Should the European bank really look more like the American bank?

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European banking mergers and acquisitions are back! Or else, a little discussion about the possibility is anyway. It’s easy to get carried away: the major banking regulators are hungry for efficiency, profitability and better service than pan-European banks could offer.

Deutsche Bank AG CEO Christian Sewing told a Bloomberg conference last week that he wanted to lead European consolidation, although he also listed the many hurdles to clear before deals could be struck. . BNP Paribas SA of France, meanwhile, hinted to the Dutch government that it might be willing to take ABN Amro out of its hands, Bloomberg News reported a few days earlier.

Big deals have been absent for so long that authorities might be encouraging the softer couples down the line. In anticipation of something happening, we might forget to ask why, or whether such offers are even a good idea. Creating European champions would be good for the banks, for their ability to compete with their American peers, and potentially good for the European economy as a whole. But they could make matters worse for some countries or regions by worsening economic downturns.

The European Central Bank and its watchdogs have been pushing for a banking union since 2014 – a true single market in finance. The main obstacle is the lack of a common deposit insurance system at European level. There had been hopes of a breakthrough, but a meeting of Eurogroup finance ministers this month faltered again, unable to agree to create something that Andrea Enria, head of banking supervision at the BCE, called last week “the holy grail.” The United States has had a federal deposit insurance program since the 1930s.

But the European project has gone far enough to win some benefits from global policymakers in the Basel Committee on Banking Supervision. This month they finalized new rules for banks lending across national borders in Europe, allowing such loans to be treated more like domestic loans. It’s a big deal for almost no one except BNP, one of the few banks with a pan-European business. The new rules mean that BNP itself becomes less risky from a systemic perspective and therefore capital requirements will be lower.

Cross-border lending is a big part of what the European agreements and a banking union are supposed to promote. It collapsed after the 2008 global financial crisis and struggled to recover. The ECB wants more cross-border lending because multinational banks should be less sensitive to domestic shocks; competition and the resilience of the European banking sector could be strengthened; and large sophisticated banks would bring better risk management to smaller markets.

The downturn since 2008 has left many European banks focused on home loans and with high exposure to their own government bonds. This happened largely because the catastrophic loop that tied the fates of banks and their governments during the 2011-2012 eurozone crisis exposed the allergic reaction of many countries to the idea of ​​sharing financial risks within the currency bloc. This led to the fragmentation within Europe that the ECB is still struggling to resolve today.

The reluctance to share risk also explains why it is so difficult to implement a single deposit insurance scheme. A real banking union may never see the light of day until there are European federal obligations, taxes and spending. It doesn’t have to be at the same level as the US, but a good way to get there would help.

Indeed, if the Holy Grail has American characteristics, the quest must be pursued with caution. It is not without risks. The free flow of capital and credit across borders within Europe would benefit the Union as a whole, but could worsen economic outcomes in some regions. This is the conclusion of a recent study on the American banking sector carried out by academics from UCLA and the University of Chicago, published in the Anderson Review.

Financial deregulation in the United States in the 1980s allowed lending across state lines and helped banks better cope with shocks related to changes in economic growth or productivity of major industries in different US states. When risks and returns deteriorated in their home country, banks were free to seek better borrowers elsewhere. This may have helped generate the great moderation in non-inflationary growth with few economic disasters that prevailed in the United States – and beyond – from the 1990s onwards, the academics conclude. The problem is that global tranquility has come at the cost of greater variance between the fortunes of different states.

“[A] a stronger banking union could lead to divergence in economic growth between member states,” the scholars noted of Europe.

Cross-border banking and greater risk sharing in Europe makes a lot of sense for banks in the region. But there are likely to be political costs for a banking union as well.

More from this writer and others on Bloomberg Opinion:

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This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Paul J. Davies is a Bloomberg Opinion columnist covering banking and finance. Previously, he was a reporter for the Wall Street Journal and the Financial Times.

More stories like this are available at bloomberg.com/opinion