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"Huge increase in concentration in European banking market"

Press Release of June 14, 2010

Banks should diversify their investment portfolios, European think tanks urge

European banks should develop more strongly diversified international investment portfolios. This would substantially reduce the risk of contagion in financial market crises, economists have urged. Their findings are included in a policy brief published today by FINESS, an EU-wide research consortium, led by DIW Berlin, the German Institute of Economic Research.
The policy brief also urges European policymakers to substantially increase competition in European banking markets. “Even though integration of global financial markets  is well advanced, the foreign asset portfolios of European banks are less than optimally diversified”, said Christian Dreger who co-ordinates the FINESS network. “In addition a wave of mergers and acquisitions in the European banking sector has resulted in a huge increase in bank market concentration. This has the potential to hamper the access of firms to bank credit ”..”

The policy brief also spells out the risks of banking market integration in Europe. These include:

  • Ongoing  consolidation in the banking sector has the potential to hamper access of firms to bank financing
  • In the new EU member states the competition among banks led to an under-pricing of credit risk.
  • Foreign banks in the new member states can exert negative effects on the creation of new firms in industries with high informational asymmetries.

The FINESS network is a research network involving eight European think tanks and universities, including Cambridge University and the Paris-based Centre d’Études Prospectives et d’Informations Internationales (CEPII). Their research work is being funded by the European Commission under the European Framework Programme for Research.
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