Cross-border M&A of banks in the Nordic countries

1. Cross-border M&A of banks in the Nordic countries Panel contribution at the FDIC, FRB of Chicago, and JFSR conference on Mergers and Acquisitions of Financial Institutions Arlington, VANovember 30 - December 1, 2007 Bent Vale, Norges Bank (central bank of Norway) Views and conclusions expressed, are my own and cannot be attributed to Norges Bank

2. Outline of talk • Why banks in Nordic countries • Performance of merged banks • Regulation of mergers by competition authorities • Some other regulatory issues specific to cross-border banks • Supervision • Deposit insurance • Crisis handling

3. Why banks in Nordic countries • The Nordic countries (Denmark, Finland, Iceland, Norway, and Sweden) is perhaps the region inside EU with largest cross-border banking activities. • Most cross-border M&A activities for banks

4. Nordic bank structure in 2004Total assets

5. Performance of cross-border merged banks • Potential economies of scale and realizations of these have been observed by studies of mergers at national level (Humphrey and Vale (JBF 2004), Norway) • Karceski, Ongena and Smith (JFE 2005) on bank mergers in Norway: Commercial customers (traded companies) of acquired banks suffer, those of acquiring banks benefit.

6. Performance of cross-border merged banks • Nordea a merger between 4 banks from 4 Nordic countries, each with a large market share in their own country. • Goldberg, Sweeney and Wihlborg (JBF 2007) study i.a. ROE and cost/income ratios of Nordea and comparables in the 4 countries: • ROE of Nordea holding roughly the same • ROE for 4 Nordea banks better than comparables • Cost efficiency gains from the merger have yet to appear.

7. Regulation of mergers • Inside EU all banks have the same right to acquire another bank irrepective of nationality. • All cross country banks free to transform foreign subsidiaries into branches. • Issues of competition treated both at European level and at national level, but is the national market the relevant for competition? • Are market shares a good proxy for bank competition?

8. Supervision • Base rule inside EU: • Subsidiaries of foreign banks supervised by host country. • Branches supervised by home country. • But: • MoU between supervisors in Nordic countries: Share supervisory information between host and home, joint onside examinations. • Institution specific MoU on cooperation in supervision, for instance a supervisory college for Nordea and its subsidiaries. • Also agreements for supervison of foreign branches

9. Deposit insurance • EU rules: • Subsidiaries insured by host country scheme • Branches insured by home country schemes, but provisions for topping up in the host scheme. • Large variation in deposit insurance schemes in EU, also among Nordic countries. • Can be problematic when tranforming subsidiaries into branches.

10. Crisis handling • Responsibility of national authorities • Although a MoU on exchange of information if problems in a cross-border bank, no specific rules ex.ante as to how or by whom it will be handled. • Can this uncertainty hamper otherwise desirable cross-border mergers? • Can this uncertainty reduce moral hazard?