BIG-BANK MERGERS IN EUROPE - AN ANALYSIS OF THE COST IMPLICATIONS

This paper examines the cost implications from hypothetical cross-bord er bank mergers in the EU in light of recent claims that substantial c ost savings could be expected as the result of the EU's Single Market Programme for financial services. In fact, our results suggest only li mited opportunities for costs saving from big-bank mergers and indicat e that such mergers are more likely to result in an increase in total costs. While there is a large variation in the simulated cost outcomes , the greatest opportunities for cost savings would appear to be gener ated by mergers between German and Italian banks. In contrast, mergers between French and German banks appear likely to result in substantia l cost increases. Although the overall findings suggest limited benefi ts from cross-border mergers between large banks, this may be a reflec tion of the methodology. Merger simulations are carried out hypothetic ally, ignoring any prior information about the pairings. We assume no premiums or merger costs and no further synergies resulting from such things as branch closures or a restructuring of the product mix. These assumptions may cause us to understate the potential reduction in tot al costs resulting from large bank mergers, and therefore our estimate s provide the most pessimistic of total cost reduction outcomes. In co nclusion, the substantial variation of cost outcomes generated suggest s that large banks seeking economies through cross-border mergers shou ld select potential partners with great care.