Economica (1997) 64, 317–29 Big-Bank Mergers in Europe: An Analysis of the Cost Implications By YENER ALTUNBAS ¸ ,PHILIP MOLYNEUX and JOHN THORNTON Etibank Banking Inc., Ankara, Turkey; University College of North Wales; International Monetary Fund Final version received 25 March 1996 This paper examines the cost implications from hypothetical cross-border bank mergers in the EU in light of recent claims that substantial cost savings could be expected as the result of the EU’s Single Market Programme for financial services. In fact, our results suggest only limited opportunities for costs saving from big-bank mergers and indicate that such mergers are more likely to result in an increase in total costs. While there is a large variation in the simulated cost outcomes, the greatest opportunities for cost savings would appear to be gener- ated by mergers between German and Italian banks. In contrast, mergers between French and German banks appear likely to result in substantial cost increases. Although the overall findings suggest limited benefits from cross-border mergers between large banks, this may be a reflection of the methodology. Merger simulations are carried out hypothetically, ignoring any prior information about the pairings. We assume no premiums or merger costs and no further synergies resulting from such things as branch closures or a restructuring of the product mix. These assumptions may cause us to understate the potential reduction in total costs resulting from large bank mergers, and therefore our estimates provide the most pessi- mistic of total cost reduction outcomes. In conclusion, the substantial variation of cost out- comes generated suggests that large banks seeking economies through cross-border mergers should select potential partners with great care. INTRODUCTION The European Union’s (EU) Cecchini Report (Cecchini 1988) pointed to poss- ible substantial cost savings resulting from the EU’s Single Market Programme in banking services after 1992. Two important supply-side effects were expected to come from market unification: (i) price reductions resulting from rationaliz- ation and improved economies of scale were expected to lower production costs; (ii) an increase in productivity was expected to result from a reallocation of resources (human, financial and technological) orand industrial restructur- ing (economies of scale and mergers). The prospect of such gains was expected to accelerate cross-border merger activity throughout the EU. In fact, the cost savings anticipated by the Cecchini Report through cross- border mergers, appear to be limited according to the results of a number of recent empirical studies of the US banking market (Shaffer 1992; LaWare 1991, Cornett and De 1991; Holder 1993; Dunham and Syron 1984; Phillis and Pavel 1986), which suggests that interstate bank mergers are less likely to generate cost synergies than intrastate mergers, on the grounds that no over- lapping branch networks exist across states. Srinivasan and Wall (1992) also find that opportunities for cost reductions are greater when the merger partners operate in the same deposit market. The purpose of this paper is to shed some light on potential economies in European banking by evaluating the cost implications of hypothetical big-bank cross-border mergers in the EU. Our major conclusion is that such mergers  The London School of Economics and Political Science 1997