16 For banks these changes will open up opportunities to improve their cost

16 for banks these changes will open up opportunities

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16 For banks, these changes will open up opportunities to improve their cost efficiency. However for smaller banks, in particular, these changes might be challenging, since they need to cut branches and staff while maintaining their comparative advantage over large banks owing to their close customer relationships. The closing of branches and job cuts, furthermore, will not alleviate the increasing burden of non-branch-related and non-staff-related overhead costs that arise, for instance, from IT infrastructure. Technological outsourcing is one strategy to reduce such overhead and to allow banks to refocus on their core competencies. Outsourcing is, however, not risk- free, and the potential for outsourcing is limited, since critical and complex functions cannot be outsourced. Furthermore, outsourcing always requires some sort of standardization, 16 For more information on the future of branch networks, see Köhler und Lang (2008). which reduces flexibility. 17 Additional overhead costs arise as a result of the new Basel III regulations, since banks will probably need to recruit extra staff in order to ensure compliance with the new regulatory framework. These costs are usually disproportionally higher for small banks, since they will most likely not be able to completely pass the higher regulatory costs through to their customers [Santos and Elliott (2012)]. For these reasons, a further consolidation will likely be necessary among small banks in future. 5.3 Possible impact on the structure of the E.U. banking sector The restructuring process will not only affect banks’ individual business models, but will also have an impact on the structure of the E.U. banking sector as a whole because it will likely lead to M&A. Because many banks are unloading their non- core businesses, the number of investment opportunities is expected to rise going forward. This will particularly affect large, investment-oriented banks, because they face the greatest pressure to become more streamlined and focused. They are also disproportionately affected by higher capital and liquidity requirements that force them to significantly deleverage and to reduce their capital usage. While large, investment-oriented banks will, hence, most likely be the sellers, large, retail-oriented banks may be potential acquirers, since they have been relatively stable during the crisis. For example, the Spanish Banco Santander not only exited peripheral units by offloading its sub-scale businesses in Switzerland and the Czech Republic, but also strengthened its core markets by taking over the Polish Kredyt Bank from the KBC in 2012 to combine it with its Polish division. This indicates that some banks might also act as both seller and acquirer during their restructuring. Medium-sized banks with a solid capital base may also seek to strengthen their core businesses and markets by building scale in an effort to become more competitive.
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