Why Italy Is At the Centre of Europe's Bank Merger Frenzy?

Italy has unexpectedly become the principal arena in the rapid consolidation taking place in European banking. This is shown by the series of takeover offers and defensive mergers which are reshaping the country's financial sector and possibly altering the balance of power in European banking.

Over the last two years, Italy's banks have worked on strengthening their balance sheets, building up capital and improving their profitability. This has given them the financial means to carry out acquisitions which would have been impossible to consider during the European debt crisis which occurred between 2009 to 2018. What started out as a series of individual transactions has now turned into a wider struggle for control of the Italian banking system. The central figure in the present situation is Monte dei Paschi di Siena (MPS), one of the oldest banks in the world having been founded on the 27th February 1472. The bank has changed its image from that of a representation of Italy's banking difficulties to that of an active consolidator.

Having acquired Mediobanca, MPS has become a significant shareholder in Assicurazioni Generali, Italy's largest insurance company. As a result, its strategic value has increased and this has drawn the notice of larger competitors. The greatest difficulty arose from Intesa Sanpaolo, who proposed a takeover offer for MPS consisting of about €35 billion in cash and shares. Instead of merely accepting this tempting proposal, MPS replied with an exceptional defensive measure by suggesting that it should acquire Banco BPM and Banca Generali; the company states that the two transactions could produce pre-tax benefits of around €1.8 billion, comprising significant cost reductions. The reason for the strategy is simple: by growing considerably in size, MPS hopes to become so strategically important that it will be impossible for it to be absorbed.

 If MPS, Banco BPM and Banca Generali were to join together, they would set up a big Italian banking group and might thus create a stronger competitor than the two biggest banking companies in the country, Intesa and UniCredit and allowing them to take the majority of market share in the industry. Moreover, this idea is in line with Italy's long-held aim of setting up a strong 'third pole' in the banking sector. At the same time, UniCredit shows why the Italian case has turned into a European issue. The bank, which is based in Milan, has been seeking to expand its operations beyond Italy and has been engaged in a long-running attempt to enhance its influence over to Germany-based Commerzbank.

 The German authorities have opposed the possible takeover, their officials stressing that Commerzbank should keep its head office in Frankfurt and should continue to support German businesses. The cross-border aspect is especially important since European banks are still more fragmented than the big American financial institutions and policymakers are coming to view consolidation as a means of setting up stronger banks which can compete on an international scale. While the European Commission has indicated that it is becoming more willing to approve mergers which could improve European competitiveness, competition rules are still applicable. Italy is especially suitable for consolidation since its banking sector still includes a number of large institutions that could in principle be merged together.

The recent dealings between BPER Banca and Banca Popolare di Sondrio, together with the MPS-Mediobanca agreement and the situations concerning Banco BPM, show how rapidly the landscape is evolving. It's not just a matter of individual banks that underlies Italy's wave of mergers; it is instead a struggle over who will take control of the country's financial system and whether Italy can create banking groups large enough to compete in Europe. Since Intesa is challenging MPS, MPS is trying to expand by means of Banco BPM and Banca Generali, and UniCredit is seeking opportunities overseas, Italy has now become the most clear-cut example of Europe's current phase of banking consolidation.

The current consolidation of Italy's banking industry is not just a takeover frenzy or even a battle for political control; it is the result of a more robust banking system encountering the European requirement for increased financial scale. While the potential benefits from consolidation include improved efficiency and competitiveness among both Italian and European banks, the ultimate success of these mergers depends upon whether or not the expected efficiencies are realised, without impairing either competition or access to financing. It is still uncertain what the result will be of this issue, but there is one point that is clear: Italy is not merely responding to the consolidation of European banks anymore. It is now helping to lead it.