Opinions & Interviews

2022-02-04 Roberto Ruozi

Past, Present, and Future of Bank Concentrations

In Italy, talk of bank concentration, and activity in that direction, began towards the end of the 1960s. There were two goals: to rescue banks in difficulty and to favor the creation of economies of scale. Subsequently, a strong impulse for concentration came from the privatization of public banks. However, these operations did not succeed in improving the profitability of banks, and this translated into listing on the stock market at lower prices than the book value of their shareholders’ equity. The solution to this problem today does not seem to come from adopting either cross-border concentration or domestic concentration.

The phenomenon of bank concentration, as I have said on multiple occasions also with reference to other types of financial operations, lends itself to varied judgments in relation to both its formal intrinsic value and its practical application.

Indeed the objectives and results of bank concentration, a phenomenon which has had significant effects in almost all countries in the world in the post-WWII period, have changed over the course of time, and the evaluations that have been expressed on it in different periods have been conditioned by the respective historical contexts.

In our country, there began to be serious talk of bank concentration towards the end of the 1960s (and serious action as well), and there were essentially two objectives: to save banks in difficulty by avoiding their bankruptcy through amalgamation with healthy banks, and to produce economies of scale. Subsequently, a strong impulse for concentration came from the privatization of the country’s public banks, and in particular, with the implementation of the “Amato Law” on the transformation of those banks into joint-stock companies, that became the property of the banking foundations, which then had to sell the majority of their shares to third parties. In that period the problem of bank rescues was less pressing than in the past, while the priority goal remained to produce economies of scale, and at the same time solve the problems of governance in the Italian banking system.

However, empirical investigations and experience in the field began to demonstrate that the creation of those economies of scale was not a given, and that beyond certain dimensions – reached also through mergers, absorptions, or purchases – the economies of scale could actually turn into diseconomies. Again with reference to Italy, that level actually seemed far away, and thus the concentration continued, although at a less intense rate than in the past, until the period of the great crisis of 2007-2008, when many economic rules no longer held, not even in banks, and concentration also took on increasingly complex characteristics. In the meantime, changes in consumer demand, especially regarding investment products and services and asset management, the activity of non-bank intermediaries and financial markets, and the impulses of competition and the technological revolution, together with increasingly strict interventions by oversight authorities and the growing internationalization of banking activities, contributed to viewing concentration in a relatively new way.

Today this is visible in banking systems that are nimbler, more competitive, more technologically advanced, with a greater and more conscious approach to the governance of single banks and so forth, but this does not always lead to improving profitability. It translates into listing on the stock exchange at prices below the book value of their shareholders’ equity. In the background there is the shift of authority for systemic banks – those most affected by the phenomenon of concentration – from the Bank of Italy to the ECB, that produced a multiplication of laws with different effects in the single countries of the European Union and on their single banks, creating difficulties and paradoxes that were problematic and above all costly to overcome. The failure to create a true single European banking market that takes into account national differences and differences among categories of banks, contributes to creating a certain confusion in European banking systems. Moreover, Italy’s problems in this sector are very similar to those of other countries in the European Union, that in turn are not that different from those in the United States of America.

In this context, how can additional developments in the concentration of those systems be seen? From the standpoint of the oversight authorities, it seems necessary to proceed without particular problems. The search for greater economies of scale, and thus – all other conditions being equal – greater profitability, seems to be the priority objective to pursue. On the type of concentration useful to reach that purpose, though, there is some confusion of ideas. The situation is in fact different, for example, if we aim at cross-border concentration, or domestic concentration.

As for the latter, I think that something new can be done in Italy as well, but I recall that achieving economies of scale is increasingly difficult, and above all that eliminating small and minor banks, increasing the dimensions of larger banks – although not by much – could be strongly harmful for the efficiency of the system. In particular, at the levels that have already been reached, greater concentration risks having a negative impact on the degree of market competition and making the mobility of customers from one bank to another more difficult.

The problem is serious, in part because at least in Italy, where there is a situation that in principal is actually quite similar to that of the United States, small and minor banks (defined as such by the Bank of Italy, and thus having less than 9 billion euros in funds) still represent approximately 91 percent of the total number of Italian banks and have almost 26 percent of branches, approximately 20 percent of bank workers, more than 16 percent of deposits, and almost 16 percent of loans. Consider also that the two categories of banks cited are performing functions that are always different, and that the market segments that interest one are always less attractive to the others. This is also true for the location of the relative branches, that involve areas in which the two types of banks have different types of interest. The absorption of small and minor banks by larger banks thus might not improve the profitability of the latter, and could worsen the efficiency of the systems.

As for the problem of cross-border concentration, things are even more complicated. The goals of the leading banking groups in European countries in this regard are still not clear, and the absence of a common banking system would make the conduct in a single cross-border bank of activities regulated in different ways from one country to another problematic. This, despite the fact that some of these groups are thinking about this possibility, although the time is not ripe for definitive decisions. Before undertaking uncertain and potentially dangerous adventures, whose positive repercussions on the areas in which they would find themselves operating are not at all certain, it would be good to wait to have better income and equity situations, and more solid strategic goals.