Banque Nationale de Paris' bid to create a $1 trillion-asset bank by taking over Societe Generale and Banque Paribas has brought to the fore a simmering debate over whether bigger is better.
Bankers, analysts, and consultants broadly agree that size will increasingly separate the winners from the losers in the race to build global financial institutions. However, they add that size alone will not make a bank a winner.
"Who knows what that much money means?" said Ed Furash, chairman of Alexandria, Va.-based Monument Financial Group and a longtime observer of the banking scene. "You can put it all together or you can screw it up."
Still, observers said BNP's bid has considerably upped the ante in the global bank mergers and acquisitions game. Whether or not it succeeds, the bank's hostile offer has paved the way for other European giants to make unsolicited bids for their competitors in their quest for scale.
"The dam is breaking up and things are going to happen," said Daniel Davies, a banking analyst with Robert Fleming Securities in London. The BNP offer "sets a precedent."
Speaking to analysts in London, BNP chairman Michel Pebereau said the main objective of the deal is to strengthen the operations of BNP and Societe Generale in France. But, he said, he is also looking to help the French banks establish themselves on the worldwide stage.
"The international networks of French banks are not very efficient, don't have big customer bases, and are not creating a lot of value," he said.
"This will help cut costs, increase revenues, reduce risk, and give us a more important part of the market."
Observers said it remains to be seen whether the proposed bank's size would be enough to transform it into a truly global competitor. Though the merged bank would do business with 11 million retail customers in France, it would only have 2.5 million customers outside of its home country.
"What this does is preserve a French-based entity that continues to make France a tier one international player," Mr. Furash said.
"Given that there aren't going to be that many tier one players in Europe, the next thing I would expect is that they would look for something here in the U.S. to get an anchor in the Western Hemisphere."
Moreover, its market capitalization would be approximately $50 billion, compared with $144 billion for Citigroup and $123 billion for BankAmerica.
"The name of the game is market capital because that determines who acquires who and what kind of risk you can take," said Lowell Bryan, a director at McKinsey & Co.
"Asset size, sales revenues, number of employees are the old measures."
Mr. Bryan said the financial world is increasingly moving toward very large providers operating across several sectors that are consolidating their domestic position and expanding globally, and large providers of specialized services like discount brokerage, credit cards, and mutual funds, which are globalizing at different speeds.
Analysts said there are several advantages to size. First, institutions with tens of billions of dollars in capital and hundreds of billions in diversified assets are far better placed to withstand financial setbacks than smaller institutions more dependent on fewer lines of business.
Second, they are better positioned to build global financial conglomerates that straddle commercial banking, insurance, wealth management, and capital markets activities.
Third, they gain enormous efficiencies of scale by handling much larger volumes, which makes them better able to compete on price.
"The world of the future is going to be dominated by 10, or at most 12, banks and most of them have so far come out of the U.S.," Mr. Furash said.
"This is what banks are responding to and we're at a point where every country has to make a decision whether one of its banks are going to be in the top 10 or become an also-ran."
He and others named Citigroup, BankAmerica Corp., and Chase Manhattan Corp. as among the U.S. contenders for global supremacy in financial services alongside investment banks like Merrill Lynch & Co., Switzerland's UBS AG, Germany's Deutsche Bank, and Holland's ABN Amro.
They added that American International Group and GE Capital are also contenders, albeit in more specialized market sectors such as insurance, commercial finance, and leasing. Close behind are big U.S. banks like Bank One Corp., First Union Corp., Wells Fargo,and, if it succeeds, the new French banking giant proposed by putting together BNP, Societe Generale, and Banque Paribas.
As banks start heading into the $100 billion to $200 billion market cap range, other banks struggling to stay in the global banking game need at least $50 billion. And even if they have that much, Mr. Bryan said, return on capital is even more important.
"Having a lot of capital and not earning high returns on equity is pretty worthless," Mr. Bryan said.
In addition, size, if not managed well, can create bigger risks and bigger volatility, analysts said. The collapse of a single, gigantic institution, they pointed out, has far more ramifications for financial markets and regulators than the failure of a much smaller one.
"On one hand, you get large entities which are good for the economic competitiveness of a particular country in financial services," Mr. Furash observed. "But it also means regulators will have to do a better job of tracking, because bigger size means bigger safety and soundness issues and increases the risk of bigger bailouts."
Whatever the pros and cons of size, the consolidation and globalization of banking is going to accelerate, almost everyone agreed.
"You have between $500 billion and $600 billion in profits in financial services worldwide and no one has more than a 1% or 2% share of that," Mr. Bryan said.
"This is going to go on for a long time to come."
