Banking consolidation in Europe: Current situation and impact on efficiency

Abstract

This essay aims to shed some light on the continuous trend towards banking consolidation and studies its relationship with the efficiency of the banking industry. Firstly, this dissertation describes the current banking consolidation situation in Europe as well as its main objectives, obstacles and potential solutions. Then, using bank level balance sheet data for 27 banks located in 12 European Union members, this dissertation uses a panel data analysis, with a country and year fixed effects, in order to study the relationship between banking consolidation and banking efficiency. The analysis period runs from 2014 to 2018. The descriptive analysis demonstrates that steps are being taken in the direction of further European banking consolidation even though there are still many obstacles before to achieve a fully integrated market. In fact, there are economic, political, regulatory and also cultural obstacles that are difficult to overcome. These obstacles triggers many uncertainties which have led banks to focus on internal projects such as adapting their business models, managing their existing assets, reducing their expenses and mastering the use of digitization, while being forced to comply with more stringent regulations. Nevertheless, whether at the level of the entities of the European Union or at the level of its members, the desire for greater integration and consolidation is being felt. It seems that everyone involved agree about the benefits of a greater banking integration and consolidation in Europe. Indeed, greater consolidation can play a crucial role in order to respond to some of the structural challenges that banks are facing. Moreover, thanks to a greater consolidation and financial market integration, the European countries can become more resilient to severe economic cycles. The analysis of the consolidation and efficiency scores demonstrates that the banking market in the EU is slowly changing into a more consolidated and more efficient market. Concerning the panel data analysis, it shows the complexity of the relationship as mixed results have been obtained. In fact, through the pooled model which is actually the same as an OLS model, the consolidation index demonstrates a positive but statistically not significant relation with the efficiency of the banks. However, the fixed effects model, which creates dummy variables for the 12 countries in the sample and for the 5 considered period of times, indicates a positive and statistically significant relation between the consolidation ratio and the efficiency score.