Banking Consolidation: Sabadell Chair Warns of Risks to Consumers Amid Hostile BBVA Takeover

 Por Jurandir Coelho

 The debate over banking consolidation has once again taken center stage as Spain's Banco Sabadell faces a hostile takeover bid from its larger rival, BBVA. In a recent address at the Spanish Chamber of Commerce in London, Josep Oliu, the Chair of Sabadell, raised concerns about the potential risks of such deals, particularly when it comes to the impact on consumers, competition, and credit availability. Oliu's remarks come as the Spanish government and regulators weigh the implications of the €12 billion ($13.09 billion) bid, which has already been approved by the European Central Bank (ECB) but remains under review by Spain’s competition authorities.

The proposed acquisition has sparked a broader conversation about the effects of banking consolidation in Europe and beyond. While some see it as a necessary step to create stronger institutions capable of competing on a global scale, others, like Oliu, warn that mergers can lead to the formation of oligopolies that harm consumers and undermine competition. The tension between these two views highlights the complex nature of modern banking and the challenges facing regulators as they seek to balance stability and competition in the financial sector.

The BBVA-Sabadell Deal: A Controversial Bid

BBVA's bid to acquire Sabadell represents one of the largest potential banking deals in recent European history. The move comes amid a wave of consolidation across the continent, as banks look to bolster their balance sheets and enhance their competitive position in an increasingly challenging market. For BBVA, the acquisition of Sabadell offers the opportunity to expand its market share in Spain, strengthen its presence in key European markets, and increase its ability to compete with larger global rivals.

However, the bid has been met with strong opposition from various quarters, including the Spanish government. Economy Minister Carlos Cuerpo recently stated that the review of BBVA’s offer could extend into the first quarter of 2025, reflecting the complexity and sensitivity of the situation. The government has expressed concerns about the potential impact on jobs and customers, as the combination of the two banks could lead to branch closures and layoffs.

While the ECB has approved the bid, citing the potential benefits of consolidation for the overall stability of the financial system, Oliu argues that the deal would have negative consequences for consumers and small and medium-sized enterprises (SMEs). He warned that increasing the relative size of a bank in a given market often leads to "increased oligopolistic power," which can result in higher fees, reduced credit availability, and less favorable terms for customers. Oliu emphasized the need for competition authorities to thoroughly analyze the deal to ensure that it does not harm the broader economy.

The Risks of Banking Oligopolies

Oliu's concerns reflect a broader debate about the risks of banking oligopolies—markets dominated by a small number of large institutions. When banks consolidate, they often gain significant control over pricing and terms, which can limit competition and reduce options for consumers. In markets with fewer competitors, banks may have less incentive to offer competitive interest rates, lower fees, or innovative products, leading to a deterioration in the quality of service.

For SMEs, the impact can be particularly severe. Smaller businesses often rely on regional or niche banks for financing, as these institutions tend to be more attuned to their specific needs and willing to offer flexible terms. When large banks take over smaller ones, the focus often shifts toward larger corporate clients, leaving SMEs with fewer options for obtaining credit. Oliu argued that this dynamic could play out in the BBVA-Sabadell deal, with potential negative consequences for Spain's SME sector, which forms the backbone of the country's economy.

The issue of credit availability is also a major concern. In markets dominated by a few large players, credit tends to become more expensive and harder to obtain, particularly for higher-risk borrowers. This can stifle economic growth, as businesses and consumers may struggle to access the financing they need to invest, expand, or make purchases. Oliu stressed that these factors must be carefully considered by regulators before approving the BBVA-Sabadell merger.

The Push for a European Banking Union

Beyond the immediate concerns of the BBVA-Sabadell deal, Oliu's comments touched on the broader issue of banking union in Europe. A fully integrated European banking union has long been seen as a goal for policymakers, as it would allow banks to operate more seamlessly across borders, improve the flow of capital, and enhance financial stability. However, progress toward this goal has been slow, hampered by a range of regulatory and political challenges.

One of the key obstacles has been the lack of a European deposit insurance scheme, which would protect depositors across the eurozone in the event of a bank failure. Currently, deposit insurance is handled at the national level, which creates fragmentation and limits the ability of banks to operate efficiently across borders. Oliu noted that while a banking union is ultimately desirable, these structural issues need to be resolved before it can become a reality.

Consolidation, Oliu argued, can help strengthen the financial system by creating larger, more resilient institutions. However, he cautioned that this process must be managed carefully to ensure that it does not lead to excessive concentration of power in the hands of a few banks. "Consolidation processes would boost value," he said, "provided employees, clients, society, and politicians embrace them."

Global Competition and the Future of European Banks

One of the arguments in favor of consolidation is that it enables European banks to compete more effectively with their global counterparts, particularly those in the United States and China. BBVA's Chief Executive Officer Onur Genc recently told Reuters that European banks risk falling further behind global rivals if governments block consolidation efforts like BBVA's bid for Sabadell or UniCredit's potential takeover of Germany's Commerzbank.

In a globalized financial system, size matters. Larger banks have more resources to invest in technology, innovation, and expansion into new markets. They also benefit from economies of scale, which can help reduce costs and improve profitability. For European banks, which have faced years of low interest rates, slow economic growth, and increasing regulatory burdens, consolidation offers a path to greater efficiency and competitiveness.

However, as Oliu pointed out, bigger is not always better. While size can confer advantages, it can also create new risks, particularly when it comes to governance and risk management. Larger institutions are often more complex, making it harder for regulators to oversee them effectively. In the event of a crisis, the failure of a large, systemically important bank can have devastating consequences for the broader economy, as seen during the 2008 financial crisis.

Conclusion: Balancing Growth and Stability

The debate over the BBVA-Sabadell merger highlights the broader challenges facing the European banking sector as it seeks to balance growth, stability, and competition. While consolidation offers potential benefits, including increased resilience and global competitiveness, it also raises significant risks, particularly for consumers and SMEs.

Oliu’s warnings about the dangers of oligopolies and reduced competition should not be taken lightly. As regulators in Spain and across Europe evaluate the potential impacts of banking mergers, they must consider not only the financial stability of the institutions involved but also the long-term effects on consumers, businesses, and the broader economy. Ultimately, the goal should be to create a banking system that is both strong and competitive, capable of supporting economic growth while protecting the interests of all stakeholders.

As the review of BBVA’s bid for Sabadell continues, the outcome will have far-reaching implications for the future of European banking and the role of consolidation in shaping the industry’s trajectory.

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Sabadell October 14, 2024