A roadmap can allow players to anticipate closer European financial-sector integration
Frédéric Oudéa, long-standing chief executive of Société Générale and head of the European Banking Federation, is well aware that his bank and industry lag US rivals in terms of market capitalization and wholesale banking share.
But despite business and political challenges, he thinks mergers could bring about bigger and more successful continent-wide banks that benefit from a more unified market, thanks to EU financial integration policies, as well as technological enablers.
“We are getting ready to be in a position of strength for if and when there’s a consolidation process,” he says. “There are too many banks in Europe. Intellectually, it would be good for the sector to have fewer banks, but this will take time. The overall regulatory framework at this stage does not allow this momentum to come. There’s an idea of an integrated market when, in practice, there is a significant level of fragmentation.”
The variety of ways that member states have transposed the new framework for bank resolution and bail-in buffers into national regulation is just one example of how fragmentation persists in the eurozone, according to Oudéa.
However, he thinks this situation could and should change, with closer integration of banking systems going hand-in-hand with bigger and more pan-European capital markets.
“I cannot see how there will be enough momentum before the end of 2020,” he says. “All banks, in addition, have so much to do on their business models in this period.”
Oudéa is optimistic about the period after 2020.
“I see two avenues ahead. One: a European deposit insurance scheme is on the agenda of the European Commission and the European parliament and at least one of the priorities; and there is a debate on whether mergers make sense, for Europe to have fewer banks. Or two: there is no willingness to move forward. The jury is out.”
Deeper European capital markets and “a higher velocity of balance sheet” would be crucial to the success of bigger cross-border banks in Europe, according to Oudéa. The US banks’ balance sheets are, after all, not just big but efficient too – like “a washing machine that turns very quickly”. State mortgage companies Fannie Mae and Freddie Mac help lighten their load. It will probably take five to 10 years to make progress away from European banks’ persistent tendency to keep loans on their balance sheets.
“Clearly this conception will take time; and we lost time because of Brexit and other reasons,” says Oudéa.
However, clearer evidence that the EU is prioritizing its banking and capital markets union would allow banks to do their part.
“A roadmap can allow players to anticipate closer European financial-sector integration and start to build a business model that will benefit from that roadmap,” he says.
Can this year’s European elections and a new college of European Commissioners for the 2019 to 2024 term inject more life into this idea? The rise in populist euroscepticism could make it even harder.
Yet the threats of a more internationally assertive China and diplomatic divergence from the US could underline the need for strong European champions – including in banking – even if it involves a less liberal approach than before by Europe’s leaders. Perhaps China will use financial sector clout to further its geopolitical goals, just as the US has done with Iran.
Oudéa seems heartened, at least, by recent progress on Franco-German cooperation to rival Asian manufacturers of batteries for electric cars.
“Europe will struggle more than expected, given the political environment, in building a new process of integration. We can doubt that the big topics will move very far. In that situation, the question is how can Europe still demonstrate it wants to move forward? As in 2013, the banking union may be the most obvious project that people can agree on. It has a limited political price. Maybe it will be the same this time.”
Meanwhile, banks’ digital transformation programmes are becoming ever more expensive and complicated, without throwing other IT integration into the mix. But Oudéa thinks technological change could offer new opportunities for growth by banks like his, including through mergers.
He says the advent of technology, such as facial recognition, that replaces nationally designed paper-based processes could make it easier to harmonize account-opening processes between France and Germany, for example, while new ways of developing IT systems will also relieve the burden on mainframes.
“I can imagine more capacity to mutualize IT systems in a consolidation process – it will be easier in five years,” he says.