BBVA, the second-largest bank in Spain, and ABN Amro, the largest bank in the Netherlands, have fired two joint blows at Italian banks’ stranglehold on foreign capital. The acquisition bids that these two banks have made for BNL and Antonveneta, respectively, are important not merely because of business considerations. They have also become an acid test for the principle of free capital movement in the European Union. Apparently, the European Union will not allow the protectionism of the Bank of Italy to lead to the failure of these two takeover attempts.


Italian football teams are recognized worldwide for their structured, rigid defense, known as ‘catenaccio.’ For opposition teams, scoring a goal against Italy is practically an impossible dream. A team continues to attack Italy until it finds a breakthrough in the dense defense, and moves into a position where it can take a shot at the goal.


Ironically, the same situation applies to the Italian financial system. Antonio Fazio, governor of the Bank of Italy, has spent years using a ‘catenaccio’ defense to protect Italian banks against major foreign institutions, allowing them to acquire only a 15% ownership in any specific bank. Nevertheless, after many attempts (including the failure of Dexia to buy Sanpaolo IMI early this year), it now appears that scoring a goal will be easier than in the past.


Two different teams of outsiders have recently launched simultaneous attacks against the Italian defense. On March 28, the board of BBVA, the second-largest bank in Spain, approved a plan to launch a takeover bid for Banca Nazionale del Lavoro (BNL), the sixth-largest bank in Italy. Only two days later, ABN Amro made its own takeover bid for Banca Antonveneta, the ninth-largest institution in the country. The value of the two bids is quite similar – about €6.5 billion ($8.4 billion).


Both banks had already been playing on Italian turf for some time. BBVA had a 14.7% stake in BNL, and ABN had acquired control of 12.25% of Antonveneta. However, only now have they succeeded in getting close enough to take a shot on goal. But they have yet to score, and Fazio will do everything possible to avoid that fate at the hands of foreigners.


Fazio has not said so in public, but he is trying to convince Italian authorities that, by means of a counter-offer (launched through some major local companies) Italy can prevent BNL and Antonveneta from coming under foreign control. If that plan does not work out, it will be very hard for the governor of the Bank of Italy to justify not authorizing the takeovers to European authorities merely because the acquiring banks in both cases are not Italian institutions.


Altina Sebastián, professor of finance at the Complutense University of Madrid, believes that, despite Italian protectionism, the BBVA takeover deal “will succeed.”  She said, however, that “others disagree. Some ministers, and the governor of the Bank of Italy himself, have expressed the opposite view. And [Italian Prime Minister Silvio] Berlusconi has raised objections to foreign capital coming into the economy. The European Commission is also very interested in having things move ahead. And while it will not issue any statements against what the Bank of Italy is doing, the European Central Bank also supports it…”


Manuel Romera, director of the finance department at the Instituto de Empresa, also believes “there is a high likelihood that the deal will work out. The European Commission will have a lot to say about that. Fazio has enormous power in the Italian financial system (his post is held for life) but that means nothing. A supervisor must be vigilant and make sure that the financial system is more competitive, [rather than act] to create more protectionism, which leads to less efficiency.” In Romera’s view, “Clearly, Europe is becoming more and more integrated into the global economy. These kinds of situations are an acid test for the construction process.”


Although Fazio does not like it, European trends favor cross-border mergers. In the closing stages of last year, Santander acquired Abbey, the British bank, in a move that pleased European authorities. According to Sebastián, “The ultimate goal of the European Union is to create an integrated space; one unique space. Right now, there are clear differences between the countries that comprise it.”


According to the European Central Bank, at the end of 2003 the level of banking concentration in Italy was 27%, compared with 44% in Spain and 80% in the Netherlands. This statistic measures the percentage of total assets of the financial system that are held by the country’s five largest financial institutions.


According to Sebastián, “In the other two countries, the process of national consolidation took place earlier. During the 1990s, there was a series of mergers and acquisitions among major institutions (in Spain, this involved BBV merging with Argentaria and Santander merging with Central Hispano.) But this did not happen in Italy. There was some activity, but on a smaller scale. The same thing happened in Germany. The level of concentration there is even lower than in Italy — only 22%. You don’t have to be a rocket scientist to realize that the integration process of European banks must involve these two countries.”


Its failure to integrate has left Italy’s financial system in a position of weakness. “It is very fragmented, with more than 800 institutions. It is very closed and very uncompetitive. In recent years, it has not innovated products or invested in technology or developed efficiency programs,” says Sebastián.


In fact, it was Antonio Fazio himself who rejected two deals in 1999 that easily could have changed the face of the Italian system: the merger attempt of Sanpaolo and Banco di Roma (now Capitalia); and the move to bring UniCredito together with Comit. “Italian banking is within Europe, yet on its margins; it is still anchored in the nineteenth century. It has not participated in domestic mergers and acquisitions. Instead, it has chosen a formula that involves extreme protectionism through limitations on international banks,” says Sebastián.


Nevertheless, size is not the key, Romera says. “The fact that a company is bigger does not mean that it cannot be acquired.” Francisco González, president of BBVA, expressed that idea recently at the general shareholders meeting of his bank. González said the best defense for the institution is to improve its efficiency and profitability, and thus increase the value of its shares on the stock market.


The consequences of Fazio’s protectionism are damaging for Italian banking. It is Europe’s least profitable system, with net returns on investment of 7%, far below the 11% recorded in France and the 15% in Spain. The prices of products it offers to retail customers are from 20% to 30% higher than prices in the two countries (Spain and the Netherlands) that want to purchase these Italian banks. The incidence of bad debt is one of the highest in Europe. Meanwhile, efficiency levels are also far below those of the most developed systems.


In Romera’s view, both moves by foreign banks into the Italian market are going “to revolutionize the way Italian banks function, which is very bad at the moment. It could mean that Italian banking becomes competitive, something you don’t see now.”


A more competitive banking system could lead to greater efficiencies, and wind up generating greater benefits for banks, lower prices for bank customers, and lower rates on credit cards. For Sebastián, “It seems strange that BBVA is also counting on the support of Italian trade unions and consumer organization, which see that this move could, medium-term, result more in increased revenues than in lower costs. During the first years, BBVA hopes to direct the operation itself. However, later on, it wants to grow local operations in central and southern Italy.” This attitude is surprising when you consider that the last cross-border banking merger – Santander’s purchase of Abbey – led to 3,000 layoffs.


Some Italian ministers are clearly concerned that a merger will mean job cuts, notes Romera. Roberto Maroni, Italy’s labor minister, announced that the two deals “are an attempt to attack the Italian banking system.” According to Romera, “politicians are worried that jobs could be lost and that the deal could wind up backfiring. They see the Abbey deal as a precedent. In Italian banks, there are three times as many employees per branch as in Spanish banks.”


Opening up Italian banking will not only bring advantages to the sector, it will also help the entire economy, says Sebastián. “Until now, Italian companies have taken the view that they are limited when it comes time to expanding overseas because Italian banks have not moved overseas or allowed international banks to enter Italy. It is just the opposite in Spain, where banks have made it easy for businesses to expand into Latin America.”


The ball is now in Fazio’s court. Most likely, he will try to clear it out of his territory using all his might. However, that kind of move could wind up haunting him. The European Commission’s committee on internal markets has already written Fazio, warning him that he can only veto the deal by alleging that there is a shortage of financial liquidity. According to Sebastián, “It would be ridiculous if the governor of the Bank of Italy said that BBVA has insufficient financial strength just when Goldman Sachs, the U.S. investment bank, published a report that called BBVA the model for Europe to follow.”


In his view, both the BBVA and ABN deals will proceed as planned. And they could become an “accelerator” for the integration process, by leading to a chain reaction of similar moves in other countries. Sebastián has no doubt that when it comes time for banks in good condition to consider their next foreign destination in Europe, they will look toward Germany. That’s because “the financial system in Germany is even more inefficient,” he concludes.