by Stefano Caselli, Dean SDA Bocconi School of Management.
This article was originally posted on IEP@BU, Institute for European Policy Making @ Bocconi University
Leading to Milan 2024 Influence Relevance & Growth Conference, NEWEST hosts Professor Caselli's contribution on the need for the European Union to have a more robust and prominent financial industry.
Newest has argued that Europe to become an influential global player must concentrate on the scale and the scope of geopolitically relevant industries and, while not popular, on a separate European Defense system complementary to NATO.
"If the European Union wants to have a global economic weight, it must equip itself with great European banking champions capable of attracting capital globally and able to support Europe as a development platform.
“The European Union needs more giants like JP Morgan". These are words by Andrea Enria, Chair of the ECB Supervisory Board, in his farewell interview with ECB President Christine Lagarde to trace the scenario and challenges for the European banking system.
JP Morgan is the world’s leading bank in terms of total assets and stock market capitalization. It certainly expresses that sense of great size and scale that represents an element partly missing to complete the path of the Banking Union.
Above all, the European Union needs larger and more diversified banks that can be the product of new impetus in M&A operations at the transnational level, to equip the EU with a functional infrastructure for growth.
The forthcoming year will prove crucial for our continent, not only because there are elections, but more crucially because the Union must reflect on the role it can play in the global scenario and on the role it must play in driving GDP and employment growth.
An important part of this reasoning must be based on the need to equip itself not only with a more solid banking system protected from crises - as has now happened - but above all capable of being the development factor of European businesses.
What are the numbers at stake today?
If we look at total assets, within the world’s top ten banks, after JP Morgan and Bank of America, which rank first and second respectively, we find four EU banks, namely BNP Paribas, Crédit Agricole, Santander, and the BPCE Group.
Among the top 20, French banks are the most represented (with 5 banks out of 20) and for Italy, we have only Banca Intesa.
If we look instead at the market capitalization and therefore the value of the banks, in the top ten in the world there are no European Union banks and only American Chinese, or British banks appear.
.Why does Europe need larger banks and what are the benefits for its businesses and citizens? There are three main reasons.
The first is related to corporate and investment banking services. The growth of the size of enterprises - and therefore of GDP and employment - passes through the ability to open up capital, gather resources on the financial markets, and carry out expansion operations beyond national boundaries.
Corporate and investment banking services can only be offered if the bank has a size such as to ensure a global range of action and a critical mass that allows it to pull companies in the field of stock market listing, debt securities placement, private equity, M&A, and support for international growth.
The Financial Times "League Tables of Investment Banking" ranks the top 10 banks in the world for the activity of investment banking: JP Morgan is always the first and we find three European banks, namely Barclays in sixth place, UBS in seventh position (thanks to the merger with Credit Suisse) and BNP Paribas in ninth position. Only one, BNP Paribas, is based in the European Union.
The second rationale for requiring larger banks within the EU is tied to their capacity to attract young talents and the best managers. The potential for any industry to grow and improve its performance over time depends on human capital.
Banks need human capital of increasingly high quality to offer services of higher quality to businesses and individuals. The ability to attract the best possible human capital depends not only on the level of compensation but also on the strength of ensuring career paths that enhance and improve the abilities of individuals, to make the most of the effort that young people, in particular, have made in their studies, which offers opportunities for international mobility.
If banks do not reach a larger size - and this also applies to Italian banks - the risk is to take second place to the attractiveness of the largest companies worldwide that, in different areas (from the technological to consulting to pharmaceutical) are more able to invest on the human capital.
The third reason relates to technological investments. The ability to offer more accessible services to customers, simpler but of higher quality and at lower costs, is played only on the ability to insert the technological dimension, digital and artificial intelligence in the production and offer processes.
This requires far-reaching investments that only a larger size and greater attractiveness of capital can provide. Payment services, and above all investment services for the large retail market, are the sectors in which technological innovation is playing a decisive role in ensuring that savings of any size can be linked as effectively as possible to the needs of the real economy, and its growth.
In the forthcoming months, the importance of the banking system should be part of not only the political debate about which European Union we want and what are the instruments to ensure the growth of the different countries of the Union but, crucially, in recognizing the fundamental role that banks play in supporting the growth of the economic system as a whole. An aspect that seems sometimes forgotten.
If the European Union wants to have a global economic weight, it must equip itself with great European banking champions capable of attracting capital globally and able to support Europe as a development platform.
The United States and China know this very well and other emerging areas of the world are doing so.
European banks have achieved important levels of soundness and now it is time for the European institutions to give the signal that size matters, and that M&A transactions between banks are the next challenge. "