63.
62
Source: http://www.banksdaily.com/topbanks/Europe/2013.html 63
The effects of 2007 financial crisis on banking industry have been deepened in Chapter II. This part wants to
consider in particular the effect of the sovereign debt crisis that is affecting Italy since the mid-2010.
Concentration in the Italian banking industry: future prospects
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From 2010 to the first half of 2011, after an increase of 2 per cent in the spread
between the yield of Italian 10- years government bonds and the German one (the so-called
BTP-Bund spread), this gap grew rapidly up to touch 500 basic point in summer 2011. The
sovereign debt crisis that had hit Greece propagated outside national borders and, after
having infected Ireland and Portugal, touched even Italy and Spain assuming a systemic
dimension.
Chart 22 – Italian BTP and German Bund Spread 2008 - 2013
Source: www.borse.it
Tension in sovereign debt market has been transmitted sharply to the banking
industry, in particular due to the strict link existing between sovereigns and banks.
According to Panetta (2011), Gonzalez-Pàramo (2011) and Holton (2012), in fact, several
channels exist through which sovereign tensions are transmitted to banking industry, in
particular the balance sheet channel and the liquidity channel. Since banks hold among their
assets part of the sovereign debt, a reduction in government bonds value brings
immediately to a reduction of the same intensity in banks’ balance sheet – being banks
obliged to evaluate their assets and liabilities following the international standards
Concentration in the Italian banking industry: future prospects
Page 94
IASB/FASB under the constrain of fair value – starting in this way a deleverage process that
can have important consequences on the credit supply (balance sheet channel).
Under a historical perspective, the amount of bonds owned by Italian banks,
compared to the totality of their assets, is today relatively low. In January of this year they
accounted for 9 per cent of the total assets hold in portfolio64, while 20 years before they
counted for almost 14 per cent. In the decade following the transition to the single currency,
in fact, Italian banks have gradually reduced their exposure in the Italian government bonds
through a diversification process that expanded towards European assets.
Chart 23 - Government securities as share of Italian banks’ total assets
Source: Banca d’Italia (2013)
The resumption of purchases coincided with the crisis of Lehman Brothers and in
particular with the drop in many financial securities and instruments, that obliged banks to
find alternative sources where to invest.
Secondly, government bonds are typically used by banks as collaterals in their
interbank funding activities with central banks or private counterparts. A bond value
reduction, thus, impacts on the ability of banks to raise funds since counterparts are
64 According to the Financial Stability Report (2013) published by Bank of Italy, at the end on 2012 the amount
of Italian government bonds held by national banks was € 390 billion.
0,00%
2,00%
4,00%
6,00%
8,00%
10,00%
12,00%
14,00%
16,00%
Concentration in the Italian banking industry: future prospects
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skeptical in front of the value of collaterals offered, increasing in this way the difficulty of
banks in financing in the interbank market (liquidity channel).
Chart 24 - Growth in bank funding, contributions of the different components (percentage)
Source: Banca d’Italia (2013)
In the Italian case, looking at the quarterly variation in bank funding, it is possible to
note how, since the beginning of the involvement of Italy in the sovereign debt crisis, level
of non-residents deposits and interbank market activities have suffered the highest drop
among the source of funding. On the opposite, Italian banks have constantly intensified the
recourse to the Eurosystem refinancing mechanism that in 2012 has avoided Italian banks
to become insolvent.
The growing closure of European financial markets within national borders - which
has effectively blocked the banking consolidation process in the European Union resulting
in a return to segmented markets – has widely hit interbank transactions. In Italy, in
particular, interbank market is quite concentrated around the role played by the 5 largest
Italian banking groups (Intesa SanPaolo, Unicredit, Montepaschi di Siena, Banco Popolare
and UBI Banca), that represent alone almost 65 per cent of the total positions, with peaks of
-8,0-6,0-4,0-2,00,02,04,06,08,0
10,012,014,0
déc. 2009
mars 2010
juin 2010
sept. 2010
déc. 2010
mars 2011
juin 2011
sept. 2011
déc. 2011
mars 2012
juin 2012
sept. 2012
déc. 2012
Deposits of residents Retail bonds Wholesale bonds
Deposits of non-residents Eurosystem refinancing
Concentration in the Italian banking industry: future prospects
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90 per cent in the intra-group transactions and almost 50 per cent in the relations with
foreign counterparts65.
Table 14 – e-MID66 assets and liabilities exchanged (€ billion)
Asset Liabilities
January 2007 October 2011 January 2007 October 2011
Intra - group 347
437 406
531
OF WHICH
Foreign branches and subsidiaries
36
28 111
110
Extra - group 191
157 241
279
OF WHICH
Central counterparts (Bank of Italy)
10
32 11
83
Domestic counterparts
80
58 90
73
Foreign counterparts
101 67 140 122
Source: Banca d’Italia (2012)
It is possible to notice that the financial turmoil has caused a deep transformation in
the interbank market. In particular, from 2007 to 2011, the weight of central counterparts
(Bank of Italy and the Italian clearing house Cassa di Compensazione e Garanzia, CCG) has
increased drastically (+ 220 per cent in terms of assets, + 655 per cent in terms of
liabilities). It is clear that crisis have determined a preference towards transactions
65
Cappelletti G, De Socio A et al. (2012), p. 10 – 11
66
e-MID (electronic Market for Interbank Deposit) is the Italian electronic market for trading of interbank
deposits in Europe and the United States. It was created in 1990 for trading of deposits denominated in Lira.
Since 1999, following its privatization, the company is called e-MID S.p.A .Operators involved in the
negotiations on the e-MID platform are 99 Italian banks, 79 foreign banks from 29 countries and their central
banks as observers. The market is subject to the supervision of the Bank of Italy.
Source: Treccani encyclopaedia, http://www.treccani.it/enciclopedia/e-mid/
Concentration in the Italian banking industry: future prospects
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executed with central counterparts over bilateral ones due to the absence of counterpart
risk.
Relations with foreign counterparts, instead, have dropped (-34 per cent in terms of
assets, -13 per cent in terms of liabilities) as well as, more in general, national extra-group
relations (fallen of 28 per cent for assets and of 19 per cent for liabilities). On the contrary,
intra-group relations have globally seen a rise both in lending (+ 25 per cent) and
borrowing (+ 31 per cent). A justification of this behaviour might be that, among banks
belonging to the same group, the counterpart risk is lower due to the possibility of parent
bank to move resources within the group in order to limit possible insolvency problems
rather than to optimize general liquidity. It is possible to claim, thus, that Italian banks have
interrupted many of their relationships in the private market, becoming strongly
dependents on public authorities and preferring to maintain liquidity within the group
boundaries. In addition, between mid-2011 and the end of 2012, the evolution of financial
accounts in the Italian balance of payments has traced a further contraction of external
assets and liabilities and the retreat of foreign banking activities within national borders.
Foreign private investors, in fact, have made net disinvestments from Italy equal to 13 per
cent of GDP, covered mostly by government bonds and loans to banks67.
The worsening of the situation in financial markets has put Italian banking industry
in a very difficult situation both in the inter-banking and deposits collections. This situation
has deeply influenced traditional activities of banks in 2 different ways: by decreasing the
credit supply and by increasing interest rates on loans to households and companies. The
sovereign debt crisis has been transmitted to borrowers principally through the
deterioration of the offer conditions applied by banks, with higher interest rates and tighter
selection of customers. Interest rates on new loans grew in the early months of 2011,
following the increase in reference rates, in particular the Euribor.
67
Financial Stability report, Bank of Italy, (2013), p. 18
Concentration in the Italian banking industry: future prospects
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Chart 25 – Value development of Euribor for mortgages 2009 - 2011
Source: www.telemutuo.it
From the second half of 2011, due to the higher cost of funding and the lack of
liquidity, intermediaries have revised upwards the interest rates.
Chart 26 - Average rate spread on new loans to households for house purchase
Source: Banca d’Italia (2013)
0,00%
0,50%
1,00%
1,50%
2,00%
2,50%
3,00%
Euribor 1 month Euribor 3 months Euribor 6 months
0,00%0,50%1,00%1,50%2,00%2,50%3,00%3,50%4,00%4,50%5,00%
Italy Euro area
Concentration in the Italian banking industry: future prospects
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On the same time, crisis has caused other issues, in particular related with the non-
financial companies: the economic recession and the austerity measures have further
reduced their turnovers and, consequently, financial condition and liquidity of firms have
deteriorated increasing the difficulty of repayment of bank loans.
Chart 27 – Share of loans to firms in temporary difficulty
Source: Banca d’Italia (2013)
According to Cappelletti, De Socio, Guazzarotti and Mallucci 68 (2011), Italian banks
are today in a very fragile position, although it is possible to find some differences. In
particular, the ability of banks to absorb shocks is very different depending on the
operational structure adopted: banking groups or stand-alone banks. Italian banks would
have great difficulty today to react to potential further shocks, both in the financial markets
and in the real economy, because of the extreme difficulty in raising funds. However, this
trouble can be considered more important in the case of stand-alone banks that can face the
risk of becoming isolated. In the case of Italian banking groups, instead, parent company
can recapitalize banking subsidiaries, which otherwise would go bankrupt, through the
redistribution of resources between the different subsidiaries. In this case, it is possible to
68
(2011), p. 13
0,00%
2,00%
4,00%
6,00%
8,00%
10,00%
12,00%
Top 5 groups Large banks All banks
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100
claim that the consolidation process that has led to the establishment of large banking
groups has had the effect of reducing systemic risk allowing them to spread losses caused by
international contagion among all banks belonging to the group, to the benefit of increasing
partially national financial stability.
3.5 Concluding remarks
The aim of this third chapter is to provide the readers with the tools to understand
the main drivers that have contributed to the development of the Italian banking industry.
Until the end of 1980s, Italian banking system remained pegged to the Fascist
period Banking Act (1936), developed in order to fight against the Great Depression of
1929. Credit market was structured in order to guarantee the maximum stability, through
the introduction of banking specialization, based on maturity of the collecting activities.
Supervisory tools used by Central Bank to maintain financial stability were grouped under
the structural supervision, characterized to intervene directly on the market structure.
The main changes started at the beginning of 1990s, with the Second European
Banking Directive recognition (1992), the Amato Act (1990), and the Consolidated
Banking Act (1993). The Amato Act has permitted to convert State-owned banks in joint
stock companies. Starting from 1993, Italian Governments developed a systematic
privatization plan. In addition, the Amato Act removed restrictions on the opening of new
branches, leading the creation of a true single national credit market.
The Consolidated Banking Act of 1993 put an end to the old Banking Act of 1936, by
removing the principle of specialization and extending banking activities towards those
admitted to mutual recognition. Banks now can choose the range and mix of planned
activities (principle of diversification). Supervision moved from structural to prudential,
based on micro-level control on capital adequacy of intermediaries and on a macro-level
control over the general market. It were allowed banks to decide their organizational
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structure, deciding among the universal bank model, the multifunctional banking group
model or a mixed model. Italian banks opted for the federal bank and federal multi-
business group models, characterized by the simultaneous presence of national – oriented
companies and local – oriented companies, through which to pursue simultaneously
efficiency and presence in local markets.
The issue, in 1998, of the Consolidated Act on Financial Intermediation further
enlarged the banks’ space of activity, giving them the possibility to trade with investment
services.
The increased level of competition and freedom in deciding which activities to
undertake, have caused a drop in returns from the traditional interests – based
activities, with the spread between rates on loans and deposits fallen by 1.5 per cent but
have also determined an increase of returns from the more innovative fees – based
activities, moved from 20 per cent of the total returns in 1990 up to 45 per cent in 2005.
During the period 1990 – 2012, the number of banks operating in Italy has
dropped from 1.156 to 723 with a reduction equal to 37,5 per cent. This reduction has
regarded all the different categories of domestic operators involved. On the opposite,
number of foreign branches, in the same period, has increased from 60 to 78, with a peak
of 82 in the years 2008 and 2009.
The performance of the aggregation process has experienced 2 distinct phases: the
first from 1990 to 2002, when medium-large banks started merging in order to reach a
national dimension, even if the number of branches quite often resulted lower the 1’000.
The second period instead went on 1 year, from 2006 to 2007, and brought to the creation
of the Italian National Champions Unicredit and Intesa SanPaolo.
From the point of view of the spatial distribution of banks involved in M&As, the
majority of the bidder banks are headquartered in the northern Italy and the majority of
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102
the M&As undertaken refer to the 1990s, when banking operators started to aggregate in
order to increase their dimension toward a national presence. Banks from southern Italy,
instead, remained closely anchored to their local dimension, neglecting the important
process of deregulation.
Under the point of view of efficiency of the banking industry, analysis is developed
through the cost-income ratio. The lower the ratio is, the more a company – or an industry
– is efficient. Italian banking industry efficiency can be analysed by considering the period
from 1990 to 2007, where the increase in profitability and costs reduction have allowed
to reduce the ratio of 2 per cent, and the period from 2007 up to date, where the financial
crisis and economic recession have influenced negatively banks’ profitability, increasing
again the index.
The 2007 financial crisis, that at the beginning affected mainly foreign financial
institutions with a strong inclination towards innovative finance, didn’t hit Italian banking
industry strongly at first. A brokerage model based on close relationships with
customers, an adequate system of protection of deposits and an extensive network of
branches have contributed to limit the impact of the crisis.
From 2010 the contagion of the sovereign debt crisis, started from Greece and then
spread throughout the southern Europe, has infected even Italy. Tension in the sovereign
Italian debt has been transmitted to the banking industry through the balance sheet
channel, due to the decrease in the value of sovereign bonds, and through the liquidity
channel, due to the lack of value of this kind of collateral that impacts on the ability of
banks to raise funds in the interbank market.
The Italian subsidiary of the interbank market has suffered a consistent drop in
transactions among private counterparts, in particular with extra-groups banks and
foreign banks. To compensate the reduction in this traditional source of funding, Italian
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103
banks have constantly intensified the recourse to the Eurosystem refinancing
mechanism.
The worsening in the financial markets has influenced traditional activities of
banks in 2 different ways: by decreasing credit supply and by increasing interest rates
in new loans.
Even if in all in a fragile position, Italian banks have reacted to the crisis in different
ways: stand-alone banks have suffered isolation more than banking groups that have had
the possibility to spread losses among federated banks and optimize liquidity.
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105
C H A P T E R IV
C O N C L U D I N G R E M A R K S
4.1 Final considerations and main implications.
The present work has contributed to investigate the consolidation process
undertaken in the banking industry in Italy, by focusing on the main changes happened in
the country and thanks to the advent of the European Union. Rise of inflation, technological
innovation, globalisation and deregulation have caused a strong decline in banks’ core-
business profitability, obliging them to find a way to restore adequate level of profits.
Factors that can explain the recourse to operations of external growth can be grouped into
2 different categories: business economics motivations, mainly ascribable to an increase in
efficiency, risk diversification, increase in market power or investment opportunities; and
extra-business economics motivations, which refer to private and opportunistic reasons of
managers or to protective/defensive purposes. Changes in size and number of
intermediaries in the credit markets can have severe repercussions on the market under 4
different perspective, ranging from financial risk, propagation of monetary policies, effects
on credit and competition up to the interbank payment system.
Looking at the European environment, introduction of the First and Second banking
Directives, constitution of the European Monetary Union and introduction of Euro have
brought to an increase in competition among European banks, with deep implications in
terms of credit market consolidation. During the 1990s, consolidation happened mainly at
a national level, since perceived as fundamental to compete in a broader context. Although a
certain movement in the European environment started from the second-half of the 1990s,
integration among European financial markets has remained incomplete until 2007, after
that it has blocked. Cross-border integration has verified mainly in the wholesale market
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while retail banking market remained fragmented within national boundaries. The 2007
financial crisis has had strong repercussion on the European banking industry, weakening
its operators and seriously threatening financial stability of the Euro System. In terms of
financial integration, although banks have maintained their cross-border presence, it is
possible to see sings of decline in the wholesale market activities, mainly ascribable to the
luck of trust among European banks, which prefer to deposit capitals surplus at ECB,
obtaining almost nothing. Retail banking integration seems to be less affected.
Directing the attention to Italian banking system, main changes started at the
beginning of 1990s, with the Second European Banking Directive recognition, the Amato
Act, and the Consolidated Banking Act. The Amato Act has permitted to convert State-
owned banks in joint stock companies and removed restrictions on the opening of new
branches, leading the creation of a true single national credit market. The Consolidated
Banking Act has extended banking activities towards those admitted to mutual recognition.
Italian banks adopted the federal bank and federal multi-business group models,
characterized by the simultaneous presence of national – oriented companies and local –
oriented companies, through which to pursue simultaneously efficiency and presence in
local markets. Performance of the aggregation process has experienced 2 distinct phases:
the first from 1990 to 2002, when medium-large banks started merging in order to reach a
national dimension, and a second period, from 2006 to 2007, that brought to the creation of
the Italian National Champions Unicredit and Intesa SanPaolo. From 2010, the contagion of
the sovereign debt crisis has been transmitted to the banking industry through the balance
sheet channel, and the liquidity channel. Italian subsidiary of the interbank market has
suffered a consistent drop in transactions among private counterparts, in particular in the
relations with extra-groups banks and with foreign banks. To compensate the reduction in
this traditional source of funding, Italian banks have constantly intensified the recourse to
the Eurosystem refinancing mechanism. The worsening in the financial markets has
influenced traditional activities of banks in 2 different ways: by decreasing the credit supply
and by increasing interest rates in new loans.
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107
The main problem that toady European banks are facing is represented by the
segmentation of the Single Market, which has unfortunately become increasingly apparent.
The sovereign debt crisis and the vicious circle between banks and their national countries
have led to a significant step backwards in the financial markets integration. Large cross-
border European banking groups have slowed their rates of loans in other European
countries in which they have branches or subsidiaries. Cross-border interbank activities that
before crises were a significant source of short-term funding, have slowed significantly and
were almost completely disrupted between 2010 and 201269. These patterns have been
driven by fears of big banks of the European Union that there was a high risk of contagion
and a growing uncertainty about the future of the Euro. The excess of liquidity, including
that coming from the long-term refinancing operations, was largely deposited to ECB, in
spite of these uses offered a very low or no profitability.
To ensure the proper functioning of the Single Market should be a top priority for
European policy makers in the coming months. If capital and liquidity of banks remain
trapped inside national borders and, in case of crisis, they can flee towards other countries
leaving citizens to pay the bill – something that is happening in different southern European
countries today – European Union will lose immediately any benefit coming from the
constitution of a Single Market. Situation is quite close to the prisoner’s dilemma in a certain
sense: if in a situation of crisis all parties expect to receive the same treatment regardless of
the Member State in which they reside, and that the responsibility for the crisis
management are shared, a cooperative attitude will prevail allowing to reach the best
results for all Member States.
If, on the contrary, in times of crisis the "chacun pour soi" idea outweighs, then both
national authorities and the market – banks and investors – would tend to assume an
uncooperative attitude and this could mean a segmentation of markets and the adoption of
protectionist behaviours, harmful to everyone. Today it’s clear that Memoranda of
Understanding do not have sufficient strength and, therefore, new and stronger institutional
69
Enria A., (2013), p.14
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tools to ensure a higher level of coordination among Member States and large transnational
companies are necessary. European political agreements are going in this direction,
fortunately I would say, as shown by the establishment of the Banking Union for example. In
this sense, the introduction of a new European statute for cross-border banking groups
would allow a binding coordination mechanism and, at the same time, would ensure equal
treatment for all parties, shareholders, creditors and depositors, regardless of the Member
State to which they belong.
A second very important aspect concerns the issue of supervision. It’s important that
European authorities restore the confidence among banks in terms of asset quality; with
citizens in order to restore consumptions and thus growth; and between Member States, so
to create a mutual understanding of different national needs. In the end, what matters is to
repair the institutional framework in support of the single market. During the crisis, the
decision-making process of the European Council has often been portrayed as a conflict
among Member States, with winners and losers. Often it has come to a common position
only in absence of alternatives, in particular when national and European interests were
lined up facing the risk of an impending catastrophe. A weak coordination of national
policies cannot be sufficient in a situation of crisis, when national interests tend to conflict.
Stronger European institutions are needed, able to take decisions in the interest of
European citizens and subject to effective democratic control.
One negative externality that concentration produces on the economic environment
depends on the fact that larger banking groups use to reduce the rate of loans to SMEs and
householder. It has been argued that M&As between banks or with other financial
institutions brings the new entity to modify its portfolio of activities, trying to remove all
those riskier. Quite often the lack of information provided by SMEs doesn’t permit to
correctly evaluate business performances and thus, forces banks to close relations or to
increase cost of capital. Considered that credit risk is one of the concerns of policy makers
due to its implication on financial stability, situation seems to have no remedy.
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Nevertheless, we should try to look at the situation under a different perspective:
instead of considering the relation between credit risk and financial stability, we might
focus on the information asymmetry issue. Lack of information, as said, discourages banks
to maintain relationships with SMEs due to the difficulty to evaluate credit risk. This
explication seems comprehensible in light of the fact that SMEs draw up a simplified
balance sheet, under which the amount of information produced for creditors is quite
useless.
One possible solution might be to increase the quality of information produced by
innovating in the accounting field. In general, in fact, main goal of an accounting system is to
provide a clear and sincere representation of the financial and economic situation of a
company. It is possible to argue that, if private operators do not trust in this financial
statement, it means that probably there is no a clear and sincere representation of
economic situation.
The most recent European Union directive on the subject, the number 46/2006 EEC,
admits the simplified preparation of financial statements only for businesses that are within
certain dimensional requirements in terms of turnover or number of employees. The
regulatory trend, however, has been to increase the maximum requirements70, allowing a
greater number of companies to fall into the category of those who are advantaged to
produce less information. In agreement with Capodoglio G. (2012)71 based on OECD data,
the SMEs in Europe in 2005 counted for 99.90 per cent of all the firms. This figure rises to
99.95 per cent in Italy. Although in terms of quality these companies cannot be considered
significant, they are extremely important in terms of quantity.
70
In particular, according to the Directive N° 46/2006, companies with assets value lower than € 4,4 million;
sales lower than € 8,8 million and no more than 50 employees, are allowed to prepare a simplified financial
statements. Previous values were respectively € 3,65 million of assets value; € 7,3 million of sales and 50
employees.
71
Capodoglio G., (2012), p. 4
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A possible and lawful response to this finding could be that in the most economically
advanced countries usually the financial market is composed of different operators that
ensure various financial needs in relation to the specific category of economic agents to
follow. In addition, specifically to the credit market, there are different types of banks, some
international, other national and others yet local, especially designed to serve small
businesses and citizens.
With the growing globalization of markets and the integration of economic areas
extremely large, today focus – and capital flows perhaps – is more and more directed
towards a global dimension, neglecting the local one. In front of these situations, the
increased availability of information could be a winning strategy not only in terms of
improvement of credit risk, but also to finance the economy, with positive effects on the
entire system. We use, in fact, consider that the lack of credit to the real economy depends
exclusively on banks that prefers to invest money in the financial markets - aimed to reach a
higher profitability - rather than in the real economy. Far from the possibility to claim that
this behaviour is ethically correct or that through this way of acting banks are able to lower
the impact of risk – the 2007 financial crisis is the most clear example in this sense –, we
cannot neglect that banks must face constantly a trade–off between limitation of risk, linked
to the financial stability requirements, and assumption of risk, in order to maintain enough
profitability. An increase in the level and quality of information can mitigate the effect of
this trade-off, allowing banks to better undertake their traditional activities and to preserve
a low level of risk.
In conclusion, I would underline the presence of one problematic that can be
extended to the totality of the economic environment and companies operating, although
the financial markets – and its operators – can be regarded as particularly involved.
Speaking about the economic environment, economic doctrine is usual to distinguish
between the broad concept of stakeholders, defined as "those groups without whose support
the organization would cease to exist72", and the simple shareholder, emphasizing the
72
Cit. Freeman R., (1983)
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importance of adaptation, of good relations with outsiders in a strategic dimension –
Corporate Social Responsibility, creation of specialized professionals in Supply Chain
Management and Customer Relationship Management are striking examples of the evolution
of management in this sense – and of reputation in front of the community. The role of
stakeholders in the life of an enterprise is becoming more and more active in short.
In practice, however, quite often an exact coincidence can be found between these
two categories, with companies interested exclusively in following shareholders value. It is
quite common to consider a corporate as a form of ownership in which shareholders, being
de facto owners of the company, try to maximise returns. Nevertheless, a broader and
closer vision to the reality can recognize that corporate have a legal personality and act in
front of law as an individual entities, different from the owners.
“Law and accounting tell us about the functional distinction between firm-entity and
ownership; the entity as a whole owns and possesses the assets, is able to assume its own
obligations, and has priority right in collecting economic and monetary streams results. Law
and regulation firstly protect actors other than owners”73.
Practice prevailed over doctrine and today corporate is unbalanced towards
shareholders. Corporates’ performances are measured through accounting systems fully
developed in order to answer to shareholders’ needs: financial perspective, strongly related
to financial markets – the place where owners can trade their rights of influencing
corporates’ activities – has been for long time the main and most influent perspective.
“Concerns are increasingly expressed regarding fair value and market-to-market
accounting that were advocated by international accounting convergence (IASB/FASB), but
also on excessive and misleading incentives driven by the primacy of shareholders’ value in
corporate governance and a lack of social responsibility, lack of stability in the market-based
financial architecture, and unbalanced international economic relationships in the face of
73
Cit. Biondi Y., (2005), p. 10
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globalisation. […] Environmental, societal and civic needs are emerging at the core of the new
agenda.”74
Today, even probably due to the deep and negative consequences brought by the
crisis, the need of returning to focus on the social dimension of business and the importance
of the reference community has been taken more seriously by authorities that, in front of
the huge efforts carried out to block crisis, expect a change in the way of behaving of
corporates, banks included75. In particular, it is important to understand that shareholders
are only one of several categories of individuals who come into contact with a company, and
that is not correct privilege exclusively the interests of a single category. States, especially
in Europe, expect that companies will help and support the growth of their countries,
supporting governmental policies and promoting social objectives such as employment,
technological and cultural progress of their historical areas of origin. When it comes to
public-private relationship, in fact, is to emphasis the possibility to share goals that are not
simple expressions of economic wealth for a few people, but that embrace processes of
economic and social development.
Even – perhaps especially – banks must take into consideration this change in
business perspectives and should even take into account the deep repercussion that this
philosophy has on a company, ranging from corporate culture to governance mechanisms. It
is difficult and hard to predict the way in which banks will respond by adapting to these
profound changes, but it possible to claim that, if a shift towards a more collective way of
considering business activity happens, it will have broad effects on integration processes,
both nationally and globally.
74
Cit. Biondi Y. (2009), p. 1 75
As example, on February 2013, European Parliament have issued a Resolution entitled “Corporate social
responsibility: accountable, transparent and responsible business behaviour and sustainable growth”.
Source: http://www.europarl.europa.eu/sides/getDoc.do?pubRef=-/EP/TEXT+TA+P7-TA-2013-049 +XML+V0/EN
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4.2 Suggestions for future research.
In the preparation of this research, the "recent" constitution of the European Union
has acted as a constrain due to the shortage of data developed in the form of time series
that did not allow to analyse in depth the process of bank consolidation through a historical
perspective. A second limitation came from the outbreak of the 2007 financial crisis, that
has blocked the process of consolidation at an European level making rather difficult to
judge the progress of banking aggregation towards a common market.
Nevertheless, more research is needed above the topic of M&A in banking industry
and, more in general on the banking concentration process. In particular, following the
2007 financial crisis, one useful direction for future research might be represented by a
further analysis of the relations existing between behaviour of financial operators, banks
included, and financial stability, in order to provide more clear evidences to policy makers
and to allow them to improve banking sector policies.
As well, another interesting field of research may be the analysis of the relation
existing between Central Banks and large intermediaries, in order to better deepen the
influence that these intermediaries can have on the monetary policy transmission towards
the real economy. This study could act as a link between researches investigating on
financial and economic stability and those on the rest of the economy in terms of access to
credit, economic growth or performance of non-financial companies.
In addition, it seems clear that more research in need in terms of concentration and
competition in the banking in industry, as results obtained to date are not capable to
provide clear and univocal answers. In this case, more attention might be addressed
towards the study of if and how banks different in terms of size, geographical location or
activities, affect competitive conditions.
i
R E F E R E N C E S
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F. Websites
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ix
T A B L E O F P I C T U R E S
G. Charts
1 - Inflation in United States 1970 – 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
2 - Rise in non-interest income for commercial banks in U.S 1970 – 2011. . . . . . . . . . . . . . . . . . . . . . . . . . . .19
3 - Historical ROE and ROA for United States banks 1970 – 2012. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
4 - Bank failures in United States 1970 – 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
5 - Credit Institute in United States 1970 – 2012. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
6 - Assets of 5 largest banks as percentage of total Assets 1990 – 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .44
7 - Total Assets and market share foreign banks in East European countries. . . . . . . . . . . . . . . . . . . . . . . . .49
8 - Stock market performance. Dow Jones Stoxx Banks price index 2000 – 2013 . . . . . . . . . . . . . . . . . . . . .53
9 - Debt/GDP ratio in U.S and European countries 2000 – 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
10 - Total aid used towards banks in EU 27 (€ trillion) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .57
11 - CDS and Stock Indexes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .58
12 - Short Term wholesale funding of EU and UK countries (€ billion) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
13 - Ordinary Banks, Saving Banks and Cooperative and Popular Banks 1937 – 1965. . . . . . . . . . . . . . . .70
14 - Spread between rate on loans and on deposits in Italy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
15 - Composition of total revenue for Italian banks 1990 – 2005. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .79
16 - Number of banks in Italy 1990 – 2012. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .81
17 - Gini Index in the Italian Banking Industry 1999 – 2007. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
18 - Operational efficiency in the Italian banking system 1990 – 2005. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
19 - Personnel cost on total operative cost (per cent) in Italian banking industry 1990 – 2011. . . . . . . 87
x
20 - Intermediation margin for the Italian banking industry 1990 – 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . .88
21 - Unicredit S.p.A share price 2006 – 2013. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .92
22 - Italian BPT and German Bund spread 2008 – 2013. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .93
23 - Government securities as share of Italian bank’s total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .94
24 - Growth in bank funding, contribution of the different components . . . . . . . . . . . . . . . . . . . . . . . . . . . . .95
25 - Value development of Euribor for mortgages.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .98
26 - Average rate on new loans to households for house purchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .98
27 - Share of loans in temporary difficulty.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
I. Tables
1 - Banking Industry regulation and deregulation in United States 1863 – 1999 . . . . . . . . . . . . . . . . . . . . .16
2 - European banking regulation in 1980. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36
3 - Domestic banking M&A in Europe by sub-periods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .39
4 - Domestic M&As in Europe .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
5 - Main cross-border M&As in Europe. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .46
6 - Swiss and German banking expansion in U.S . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .51
7 – EU parliamentary approved amounts of state aid 2008 – 2011. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
8 - National Interest Banks and Public Institutions after the 1936 Banking Law. . . . . . . . . . . . . . . . . . . . 71
9 - Main M&As in Italy 1990 – 2007. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
10 - Universal Bank and Multi-functional group in comparison. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
11 - Main Italian regulation regarding credit market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .80
12 - Number and typology of banks in Italy 2004 – 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .82
13 – Constitution of Unicredit group. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
14 – e – MID assests and liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
Déclaration sur l’honneur
Je, soussigné, Jacopo Maria Parise, certifie sur l’honneur que je n’ai rien plagié dans le
travail ci-joint, ce qui signifie que je suis le seul auteur de toutes les phrases dont le texte est
composé. Toute phrase ayant un autre auteur que moi a été mise entre guillemets, avec
indication explicite de sa source. Je suis conscient(e) qu’en contrevenant à la présente règle je
transgresse les principes académiques reconnus et m’expose aux sanctions qui seront
prononcées par le conseil de discipline.
J’atteste également que ce travail n’a jamais été présenté dans le cadre d’études antérieures à
ESCP Europe.
S’il s’agit d’un travail réalisé dans le cadre d’études effectuées en parallèle, je dois le préciser.
Les propos tenus dans ce mémoire n’engagent que moi-même.
Fait à Paris le 2013
Affidavit
I the undersigned, Jacopo Maria Parise ,certify on the honour that I have not plagiarized the
paper enclosed, which means that I am the only author of all the sentences this text is
composed of. Any sentence from a different author than me was written in quotation marks,
with explicit indication of its source. I am aware that by contravening to the present rule, I
break the recognised academic principles and I expose myself to the sanctions the disciplinary
committee will decide on.
I also confirm this work has never been submitted during studies prior to ESCP Europe.
If this work has been written during studies conducted in parallel, I must precise it.
The remarks written in those pages only commit me.
Paris, 2013
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