concentration in the italian banking industry: future

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

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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

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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. . . . . . . . . . . . . . . . . . . . . . . . .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

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To my family, that with passion and sacrifice allowed me to reach this milestone.

Concentration in the Italian banking industry: future prospects

Page 1

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


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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


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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.


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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


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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


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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).


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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


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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.


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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


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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


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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


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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


Page 15

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


Page 16

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


Page 17

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


Page 18

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


Page 19

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%


Page 20

Chart 3 – Historical ROE and ROA for United States banks 1970 - 2012


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


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


Page 21

Chart 5 –Credit Institute in United States 1970 - 2012


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


Page 22

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


Page 23

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.


Page 24

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


Page 25

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


Page 26

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.

http://en.wikipedia.org/wiki/Cascading_failure


Page 27

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


Page 28

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


Page 29

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


Page 30

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


Page 31

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.


Page 32

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


Page 33

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.


Page 34


Page 35

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.


Page 36

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.


Page 37

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”.


Page 38

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


Page 39

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


Page 40

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


Page 41

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


Page 42

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


Page 43

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.


Page 44

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


Page 45

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


Page 46

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


Page 47

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


Page 48

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.


Page 49

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


Page 50

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


Page 51

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


Page 52

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.


Page 53

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


Page 54

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


Page 55

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


Page 56

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


Page 57

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


Page 58

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


Page 59

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


Page 60

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


Page 61

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


Page 65

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”.


Page 66

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


Page 68

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


Page 70

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.


Page 72

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.


Page 74

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


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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.


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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.


Page 77

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


Page 78

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


Page 79

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


Page 80

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.


Page 81

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


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


Page 82

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)


Page 83

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.


Page 84

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;


Page 85

- 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


Page 86

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)


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%


Page 87

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


50,00%

52,00%

54,00%

56,00%

58,00%

60,00%

62,00%

64,00%

66,00%


Page 88

Chart 20 - Intermediation margin in the Italian baking industry 1990 - 2011


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


Page 89

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.


Page 90

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.


Page 91

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


Page 92

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.


Page 93

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


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%


Page 95

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)


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


Page 96

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


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/


Page 97

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


Page 98

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


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


Page 99

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


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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101

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.


Page

104


Page

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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106

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.


Page

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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108

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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109

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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110

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

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European Parliament

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vi

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viii

F. Websites

Bank of Italy

http://www.bancaditalia.it/statistiche

Bankscope

https://bankscope2.bvdep.com/version-2013314/home.serv?product=scope2006

Bloomberg

https://www.bloomberg.com

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http://www.ecb.int/stats/html/index.en.html

Federal Deposit Insurance Corporation

http://www2.fdic.gov

Federal Reserve

http://www.federalreserve.gov/econresdata/default.htm

OECD

http://www.oecd.org/statistics/

Worldbank

http://data.worldbank.org/indicator

Intesa SanPaolo group

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Unicredit Bank group

https://www.unicreditgroup.eu/en/investors.html

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

concentration in the italian banking industry: future

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