Yet we also know there is a risk that local banks can become engaged in so-called “connected lending”, which tends to be inefficient.4 Research suggests that in this context retail banking integration – in the form of cross-border M&A – can improve allocative efficiency by increasing the distance between the main shareholders and management of a bank and the vested interests in the country where the bank operates.5 Another dimension is the connection between national banks and national interests.
There may be allocative inefficiencies that arise from trying to build up or defend “national champions” in the context of an integrated EU financial market.6 One example of this phenomenon during the crisis was the decision of several national authorities to merge failing banks with other domestic banks rather than resolve them, which probably increased concentration.