The Effect of Mergers on Competition

THERE WERE SEVERAL MA OPERATIONS INVOLVING MAJOR BANKS IN ITALY AND FRANCE IN THE 20042008 PERIOD, BUT THE INCREASE IN MARKET CONCENTRATION HAD OPPOSITE EFFECTS IN THE TWO COUNTRIES

by Barbara Chizzolini, Bocconi Department of Economics
Translated by Alex Foti



Since the 1990s, in the wake of Directive 646/1989/EC, which liberalized the hitherto highly regulated banking industry, successive waves of mergers and acquisitions of banks have increased the concentration of the sector, initially within national borders of individual countries of the European Community, then through the creation of transnational banking groups.

The avowed purpose of the banking mergers was not to gain greater market power, but rather enter new markets and diversify  operations, as well as transfer or more efficiently exploit managerial skills about customers and targets. For their part, competition authorities have been torn between the opposing imperatives of reversing the concentration process, which generally improves market competition, or instead favoring it to strengthen financial stability in an integrated European market.

But how and to what extent does greater concentration imply less competition between banking groups? If the result of a merger is the entry of a new and larger bank in a market previously dominated by a single major group, the entry of the new entity favors greater competition in that market. The opposite occurs if the new bank results from the merger between two or more already existing banks, leaving only smaller banks outside the market agreement, so as to create a near-monopoly in that market.

Our analysis of bank mergers in Italy and France between 2004 and 2008 verifies these insights. Taking advantage of public information on bank deposits and the size of banking group branch networks in the provinces of Italy and in the departments of France, we derive the profitability of Italian and French pre-merger banks, separately identifying the cost component that varies across banking groups, and the intensity of competition in local markets, which instead affects profitability for all banks operating in these markets. Estimates of group costs and intensity of local competition vary when, after mergers, the number of banks and branches, by bank and by market, changes.

Our results show that in France after a string of mergers between Crédit Agricole and Crédit Lyonnais, between Caisse d' Épargne and Banque Populaire, and between Crédit Mutuel and Crédit Industriel Commercial, the intensity of competition has increased, thanks to the creation of groups capable of competing more effectively with each other and with La Poste on retail credit on all local markets.

On the contrary, in Italy, the two mergers between Intesa and Sanpaolo and between Unicredito and Capitalia have caused a significant reduction in competition in many local markets. Either Intesa Sanpaolo or Unicredit have become dominant groups in several provinces, despite competition from local banks. It should be added that while in France all the banks had even larger networks of branches in all  departments before the mergers, in Italy there are few banks that operate throughout the national territory and mergers have further reduced that number. Asymmetries in number and size of banks across provinces favors situations of poor competition in several local markets.

The advent of technological innovations and entry into the sector of BancoPosta (and to a lesser extent of Cassa Depositi e Prestiti) in the lending market have since then substantially changed the structure of the banking industry in Italy. The number of private banks’ branches has fallen by 25% across the country, while it is not entirely clear how the interaction between private and public banks will affect the mechanisms that currently regulate competition in the industry. These considerations shall receive further and more in-depth study.