BANKING

Banking



Banking

Chapter: 1

1. Introduction

In the era of globalisation, where priorities for every business are set to become bigger and more powerful, companies try to move from their domestic markets to increase their competitive advantage and build their strength by merging with other companies, in order to benefit from economies of scale. This report investigates thoroughly the changes that occurred in the financial service sector, with a particular attention to the changes in the market structure. It also explains the rationale for the cross border restructuring that has been taking place recently by describing and clarifying the major forces and processes in external environment. The connections between these forces and the changes generated by them are drawn in this paper as well. This study concentrates on EU15 countries (1995 enlargement) but the main focus will be on Germany, Spain, Italy, United Kingdom and Netherlands where the retail banking has a significant role in the economy and is a very powerful industry. Report also includes some important examples from CEE (Central Eastern Europe) market to illustrate the growing importance of the emerging markets and the changes in the political and legal environment that helped bring them out. In order to make the report more manageable it will be time restraint to the past 10 years.

2. Size, market structure and concentration in the retail banking industry

A retail bank, for the study purpose, will be defined as a credit institution that deals directly with the customers, providing services including: mortgages, savings accounts, personal loans and credit card accounts. The retail banking in most of the European countries comprise the features of the oligopolistic competition. Oligopoly can be characterized as a form of market with few firms functioning in it. It does usually have high barriers of entry and the companies are producing a similar product. According to the European Central Bank studies (Report on EU Banking Structure, 2004, 2007) and Lipczynski, Goddard (Industrial Organisation, 2005) a sharp decline in the number of banks during last 10 years could have been witnessed. Over the same period of time number of branches has decreased, as banks have sought to rationalise their branch networks. Table 1 and 2 certifies that during the given period of time number of banks in most of the countries has reduced noticeably and beyond doubt. Although the information below is not focused on the retail sector only, but on the whole banking industry, the same trend can be noticed in the retail banking.

Source: European Central Bank, 2004

Source: European Central Bank, 2007

The graph below illustrates the decreasing number of companies operating in the banking industry. The downfall of almost 30% in the overall number of banks, in the given time period, can be explained by the global consolidation in the banking market, including retail banking division. The increasing concentration in the financial sector is due to the mergers and acquisitions, both domestic and cross-border. According to the report by PriceWaterHouseCoopers, in the period between 1996 and 2005 there were 384 domestic M&A ...