Banca d'Italia official explores banking consolidation's impact on competition and stability

Banking consolidation, driven by economic, technological, and regulatory pressures, has become a primary tool for sector reorganization over the past three decades.

This process challenges the traditional antitrust view that higher concentration automatically leads to less competition.

The banking sector is unique, characterized by heavy regulation, high capital intensity, information asymmetries, and stringent prudential constraints.

In this context, size can foster efficiency, innovation, and resilience against shocks, not just market power.

Post-2007-2009, financial stability became central, revealing that fragmented banking systems can be more vulnerable.

The challenge is to balance competition and stability within the regulatory framework.

Furthermore, digitalization and the rise of non-bank operators like fintech and big tech have intensified competitive pressure, particularly in standardized segments, while regulatory requirements have become more onerous, increasing fixed costs.

Banking consolidation is driven by factors like removed geographic constraints, privatizations, and stringent capital and compliance requirements.

These pressures force smaller banks to merge, diluting rising fixed costs.

EU consolidation remains largely domestic, hindered by the lack of a fully mutualized deposit guarantee system.

Economies of scale are crucial, enabling larger entities to spread IT, compliance, and risk management costs.

Economies of scope, offering diverse services, also create synergies and enhance risk assessment.

However, beyond a certain threshold, increased size can introduce diseconomies such as greater organizational complexity and governance challenges, necessitating careful contextual evaluation for each operation.