Recently Banco Sabadell celebrated the return of its headquarters to the Catalan city, showcasing the confidence that the various Catalan economic sectors place in the Generalitat’s institutional stability in this new phase with Salvador Illa as president. At the general shareholders’ meeting, emphasis was placed on the profitability of Banco Sabadell and the leadership’s commitment to refusing a merger with BBVA. Regardless of which side of the ownership (BBVA or Sabadell) wins or loses, what concerns us as citizens is whether such a merger would yield an improvement for everyone. In other words, whether the resulting entity will operate by improving credit conditions for companies and families and whether it will offer financial products with better returns for savers. The second issue, more technical for the public, but no less important, is whether that new entity would provide greater stability to the financial system.
“Spanish banks are among those that pay the least on deposits in the Eurozone and passed on the ECB’s rate hikes to lending conditions after the tightening of ECB conditions”
In principle, the scale increase that the merger would bring could lead to a reduction in operating costs, but that cost reduction only translates into an improvement in conditions for investors and savers if the degree of banking competition is not affected by the merger. It is true that if there exists Bertrand-like competition (on prices), even with few firms, the resulting equilibrium is similar to perfect competition. But that kind of competition only occurs when there is no product differentiation.
Are Spanish financial institutions currently competing in a Bertrand sense? It does not seem so, and they will do so even less if the degree of banking concentration increases. Ideally, the financial sector should be a veil that intermediates between savers and investors. The ideal world is one in which firms are large (because they are highly productive) and financial intermediaries fiercely compete among themselves. In that world, spreads are minimal and the financing costs of investments reflect savers’ opportunity costs. It is an efficient world.
In that ideal world, the bad decisions of a single bank do not pose systemic risk because its weight in the total financial system is small. Moreover, changes in Central Bank reference rates are transmitted directly to banking rates, maximizing the impact of monetary policy on real activity, since investment costs rise, but the incentive to save also rises. In that ideal world, a more restrictive monetary policy reduces credit, but it leads financial institutions to be more selective when financing investments.
One example of the effects of the lack of competition is that Spanish banks are among those that pay the least on deposits in the Eurozone and passed on the rate hikes to lending conditions after the tightening of ECB conditions. In other words, banking concentration affects the transmission of monetary policy.
Moreover, in that ideal world, financial risk —the systemic effects of a bank taking too many risks in certain markets— is diluted because firms have a diversified portfolio of banks they can work with. As Bentolila, Jansen and Jiménez show in their study, during the Great Recession the banking crisis in Spain swept away the companies that concentrated their financial management in fewer banks, especially.
Another effect of banking concentration is the greater influence that the financial sector acquires over the economic activity of a country and its industrial organization, especially in times of major sectoral changes. This effect of the BBVA-Banco Sabadell merger is one of the concerns that most worries me from a political standpoint, in my view.
“To date, there is no European fund that integrates the banking system in the Eurozone. This is the last pillar that remains to achieve the much-needed banking integration”
Despite all that has been said, the increase in banking concentration may have non-negative consequences for welfare and overall competitiveness of the economy. For example, when the increase in size implies improvements in financial innovation processes that translate into greater financing resources for businesses. This is especially important in emerging economies. Another reason could be regulatory constraints in banking.
For example, without a deposit guarantee system, the financial system is more prone to bank runs. In that case, large banks have more capacity to weather financial crises. Obviously, the Spanish financial system has that guarantee fund, but, to date, there is no European fund that integrates the banking system in the Eurozone. This is the last pillar left to achieve the much-needed banking integration.
In the current circumstances, with Trump’s tariff threats and the weakened power of NATO, the European Union would do well to strengthen the internal market. This strengthening involves advancing the integration of European capital markets and the banking system. This is essential to finance the investments we must undertake in the new international context, without forgetting the ecological and digital transition. In the case of the capital market, there seems to be a new impulse based on the reports by E. Letta and M. Draghi. In the second case, there are proposals, such as that of I. Angeloni, a member of the Single Resolution Board, to create a single jurisdiction for European banks of medium and large size. This would facilitate cross-border banking integration processes. If barriers hindering integration can be removed, European banks could exploit longer-range complementarities and, at the same time, increase competition in the sector.
