Consolidation should also accelerate In particular in countries with a large

Consolidation should also accelerate in particular in

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Consolidation should also accelerate. In particular, in countries with a large number of banks relative to their population, a considerable potential for consolidation remains unexploited. According to Figure 4, these countries are primarily Austria, Denmark, Finland, Germany and Sweden, since the small numbers for Luxembourg and Ireland reflect their position as international financial centers. The need for further consolidation is also reflected by the small average bank size in these countries. In Austria and Germany, this is due to the large number of local savings and cooperative banks. According to EY (2013), most of the deals in these countries are expected to take place in more than three years from now, while most deals involving British and Spanish banks are crisis-related and expected to take place over the next 12 months. To conclude, the financial crisis is a catalyst to M&A and will lead to a further consolidation of the E.U. banking sector. Small and large banks are differently affected by this process. Large banks will concentrate on their core activities and be left with less complex business models than pre-crisis. Because of comparative advantages, they will tend to be focused on corporate and investment banking. However, in order to become more diversified and to meet regulatory requirements, they are likely to increase their retail banking activities and sell basic, highly standardized financial products that allow them to Figure 3: M&A activity in the E.U. banking sector Source: Zepyhr (2013). Figure shows the total number and the total deal value (in € millions) of M&A in the E.U.-15 banking sector for the period between 2004 and the first half of 2013. Acquisitions of minority stakes are not included. The acquired institutions are commercial banks, savings banks, cooperative banks, branches and agencies of foreign banks, personal and business credit institutions as well as mortgage bankers and brokers. 0 20,000 40,000 60,000 80,000 100,000 120,000 140,000 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 0 160 140 120 100 80 60 40 20 Aggregate deal value (€ millions) Number of deals
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15 The Journal of Financial Perspectives generate economies of scale from their size. This transactional banking approach contrasts with small banks which, even though they tend to grow in size, will remain focused on more personalized, high-value-added products, such as small business loans and personalized investment and trust services, with profit margins driven by the willingness of customers to pay higher prices for these services. Relationship banking thus provides a niche for small banks that many large banks find less attractive or are less capable of providing [Berger and Udell (1995, 2002)]. However, it is likely that the successful implementation of this strategy will require them to complement their traditional services with a wider scope of financial services that allows them to earn non-interest income and to partly offset the decline in net interest margins. Consequently, even though the crisis will accelerate the consolidation process significantly, the overall structure of the E.U. banking sector with a small number of larger, investment-oriented banks, on the one hand, and a
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