National banking champions are not supposed to exist in the EU. But the fact that so many of the most successful big European banks in 2015 are concentrating on their home countries says much about the challenges of building an effective European banking union. Little wonder European challengers to US investment banks are fading away.
Banking regulation has made it harder, even for banks with large market shares in the biggest European economies, to compete globally in investment banking, and gain high enough returns to satisfy shareholders. That is partly because Europe’s national banking markets are so much smaller than the US. Even BNP Paribas, France’s biggest bank, has relatively small market shares in the other big European markets.
ING is another firm that comes close to being a pan-European bank. Its model of digital-only banking is fairly cheap and easy to export. Its German retail operation (purely online) is so successful it is beginning to rival Commerzbank and Deutsche Bank. ING has a high proportion of non-domestic European revenue, in part because its Dutch home is so small.
There is little incentive to be a cross-border EU bank without a functioning banking union, and the crisis has made it even less inviting. Regulators have paid more attention to country-level funding, and increased local capital requirements. Banks dependent on wholesale funding, including those dependent on a foreign parent, have had to retreat.
In a speech in Brussels earlier this year, Danièle Nouy, chair of the Single Supervisory Mechanism’s advisory board, bemoaned how European banking markets remain fragmented. National supervisors have continued to differentiate between local and foreign institutions, she noted. After the eurozone crisis, what little banking integration there was (largely in the interbank markets) rapidly unravelled.
Banking union, according to Nouy, should accelerate the emergence of a cross-border banking market by eliminating regulatory bias towards local institutions, lowering the compliance costs of operating across borders, and mitigating clients’ preference for firms protected by the national authorities.
But while the ECB looks favourably on consolidation, there will still be barriers to successful cross-border acquisitions within the EU. The continent’s cultural and linguistic diversity, for example, will endure. In any case, many think national authorities will still find ways to favour local institutions.
European banks with global investment banking ambitions, and a strong domestic market share, may not have the appetite for a transformative acquisition elsewhere in the EU today. It would hardly bring exposure to an underpenetrated, fast-growing market, after all.
On the other hand, some of the continent’s best-performing banks are focusing on domestic retail and commercial banking – businesses that have been less subject to regulatory whims. By improving efficiency and cross-selling to existing clients, Europe’s national champions have demonstrated plenty of scope for a steady increase in profits at home.