BBVA’s takeover bid for Banco Sabadell has the potential to transform the eurozone banking sector and revives the debate on the need for European banking consolidation that Brussels has been advocating for years. Even so, this concentration of financial services may have negative effects on banking competition and social inclusion.

A week ago, the CEO of Banco Sabadell, César González Bueno, was convinced that the hostile takeover bid would not go ahead because of the evolution of the stock premium. ‘I don’t think it will happen, it’s too complicated’. In any case, a month after it was leaked that BBVA was preparing a merger offer with Sabadell, the debate over banking consolidation is back on the table.

While the Spanish government is reticent about the operation, arguing that it will increase banking concentration and therefore hurt employment, the provision of financial services and financial stability, the European Union welcomes any bank consolidation that helps to eliminate alleged overcapacity and improve cost efficiency.

Bank consolidation refers to the process by which financial institutions merge or are acquired by other institutions, resulting in fewer banks with a larger market share. In Europe, this phenomenon has accelerated in recent years, driven by several economic and regulatory factors and with the support of the European Central Bank.

The creation of the banking union

After the financial crisis of 2008 and subsequent sovereign debt crises, the need to improve supervision and regulation of the EU financial sector became evident, especially regarding the eurozone.

In this context, the European banking union was established in 2014 to ensure the financial stability, safety, and soundness of the banking sector in the euro area and the EU as a whole. This is achieved through a single rulebook consisting of a set of legislative texts that must be complied with by all banks operating in the member states.

There are currently more than 4,500 active banks in the EU, a large part of which are small and medium-sized institutions. The ECB argues that such mergers, especially cross-border, could be conducive to risk diversification and financial market integration. It also points out that the new rules and this bank consolidation close loopholes and thus contribute to a more efficient functioning of the single market.

The darker side of consolidation

The current banking concentration in Spain is plain to see when we remember the number and diversity of building societies present three decades ago, when they had half the market share of the banking business.

The bailout of the Spanish banking sector with public money reduced their business and capacity. This consolidation resulted in a massive closure of branches and cash points. The risk of financial exclusion was real and, despite the government’s directives, the measures taken by the banks to alleviate it need to be revised.

The lack of competition in the banking market has also meant that Spanish banks’ interest rates on deposits are much lower than those offered on average in the EU. All this has happened in a context in which the big banks -CaixaBank, Banco Santander, BBVA, Banco Sabadell, Bankinter and Unicaja- have increased their profits exponentially.

Beyond bankruptcy protection, the success of bank consolidation will depend on the ability of regulators to balance profits with the need to maintain a competitive, diverse and inclusive banking sector. This will be no easy task, given that the promiscuous relationship between the political class and the banking sector has for decades been part of a system where looking after the public interest is not a priority.

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