Big‐Bank Mergers in Europe: An Analysis of the Cost Implications

Abstract

This paper examines the cost implications from hypothetical cross‐border bank mergers in the EU in light of recent claims that substantial cost savings could be expected as the result of the EU’s Single Market Programme for financial services. In fact, our results suggest only limited opportunities for costs saving from big‐bank mergers and indicate that such mergers are more likely to result in an increase in total costs. While there is a large variation in the simulated cost outcomes, the greatest opportunities for cost savings would appear to be generated by mergers between German and Italian banks. In contrast, mergers between French and German banks appear likely to result in substantial cost increases. Although the overall findings suggest limited benefits from cross‐border mergers between large banks, this may be a reflection of the methodology. Merger simulations are carried out hypothetically, ignoring any prior information about the pairings. We assume no premiums or merger costs and no further synergies resulting from such things as branch closures or a restructuring of the product mix. These assumptions may cause us to understate the potential reduction in total costs resulting from large bank mergers, and therefore our estimates provide the most pessimistic of total cost reduction outcomes. In conclusion, the substantial variation of cost outcomes generated suggests that large banks seeking economies through cross‐border mergers should select potential partners with great care.