Scale versus specialization: banking strategies after the euro

European Management Journal Vol. 17, No. 6, pp. 567–575, 1999 1999 Elsevier Science Ltd. All rights reservedPergamon

Printed in Great Britain0263-2373/99 $20.00PII: S0263-2373(99)00047-X

Scale VersusSpecialization: BankingStrategies After the EuroJORDI CANALS, IESE, University of Navarra, Spain

The euro will transform the competitive landscapeof European banking. This paper discusses some ofthe strategic effects of the euro on banks. In parti-cular, it explores two questions: the rationalebehind mergers and acquisitions and the universalbanking model. The strategic analysis of the forcesfor change in banking leads to some conclusions:scale will not be the key success factor in Europeanbanking, the euro will increase the role of financialspecialists in Europe and the universal bankingmodel will face numerous challenges in the newcontext. 1999 Elsevier Science Ltd. All rightsreserved

The Euro: Evolution or Revolution inFinancial Markets?

The introduction of a single European currency is oneof the most important economic events of the twenti-eth century. Its success or failure will determine notonly Europe’s future but also that of financial inte-gration processes in other regions of the world.

The euro carries with it three immediate effects onfinancial markets. First, the elimination of the geo-graphical fragmentation associated with the existenceof separate national currencies. Second, the conse-quent creation of a true single financial services mar-ket. Third, the elimination of the exchange risk withinthe euro-zone.

The introduction of the euro is reinforcing the revol-ution which the financial services industry in Europeis already experiencing. Consequently, its specificeffects cannot be separated from the other changessimultaneously affecting financial markets and inter-mediaries in the euro-zone.

In looking at the process of the introduction of the

European Management Journal Vol 17 No 6 December 1999 567

single currency, another (in many ways similar)experiment comes to mind: the creation of the SingleEuropean Market in 1992. Could the effects of theSingle Market be an indicator of what will happenwith the euro?

The answer is ‘no’. The Single Market of 1992 was anambitious project that has had vast positive reper-cussions in many industries, including banking.However, the effects on banking — along with thosearising from the approval of the Second BankingDirective — while positive, have not been as great asthose in other sectors, for reasons specific to the nat-ure of the financial activity and its regulation.

The euro, like the Single Market, will have a highlypositive impact on the real economy. However, thedifferences between the two shocks are significant.The Single Market entailed major deregulation of thebanking industry. The euro, however, brings about aset of enormous changes in three areas, which theSingle Market barely touched. The first and mostobvious is the elimination of the exchange risk withinthe euro-zone. The second is the convergence ofprices of financial services. The third is a moreintense transnational competition across industries.The difference in prices for the same goods in differ-ent countries continues to be significant. Hence, theeuro will play a genuine role in bringing about a con-vergence of prices in the euro-zone.

The purpose of this paper is to examine the strategiceffects that the euro will have on banks and themanagerial challenges associated with them. It con-sists of four sections. The first discusses the effects ofthe euro on the dominant financial model in Europe.The financial model in the euro-zone is moving froma model based on banks and financial intermediariesto a model in which financial markets will play amore important role. This is the context of thechanges that banks are facing. The future of universalbanks, the cornerstone of the bank-based model inEurope is analyzed next.

SCALE VERSUS SPECIALIZATION: BANKING STRATEGIES AFTER THE EURO

The following section deals with the effects of theeuro on some of the basic banking business (such asretail banking and investment banking), at the levelof single activities, not at the firm level. Finally, wewill analyze two key strategic issues for banks afterthe euro: the role of scale as a competitive advantagein the euro-zone and the dilemma between universalbanks and specialized banks.

Based on this analysis, we will argue that the intro-duction of the euro will not lead to just a few megab-anks, but will foster greater specialization amongfinancial institutions. Moreover, the euro willstrengthen the idea that scale is not the only sourceof competitive advantage for banks, nor the decis-ive one.

Towards a New Financial Model inEurope

The starting point for understanding the transform-ation that the euro will bring about in Europeanbanking is the specific structure of the financial sys-tem in the euro-zone.

An initial examination reveals that the financialmodel in the euro-zone is based on financial inter-mediaries, as opposed to the market-based model,where financial markets have a dominance over fin-ancial intermediaries.1 This distinction is highly sig-nificant in assessing the impact of the euro on finan-cial markets. It is reasonable to expect that theintroduction of the euro will promote activity in fin-ancial markets at the expense of banking-based inter-mediation. In short, the financial system in the euro-zone will move toward something more like the mar-ket-based model, though a complete identificationwith the Anglo-Saxon system will not happen. Togain a better understanding of this evolution, it isworth looking briefly at the characteristics of bothmodels.

The market-based model shows the following attri-butes. The first is that firms go directly to the marketsto raise capital, through debt or capital issues. In thismodel, banks have a less prominent role in providingcapital to firms.

The second characteristic is that this model portraysa fairly radical separation between investors whooperate in financial markets and firms that get thecapital. The primary link is the institutional investor,which does not take a very active role in managingfirms, except in times of crisis.

The separation between ownership (shareholders)and management (senior managers) creates theagency problem generated by the lack of alignment

European Management Journal Vol 17 No 6 December 1999568

between the interests of the two parties (Berglof,1990).

This separation between ownership and managementmight lead to situations of uncertainty where capitalmarkets may not know the true value of the firm orof some particular projects, such as the developmentof a new product, a technological innovation, or theacquisition of another firm.

The third characteristic is that financial markets aregood at separating the profitability and risk of eachsecurity. In this way, markets offer potential inves-tors enormous flexibility and more innovation thanbanks.

The model based on financial intermediaries, in turn,has some basic features that stem from the fact thatbanks take on the role of lending to companies oreven of becoming shareholders. In this function, akey factor is that banks may enjoy economies of scalein acquiring and processing information (Diamond,1984) at levels unattainable by the markets.

A second feature is that banks can establish moreefficient control over the management of a companythan markets can do, insofar as the relation betweenbanks and firms is professional and there is no abuseof personal relationships.

Nevertheless, this close relationship between banksand non-financial firms can create problems forbanks in the medium term, especially when firmsoperate in an unstable environment or one in whichrapid innovation is taking place.2 This is one of themain limitations of this model compared to the mar-ket-based, namely, the risk that banks assume inmaking certain investments, which can compromisetheir solvency in the medium term.

The introduction of the euro will, in fact, cause anexplosion in the supply of funds available for loansin Europe and it will allow for extensive develop-ment in financial markets. Banks, in this context, arefacing new competitive challenges and may losesome of their traditional business lending tomedium-size and large firms, as we will discuss inthe next section.

Effects of the Euro on EuropeanBanking: the Universal Banking Model

For the banking industry, the euro means the end ofgeographical barriers to competition, the expansionin the natural market size and the disappearance ofthe exchange rate risk.

In order to analyze the impact of these changes onthe banking industry — which extend beyond the


loss of the foreign exchange business involving theold national currencies — it is useful to bear in mindthat banks in Europe tend to be universal banks.From the point of view of bank management, a fea-ture of this model is that banks incorporate underone corporate umbrella business units of varioustypes, such as retail banking, corporate banking, capi-tal markets, private banking, investment funds,investment banking, insurance and, in some cases,shareholdings in other, non-financial businesses.

Universal banks are highly diversified. Thus, theyhave separate business units that cover various seg-ments of the financial services industry. It is true thatcertain similarities may exist among some businessunits, like retail banking, insurance and private bank-ing, which might be one of the reasons for managingthem as part of a single organization. Nevertheless,retail banking has little in common with capital mar-kets or investment banking.

A basic effect of this distinction is that each of thesebusiness units requires different capabilities. Thus,different professional backgrounds are needed formanagers in each business unit. As a result, the com-pensation or control systems should also be different.

The need for different capabilities and the existenceof varying institutional and legal factors in eachcountry have given rise to banks that are more speci-alized and focused on specific activities. Thus, USinvestment banks have been able to accumulateexperience and develop certain resources and capa-bilities that place them in a favorable position in thisarea of business.3

Specialized banks have the enormous advantage ofbeing able to achieve the economies of scale specifi-cally required in each business and develop theresources and capabilities they need in each of thesegments of the financial services industry. Given thegrowth that financial markets will experience withthe introduction of the euro, it is reasonable to antici-pate that the euro will not only increase the size ofbanks but will encourage specialization as well.

This increase in specialization will occur for severalreasons. First, because increasing competition in eachsegment of the financial market will lead each bankto focus on those activities where it has the rightresources and capabilities and where it can developsustainable competitive advantages. As a result,many banks will abandon certain activities wherethey can only compete marginally. The recent experi-ence of banks in shutting down retail business out-side their own countries (like Credit Lyonnais, Bar-clays, NatWest, Commerzbank) testifies to this. Thesale of investment banking units of certain Britishbanks such as Barclays and NatWest, or the restruc-turing process undertaken by banks such as CreditLyonnais and Banesto speaks volumes.


The second factor that fosters specialization is thatgreater competition will require a growing commit-ment of capital to each of the various business unitsthat today are grouped under a universal bank. Busi-ness units show different economic performance andcompete for capital. It is reasonable to believe thatshareholders expect management to allocate capitalamong business units according to their efficiency.Thus, each unit should be responsible for the capitalinvested in it, as if it were an autonomous unit. Bythe same token, the universal bank’s corporate centermust demonstrate its contribution to the wholeorganization.

As a result, cross-subsidies between business unitsthat currently exist in many universal banks will tendto disappear, since senior managers in each unit willnot want to be responsible for capital not allocatedspecifically to them or which is devoted to financingother, less profitable activities within the bankinggroup.

The third reason for arguing that specialization willincrease is that the growth in the size of the marketaccompanying the euro will allow for scale econom-ies specific to each business. For example, in the areasof investment banking or asset management, theexistence of highly qualified research teams will pro-vide a very important competitive advantage. To theextent that assets are denominated in euros and capi-tal markets tend to integrate, the development ofresearch teams at the euro-zone level will beextremely important. Large specialized banks will beable to afford this.

An important observation arising from the precedingdiscussion is that it is crucial to distinguish betweena market’s geographical scope — the current scopeof the euro — and the source of competitive advan-tage. The market may grow in size, as with the intro-duction of the single currency. However, the size ofthe market does not necessarily imply that size aloneproduces competitive advantage in the bankingindustry: only in certain cases this may be true. Thenext section deals further with this question. A betterunderstanding of the effects of the euro on banksand, in particular, on universal banks, and the impor-tance of scale in banking, can be developed by ana-lyzing the nature of each banking activity and eachof its business units.

The Effects of the Euro on SomeBanking Activities

Investment Banking

The euro will create a single financial market in Eur-ope and entail growth in investment banking activi-ties. As discussed above, the growth of debt and equ-


ity markets can be quite explosive. Investment bankswill take advantage of the opportunities of thosegrowing markets, whether in underwriting securities,or in advisory activity (mergers, acquisitions andIPOs).

The investment bank’s value chain (Figure 1), showsthat those banks should perform some basic activi-ties: raise capital, the development of new financialproducts, advisory services, risk management, andinvestment of resources.

Each activity has a different driver. Thus, in the caseof financial product development, the existence of alarge staff of talented professionals with a strongpresence in the various key markets is an essentialfactor, while in the case of risk management, special-ized technology and expertise play an essential roles.

Thus, we can see that in most cases the value chainkey driver is its ability to attract and retain talent,not just scale. Moreover, scale does not necessarilybring with it talent. Thus, US investment banks,which are the market leaders in this business, areattempting to grow, both by taking advantage ofopportunities to buy other investment banks and bytrying to attract the best young graduates fromaround the world.

Retail Banking

A retail bank’s value chain is somewhat differentfrom that of an investment bank, and includes thefollowing activities: product development, market-ing, attracting savings, data processing, developmentof investment products, investment of resources andsecuritization. Each of these activities is driven byspecific factors (Figure 2). Thus, attracting savings isa function of the network of branches, the develop-ment of certain alternative channels (such as Internetbanking) and the quality of the financial products.Marketing seems to be a function of scale, brandname and reputation.

It is clear that in retail banking, scale — except inmarketing and technology — is not a decisive vari-able. Indeed, even within these activities, the mini-mum scale necessary to exploit the possible econom-

Figure 1 Investment Bank’s Value Chain


ies of scale are achieved with medium-size banks(Berger et al., 1999). Hence, it is reasonable to supposethat scale will not be an essential competitive variablein retail banking in the euro-zone. Scale may help inbuilding and strengthening the brand image, buteven with this variable the decisive factor will not bescale itself, but innovation and quality of service, asperceived by the customers. In this respect, retailbanking, therefore, is also different from investmentbanking, where scale and the ability to attract talentare essential for the success of the activity.

Scale, Mergers and Acquisitions Afterthe Euro

Traditionally, the role of size in the banking industryhas been analyzed from the perspective of economiesof scale, that appear when the average cost of a firmdecreases while its volume of operations increases.In the case of retail banks, empirical evidence on thisphenomenon, to date, gives ground for serious skep-ticism, since economies of scale seem to disappear ata very low level of assets (around 100 milliondollars), although there is scant evidence of somescale economies for banks with assets up to 25 billiondollars (Berger et al., 1999).

There are various reasons for the lack of empiricalsupport for economies of scale. First of all, theyrequire that costs must be fixed, and must notincrease with the volume of operations. Scale, how-ever, entails greater complexity, which, in turn,involves higher costs. Therefore, while some costscan be reduced, others may increase.

At the same time, the hypothesis of economies ofscale assumes that an increased volume of operationswill lead to a proportional increase in revenues. This,however, is not always the case, since margins maydecrease.

Finally, from a methodological point of view, it is dif-ficult to determine whether or not economies of scaleexist through the estimation of cost functions. Retailbanks do not have simple cost functions, and the pro-cess of confirming empirically the existence of econ-omies of scale is difficult.


Figure 2 Retail Bank’s Value Chain

One novel factor not taken up by empirical studiesuntil very recently is the effect of scale on the cost ofcapital, both in terms of diversification of the bank’sinvestments and greater solvency. Berger and Mester(1997) obtain some results that could support thathypothesis. However, it is worth bearing in mind thatsolvency and diversification of assets are not attri-butes of scale, but of good management. Conse-quently, while it is undeniable that bigger scale canhelp in reducing the cost of capital for a well-man-aged bank, it is not clear that scale per se can guaran-tee such a reduction in cost.

The search for scale is legitimate, and the fact thatscale advantages do not exist in retail banking —although they do seem to exist in corporate andinvestment banking — does not exclude the possi-bility that institutions in the euro-zone may seekgreater operating efficiency from increased size.

This question can also be approached from anotherperspective. Gual (1999), using concepts introducedby Sutton (1991), distinguishes between competitionbased on variable costs and competition based onsunk costs. In terms of the variable cost model, fin-ancial institutions compete in areas such as price andservice. In this case, a bigger volume of activityresults in an increase in variable costs. This model isthe one that retail banking has followed, to date, inthe euro-zone.

On the contrary, the model based on sunk costsassumes that banks compete not on variable costs,but must deal instead with fixed investments andsunk costs in order to penetrate a market. The costsare independent of the scale that banks plan to achi-eve. Investment in information technology is one ofthe factors that suggests that this type of competitioncan occur in certain businesses, such as investmentbanking.

These two models have major consequences forbanking. If competition is based on variable costs, the


scale of banks is not decisive for their efficiency, oncea certain minimum scale has been reached. On theother hand, under the model based on sunk costs,scale can become decisive. Empirical evidence isinconclusive in this respect. Given what has just beendiscussed, an analysis of the value chain for invest-ment banking and for retail banking shows that theformer seems to be consistent with a model of compe-tition based on sunk costs, while the latter, at leastup to now, is consistent with a model of competitionbased on the existence of variable costs.

A separate issue is the fact that retail banks in theeuro-zone will face increasingly severe competitiveconditions, aggravated by steadily decreasing finan-cial margins due, in large part, to declining interestrates. In view of this situation, it is argued that alarger size is the only way to offset low margins inconsolidated industries.

This hypothesis depends, in turn, on the assumptionthat greater size will not entail increased manage-ment and coordination costs, a possibility that cannotbe dismissed. The same hypothesis also underliesmergers and acquisitions: consolidating the assets oftwo banks would make it possible to reduce costsand improve efficiency. But again, for this to work,the merger and subsequent integration process mustbe successful, and this has not been clearly demon-strated by mergers and acquisitions carried outwithin the banking industry in the US or Europe.

While a merger can achieve a greater scale and allowcost reductions, the first hypothesis — i.e. that onlygreater scale can offset declining margins — ignoresa fundamental factor, namely, the ability to innovatein the sector. Imitation in the retail banking industryis immediate, and innovations do not last long. Still,certain cases of innovation in European retail bank-ing with spectacular results can be cited, such as theentry of Citibank in telephone banking in Germany,and the development of super-accounts by BancoSantander in Spain.


Mergers and acquisitions are usually related to thesearch for scale. This is typical in cases of horizontalmergers in the banking industry as well as elsewhere.In the United States and Europe, this type of mergerhas been frequent in recent years, as shown by themergers between Banco Bilbao and Banco Vizcaya,Banco Santander and Banco Central Hispano, ABNand Amro, and Bank of America and NationsBank.

Another factor propelling mergers and acquisitionsis geographical complementarity. The acquisition ofBankers Trust by Deutsche Bank is perfectly in linewith this rationale.4 A third factor that explains merg-ers is the complementarity of activities and products.In this case, a merger or an acquisition is targeted atreinforcing the universal banking strategy, as withthe merger of Citibank and Travelers Group, whichseeks to make the new entity, Citigroup, into a veri-table financial supermarket, offering every conceiv-able kind of service to individuals and firms. Thecross-selling of financial products is the implicitobjective of this type of merger. This was also one ofthe aims of Smith Barney’s acquisition of SalomonBrothers, or the acquisition of Asesores Bursatiles, thepremier Spanish financial asset management group,by Morgan Stanley.

What does the recent experience in M & A in bankingshow? The answer is fairly clear. Mergers and acqui-sitions in the banking industry do not succeed in pro-ducing a substantial increase in efficiency comparedto those of the individual banks prior to the merger(Rhoades, 1998). In most of the cases where such mer-gers have been successful, the main reason is that themerger has involved major cost reductions and oneof the banks has taken the leading role, so that con-frontation between management teams has been avo-ided. In general, the assumed synergies are difficultto materialize, and they may more easily be foundin the area of cost reduction than in an increase incross-selling.

This observation leads to a crucial issue. Mergers andacquisitions represent a specific decision at a givenmoment, involving a major commitment of time andresources. However, just as important as the decisionitself is the implementation process, that requires aclearly devised integration plan.

It is not surprising that in many cases mergers andacquisitions, having produced high expectations,leave a bad aftertaste. This is because many of thesetransactions are agreed upon without a clearlydefined integration plan. This plan should, amongother things address the allocation of executiveresponsibilities within the bank, a strategic vision, anew organization and some corporate governancepractices. It is common to discover that once the planbegins to be defined, it then becomes clear that themerger will fall short of the results that may havebeen expected when it was announced.

At the same time, one must not forget that the pur-


pose of a bank, like any business, is to create valuein a sustainable way. Insofar as this objective can beachieved through mergers and acquisitions, they areto be welcomed. Mergers make banks bigger, but donot guarantee that the bank will become better ormore innovative. This does not mean that mergersand acquisitions are impossible vehicles for growthin banking, but it is clear that they are fraught withmajor obstacles.

Thus, mergers can offer a sensible option for someretail banks. However, mergers should not hinder thepotential for innovation in retail banking, which isindispensable for long-term survival. Innovation isgenerally not driven by large companies, but bysmaller, innovative ones. Hence, an exclusive empha-sis on scale may become dangerous, because it mayslow down the process of innovation. The followingsection will examine the importance of scale in bank-ing from another perspective.

Universal Banks Versus Specialists inthe Euro-Zone

In the face of narrowing financial margins in retailbanking, some banks are trying to follow a universalbank strategy and increase revenues through thediversification of their activities into other financialareas, such as asset management or insurance.

The universal bank strategy is based on three majorassumptions (Canals, 1997). The first is the possibilityof taking advantage of a single distribution networkto increase the cross-selling of financial products. Thecreation of banking giants such as the new UBS orCitigroup seems to be motivated by this intent tooffer clients all types of financial products from thedifferent business units.

The opportunities for cross-selling are of particularimportance in retail banking, asset management,investment funds and insurance, to mention only afew businesses in which the ultimate target clienteleis the middle-income market. However, experienceshows that the volume of cross-selling does notincrease as quickly as some banks would wish, for avariety of reasons. First, a bank may not offer the bestconditions in all types of products, beyond stan-dardized products such as checking accounts orgovernment debt. Second, the existence of highlycompetitive specialized firms in each of the segmentsof the market makes entry by universal banks diffi-cult. Third, a bank’s internal organization is notalways conducive to an efficient coordination, fromthe clients’ point of view, between the different typesof financial services. Fourth, the distribution systemof universal banks has become increasingly special-ized and segmented; the creation of special branchesfor high-income individuals or special networks forserving the corporate market reflect this trend.


The second assumption for the creation of universalbanks is the attempt to become exclusive providersof a wide range of financial services to individuals,families and firms. This is an interesting phenom-enon in the case of retail banking, as was earlier dis-cussed in connection with the cross-selling of finan-cial services. However, it is also interesting as itrelates to corporate banking.

There is a trend toward dealing with a smaller num-ber of banks, indeed. However, it is less obvious thata single bank can be superior to others in providingall of the financial services that companies mightrequire. In Europe, some universal banks with astrong corporate banking presence will be able totake advantage of the introduction of the euro toattract a greater volume of business, particularlyamong European multinational firms. However, itwill be difficult for them to dislodge US investmentbanks from advisory, mergers, acquisitions, andunderwriting operations. The difficulty lies, not somuch in the size of the market, as in the fact that USbanks have gained extensive experience anddeveloped unique capabilities for this kind of busi-ness, which cannot be improvised or hastilydeveloped.

The risk of substitution is a third reason for creatinguniversal banks. This risk consists of the threat ofinnovation that comes from new financial services oralternative distribution channels. The emergence ofnew products such as investment funds or new dis-tribution channels, such as Internet banking makesthis phenomenon evident.

A universal bank attempting to maintain a presencein many segments of the financial services industrycan internalize and reduce the risk of substitution bywidening the scope of its activities. However, from astrategic point of view, what really reduces the riskof substitution is innovation — the ability to antici-pate the needs of clients, understand new forms ofdistribution and offer them immediately. In thisrespect, universal banks are not, in fact, at any realdisadvantage compared to specialized banks. Thus,the differentiating factor is not scale, but rather theability to innovate.

The potential advantages of creating universal banksmust also be contrasted with certain intrinsic organi-zational limitations (Canals, 1998). The first of these isthat universal banks are diversified firms, possessingdistinct business units, whose management is com-plex.

Further, we must keep in mind that part of the ration-ale for universal banks is the potential for signifi-cantly increasing the cross-selling of products. How-ever, this requires internal coordination. This task ismade even more difficult by the fact that the businessunits offering these products are different, and theirstaffs have different backgrounds and expectations.


This last aspect is vital, and human resource policieswithin a single universal bank must be varied, withthe consequences that this entails in terms of organi-zation.

Is There a Role for Specialists?

We presented above some factors that will drive bankspecialization in the euro-zone: the need to focus thestrategy, greater transparency in allocating capital,elimination of cross-subsidies between bankingactivities and the existence of certain economies ofscale in certain activities.

In order to thoroughly understand banks’ decisionsto specialize, it is important to consider simul-taneously two factors (see Figure 3). The first factorrelates to market scale and homogeneity. As has beendiscussed in a previous section, this does not neces-sarily lead to seeking scale as a source of competitiveadvantage, though it does not exclude it. However,if there is not a high degree of market homogeneity,geographical specialization can be an importantoption, as it has been, until now, in the case of Euro-pean retail banking and some segments of the corpor-ate banking business, which in most countries is con-centrated in the hands of local banks. The euro willmean one less obstacle to market integration andstandardization; this is clear in the case of the corpor-ate market although somewhat more doubtful andslower in the retail segment.

The second factor deals with the economic nature ofcompetition in the banking industry and the exist-ence of efficiency effects. As has been seen, if thecompetitive model is increasingly based on variablecosts, the fragmentation of financial institutions inthe euro-zone will remain, at least from a strictlyeconomic point of view. On the other hand, if thecompetitive model becomes that of sunk costs, theneed for scale will force many institutions to seekgrowth, particularly through mergers and acqui-sitions.

In both cases, there appears to be a future for special-ized institutions, provided that they are innovativeand have the minimum size required to benefit frompotential economies of scale in their activities. If, infact, heterogeneous behavior of retail clients remains,due to cultural factors associated with different coun-tries, then specialization within those areas is stra-tegically sensible.

On the other hand, if scale ends up being a primaryeconomic factor for competing in particular activitiesas a result of the existence of sunk costs, then speciali-zation in a particular activity of the financial industrymay be logically warranted.

Therefore, not only is specialization not a suicidaloption in the euro-zone, but it is a sensible one for


Figure 3 European Banks: Some Strategic Options

the reasons that have just been discussed. Neverthe-less, for specialization to be a wise strategy in themedium term, two elements, implicit in this dis-cussion, are required. The first is the need to achievethe minimum size needed to exploit potential econ-omies of scale in each activity. The second is thatspecialists need to be innovative. In this context, themain risk of a specialized bank is that it may becomeso involved in covering its clients’ current needs thatit loses sight of the future ones.

Alliances Among Banks: Sharing Resources andMarkets

Globalization and the development of new techno-logies requiring increasing investment have triggereda veritable explosion in alliances in all industries. Inbanking, alliances have been the exception, not therule. Why has this not happened in this industry?Could alliances constitute an alternative strategy forbanking in the euro-zone?

Alliances that have been formed by European bankshave not always produced the anticipated results.Furthermore, some have been more defensive thanoffensive in nature — like attempting to avoid a hos-tile takeover bid. Alliances between banks and otherfinancial firms, such as insurance companies (forinstance, the alliance between Fortis and La Caixa)looking for complementarity have perhaps beensomewhat more successful.

In general, the most successful alliances are thosewith a clear complementarity of products or geo-graphical scope. This makes it possible to create anew organization that takes advantage of theresources and capabilities brought by each partner.An examination of some of the factors responsiblefor successful alliances that have taken place in otherindustries helps in understanding why this formulahas not been widely used in the banking industry.Alliances without clear objectives generally do notimprove the competitive position of the partners.


Alliances, however, are not a course withoutobstacles. First and foremost is the fact that alliances,by definition, are agreements subject to a time limit,and therefore unstable. The second factor, closelyinterrelated to the first, is that alliances are under thepressure of its partners in trying to gain advantagefrom it, sometimes to the detriment of the othermember’s rights.

On the other hand, when complementarity amongbanks is clear and objectives are specific, allianceshave a chance to achieve positive results. Thus,alliances may be an excellent formula, in the future,for coordinating businesses where scale can play anessential role, as, for example, in asset managementand financial markets. It would not be surprising tosee in the euro-zone medium-sized banks formingalliances, and sharing resources in order to formindependent entities that provide certain specializedfinancial services, such as portfolio management,which a traditional commercial bank may not havethe resources to provide.

Some Conclusions

The debate on the future of banking after the euroseems to center on whether a bigger scale will benecessary to compete in the euro-zone and theadvantages of the universal bank model over special-ized banks.

We have discussed the dilemma between scale andspecialization. Scale can be an essential variable insome areas in banking, such as investment bankingand capital markets, where the driving factors ofthese businesses require a large volume of oper-ations. In other areas of the banking industry, suchas retail and private banking, the driving factors donot seem to be linked to scale, but to other variables;this is logical, given the hypothesis that the minimumscale is lower and has already been attained. This cer-tainly does not exclude the possibility that a retail


bank would want to become larger and acquireanother bank — which may be a good option for it —though it is not an essential factor for survival.

This discussion leads to another issue: the role of spe-cialized banks and universal banks. The latter modelstill prevails in the euro-zone. Universal banks needto implement major changes in their organizationalstructure, since they are complex firms with enor-mous coordinating costs, and synergies may not beeasily attained.

At the same time, for reasons mentioned above, theeuro-zone will encourage specialization and diversityin financial firms. This possibility will improve thecompetitive positioning of more focused, specializedbanks. Universal banks will experience greater com-petition from specialized competitors.

Mergers and acquisitions in the European bankingindustry are an option in the new euro era. Neverthe-less, it should not be expected that all banks will fol-low that path, as if these were the only recipes forcompeting in the new environment. The only gener-ally proven formulas for all banks after the launch ofthe euro are the ability to innovate and the qualityof their management.

Notes

1. For an exhaustive treatment of these issues, see, amongothers, Canals (1997); Saunders and Walter (1994); Ste-inherr (1992).

2. Allen (1993) presents some of the advantages of banksover markets, according to the type of industry in whichthey invest.

3. Roe (1994) offers an interesting analysis of the legal andinstitutional factors that have shaped the specializationwithin the US financial system.

4. Cross-border mergers in the euro-zone pose the need fortransparency and standardization of financial informationwithin that region. Conversely, uncertainty regarding thevalue of information can thwart a merger.

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JORDI CANALS, IESE(International GraduateSchool of Management),Barcelona, University ofNavarra, Avenida Pear-son 21, 08034, Barce-lona, Spain.

Jordi Canals is Professorof Economics and Gen-eral Management andAssociate Dean of IESE

(International Graduate School of Management),Barcelona. He works in the field of Strategy andInternational Management with an interest in someindustries like banking, pharmaceuticals and tele-communications. He is a member of the EuropeanShadow Financial Regulatory Committee. His mostrecent book is Universal Banks: InternationalComparisons and Theoretical Perspectives(Oxford University Press, Oxford, 1997).

Documents

Scale versus specialization: banking strategies after the euro