The new European Banking Union landscape. Dirk Schoenmaker, Duisenberg school of finance

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1 DSF POLICY BRIEFS No. 35/ October 2014 The new European Banking Union landscape Dirk Schoenmaker, Duisenberg school of finance Abstract The countries participating in the new European Banking Union have relatively closed banking markets. With the advance to Banking Union, these markets may open up creating a truly integrated Banking Union. This integration process may take place through cross-border banking mergers & acquisitions as well as cross-border services from the original home country. Next, we construct the top 20 banks in the Banking Union. France appears to take a prominent place with 5 banks in the top 10, followed by Germany, the Netherlands and Italy. By contrast, the major Spanish banks have their international business mainly in the UK, the US and South America, all outside the Banking Union. Introduction The establishment of the Banking Union (BU) creates a large sub-market within the EU, comparable to the US banking market. It is expected that the BU will become an integrated market, where banks can manage their balance sheet at the aggregate BU level and the ECB conducts supervision with a European perspective. Currently, national supervisors prevent European banks to operate on a European scale, as they informally request banks to lend or invest in the same country as where deposits are collected. Moving to the demand side, it may take some time before consumers regard a bank from elsewhere in the BU as a domestic bank to which they can entrust their money. When that happens a truly integrated retail banking market will emerge. Corporates, especially the larger ones, are expected to adapt faster and select their main banks from across the BU. Banking systems at country level The EU banking system can be split into the BU and the non-bu countries. Table 1 indicates that the BU covers about 75 per cent of total EU banking assets. The BU countries have relatively closed

2 banking markets, with assets of banks from other EU countries at 14 per cent and from third countries at 2 per cent. The overall cross-border penetration for the EU is higher, due to the UK with business from third countries at 28 per cent (see Table A.1 in the Annex). This highlights the current status of London as international financial centre. Will London continue to service the BU, or will Frankfurt emerge as the financial centre of the BU? Table 1 Banking systems across three regions: BU, EU and US; 2013 Number of banks Total assets in billion Of which: domestic (in %) other EU (in %) third country (in %) BU 5,908 29, Non-BU 1,815 12, EU 7,723 42, US 6,813 11, Note: Total banking assets come from the home country, other EU countries, and third countries (i.e. outside the EU or the US). The three components add up to 100 per cent. Source: Author calculations based on ECB for European banks and Federal Reserve, FDIC and Flow of Funds for US banks. The BU banking system is comparable to that of the US in several ways. The number of banks is about 6,000 (see Table 1). The system has a strong domestic orientation at about 85 per cent of all assets. Foreign bank affiliates account for 14 per cent of the US banking system. But there is an important difference. The US banking system has fewer assets, 12 trillion (amounting to 94 per cent of US GDP) compared to the BU with 30 trillion (amounting to 313 per cent of euro area GDP). The US financial system depends less on bank intermediation and more on capital markets and non-bank financial institutions. Major banks The major banks in the BU and the US are also comparable. Figure 1 shows the geographical segmentation of the top 20 banks in the three regions (EU, BU and US). The large BU and US banks have just over 70 per cent of their assets at home (i.e. the BU and the US, respectively). The rest of the region (i.e. the rest of Europe the non-bu part and the rest of North and South America) counts for 11 per cent. The rest of the world amounts to about 18 per cent. The large EU banks are more international. They have not only a smaller home base (one country), but they have also more business in the rest of the world. Examples of major global banks outside the BU are HSBC, Barclays and Standard Chartered from the UK. The picture emerging from our analysis at country and bank level is that the BU, just like the US, is a relatively closed banking system with limited inward and outward expansion.

3 Figure 1 Geographic segmentation of top 20 banks in the EU, BU, and US (in %), 2013 Note: Total assets of the top 20 banks are segmented into domestic, rest of the region and rest of the world. The old banking landscape Banks can be divided into four categories depending on the international composition of their assets (Schoenmaker, 2013). Table A.2 (in the Annex) shows the biggest 30 banks in Europe before the start of the BU. A global bank has less than 50 per cent of its assets in the home country and the majority of its international assets in the rest of the world. These banks include HSBC, Barclays and Standard Chartered from the UK, Deutsche Bank from Germany, and Credit Suisse and UBS from Switzerland. A European bank has less than 50 per cent of its assets in the home country and the majority of its international assets in the rest of Europe. Some European banks focus on a specific region in the EU. The Nordea Group, for example, primarily operates in the Nordic countries. Other European banks operate Europe-wide; examples include BNP Paribas, UniCredit, and ING. A semi-international bank has between 50 and 75 percent of its assets in the home country. Examples are RBS from the UK, BBVA from Spain, Commerzbank from Germany and KBC from Belgium. Finally, a domestic bank has more than 75 per cent of its assets in the home country. These banks include Crédit Agricole, Lloyds Banking Group, Rabobank and Intesa Sanpaolo. The European Banking Union landscape The start of the BU entails a paradigm shift for banks and policymakers. The home market expands for banks from their country to the wider BU. This paper presents new data on the top 20 banks in the emerging BU market. Table 2 contains the geographic segmentation, splitting a bank s business in the BU, the rest of Europe (i.e. business in the non-bu member states), and the rest of the world. Some of the European banks operating on a regional basis (the second group in Table A.2) have now become pan-banking Union banks. BNP Paribas, UniCredit and ING Bank operate throughout the BU, with 65 to 80 percent of their assets in the BU. These banks are comparable with the super-regional banks in the US, such as Bank of America (see below), with a large presence across the whole region.

4 Also the semi-international and domestic banks (the third and fourth group in Table A.2) have become large players in the BU. Table 2 Top 20 banks in BU, 2013 Market share in Banking Union Total assets Of which: Banking Union Rest of Europe Rest of world Banking Group in % in bn in % in % in % 1. Crédit Agricole 5.0 1, BNP Paribas 4.0 1, Société Générale 3.4 1, Groupe BPCE 3.1 1, Deutsche Bank 2.5 1, UniCredit Crédit Mutuel ING Bank Intesa Sanpaolo Rabobank Banco Santander 1.3 1, Commerzbank DZ Bank La Caixa Group ABN AMRO BBVA Landesbank Baden-Würt Bayerische Landesbank KBC Group Erste Group Top 20 banks , Note: A bank s market share in BU is calculated as a bank s assets in the BU divided by total banking assets in BU ( 29,982 bn from Table 1). A bank s total assets are divided in assets in the BU, in rest of Europe, and the rest of the world. The top 20 is ranked by market share. Source: Assets are taken from The Banker (July 2014). The segmentation of assets is calculated by the author based on annual reports. The market share of the biggest banks in the BU lingers around 2 to 5 percent, which is low (see the second column in Table 2). The top 5 banks by market share are four French banks (i.e. Crédit Agricole, BNP Paribas, Société Générale and Groupe BPCE) and a German bank (i.e. Deutsche Bank). The market share of the 20 biggest banks amounts to 37 per cent. The prominent position of the French banks is due to their large presence across the BU, ranging from 66 to 89 per cent. By contrast, Deutsche Bank is more international with a strong presence in London and the US, but only 46 per cent in BU. Furthermore, the major Spanish banks, Banco Santander and BBVA, have a strong presence in London (for Santander), the US and South America.

5 Further consolidation within the BU can be expected. The market share of the five biggest banks (CR5) in the BU is 18 per cent (see Table 2). To compare, the CR5 is 47 per cent for the EU-15 countries and 48 per cent for the US. Even in a large country with a dispersed banking system, like Germany, the CR5 is over 30 per cent. The major US banks were formed after the lifting of restrictions on interstate banking by the Riegle-Neal Interstate Banking and Branching Efficiency Act of Through several mergers and acquisitions, super-regional banks, such as JPMorgan Chase and Bank of America, emerged with a market share of 13 and 11 percent, respectively. 1 Stiroh and Strahan (2003) provide interesting evidence on consolidation after the deregulation. They show a competitive reallocation of assets to better performers. Better banks did grow, while the poorly performing banks shrank as well, and those with the worst performance shrank the most. Similarly, the BU may act as a catalyst for change. While there is not much scope for domestic consolidation in most European countries, there is plenty scope for cross-border consolidation as the BU market shares are relatively low. The Single Market in 1992 and the start of the Economic and Monetary Union in 1999 did not lead to the at the time widely expected European consolidation, several domestic mergers in anticipation of the new setting. Examples are the merger of ABN and AMRO in 1991 and the creation of the BNP Paribas Group from the merger of BNP and Paribas in But the centralisation of supervision at the ECB as well as the harmonisation of banking regulations in the Single Rule Book may lift the final barriers 2 to a truly integrated banking market and unleash a cross-border merger wave in European banking. Cross-border expansion may happen in different ways. One approach would be a full merger between banks from different countries. Another approach would be a cross-border acquisition. An expanding bank may first acquire a local bank in a neighbouring BU country and then push more business through this local entity. A case in point is the acquisition of the German Direktbank by the Dutch ING bank. The renamed bank, ING DiBa, is now the third largest retail bank in Germany. A third way would be the cross-border supply of banking services, which can be easily done through Internet. An example is Wells Fargo, a US bank, which entered the Canadian market with small business loans based on credit scoring models. Wells Fargo subsequently established branches in Canada to support its business there. References Schoenmaker, D. (2013), Governance of International Banking: The Financial Trilemma, Oxford University Press, New York. Stiroh, K. and P. Strahan (2003), Competitive Dynamics of Deregulation: Evidence from U.S. Banking, Journal of Money, Credit, and Banking 35, Federal law prevents any bank from gaining more than 10 per cent of national deposits in the US through acquisition. 2 But company law, insolvency law and taxation are still organised at the national level and thus remain different.

6 Annex The Annex provides data at country and bank level before the start of the Banking Union. The geographical segmentation of assets is divided in assets from the home country, other EU countries and third countries. The three categories add up to 100 per cent. Table A.1 Cross-border banking penetration in EU Member States, 2013 Number of banks Total assets ( billion) Of which: domestic other EU third country Austria Belgium 103 1, Bulgaria Croatia n.a. n.a. n.a. Cyprus Czech Republic Denmark 161 1, Estonia Finland France 623 7, Germany 1,842 7, Greece Hungary Ireland Italy 694 4, Latvia Lithuania Luxembourg Malta Netherlands 253 2, Poland Portugal Romania Slovakia Slovenia Spain 290 3, Sweden 168 1, United Kingdom 358 8, Euro area 5,908 30, Non-euro area 1,815 12, EU-28 7,723 42,

7 Notes: Share of business from domestic banks, share of business of banks from other EU countries, and share of business of banks from third countries are measured as a percentage of the total banking assets in a country. Figures are for Euro area, non-euro area, and EU-28 are calculated as a weighted average (weighted according to assets). Source: Author calculations based on ECB Structural Financial Indicators.

8 Table A.2 Top 30 banks in Europe in 2013 Banking groups Global banks Capital (in billion) Total assets (in billion) Of which: domestic other EU third country 1. HSBC (UK) 115 1, Barclays (UK) 67 1, Deutsche Bank (Germany) 51 1, Credit Suisse (Switzerland) UBS (Switzerland) Standard Chartered (UK) European banks 1. BNP Paribas (France) 72 1, Santander (Spain) 61 1, UniCredit (Italy) ING (Netherlands) Nordea (Sweden) Danske Bank (Denmark) Semi-international banks 1. Royal Bank of Scotland (UK) 60 1, BBVA (Spain) Commerzbank (Germany) DNB Group (Norway) KBC (Belgium) SEB Bank (Sweden) Domestic banks 1. Crédit Agricole (France) 63 1, Groupe BPCE (France) 47 1, Lloyds Banking Group (UK) 46 1, Société Générale (France) 41 1, Rabobank (Netherlands) Intesa Sanpaolo (Italy) Crédit Mutuel (France) La Caixa Group (Spain) ABN AMRO (Netherlands) Landesbank Baden-Würt (Germany) DZ Bank (Germany) Bayerische Landesbank (Germany) Top 30 European banks 1,135 24,

9 Notes: Top 30 banks a reselected on the basis of capital strength (Tier 1 capital as published in The Banker). Assets are divided over the home country, the rest of Europe and the rest of the world. Banks are divided in four categories. Global banks: less than 50 per cent of assets in the home country and the majority of their international assets in the rest of the world. European banks: less than 50 per cent of assets in the home country and the majority of their international assets in the rest of Europe. Semi-international banks: between 50 and 75 per cent of assets in the home country. Domestic banks: 75 per cent or more of assets in the home country. Source: Schoenmaker (2013)