Merger Fever in Europe: Scale Advantages with Side Effects

The merger wave that has swept across Europe has brought advantages of scale while creating several side effects. Is there a banking crisis on the horizon?

April 18th, 2025

European banking institutions currently discover that scale matters again. Targobank acquired Oldenburgische Landesbank (OLB) in a total acquisition that created a new retail banking powerhouse with 4.8 million customers and €79 billion in balance sheet value and plans to achieve German private bank market leadership within the top ten. Targobank CEO Isabelle Chevelard announced plans to expand particularly in mortgage lending and self-insurance products.

The situation becomes more tense at another location while Unicredit continues to plan its increased ownership of Commerzbank beyond the 29.9% threshold which received European Central Bank approval. The banking institution Commerzbank describes this move as a hostile takeover effort. Unicredit CEO Andrea Orcel attempted to ease market concerns by indicating that the company will determine whether to pursue a full merger after 2025.

Bank consolidation in Europe has become an undeniable trend regardless of future timeframes.

The banking industry expects Europe to experience a major wave of mergers during 2025 according to Bank of America. The reasoning is multifaceted:

• The current valuation of European banking institutions remains below their American counterparts.

• The rising costs of capital.

• The growing requirements for digital transformation include especially cybersecurity along with regulatory technology and client integration.

• Organizations need scale to properly handle rising regulatory requirements that become too complex for manual management.

However, the road to greater size is not without pitfalls. Analysis shows that mergers create additional complex systems and data threats and market instabilities which become particularly dangerous when dealing with sensitive derivatives products.

CRE Risks: A US Trend Echoing in Europe

A particularly sensitive area is commercial real estate (CRE) lending. The US banking industry faces increasing risk concentrations because more than 1,700 institutions have CRE exposures exceeding 300% of their capital. More than 216 institutions show CRE exposures that reach higher than 600% which indicates an alarming situation.

European regional banks demonstrate identical warning indicators because they concentrate on real estate properties. The assets at OLB have a 23% concentration in commercial real estate which exceeds typical German financial institution levels.

📊 [CHART 1: CRE Exposure – European vs. US Regional Banks (% of Capital)]

This chart demonstrates the comparison between OLB, German savings banks, US mid-tier averages, and high-risk clusters regarding their CRE burdens.

Derivatives: Massive Volumes, Hidden Dangers

A second major risk lies in the derivatives market – particularly interest rate derivatives. The derivatives exposure of Deutsche Bank exceeds €52 trillion in notional values. The actual economic exposure stands at €16 billion due to netting and collateral arrangements but the nominal scale of the derivatives remains extremely large. Moreover, the risk is highly concentrated.

Central clearinghouses operated by systemically important banks including UBS, JPMorgan, and ICE process more than 70% of all over-the-counter (OTC) derivatives. Such interdependence creates a vulnerability to domino effects when one counterparty faces default.

The charts in the following section present the relationship between notional and economic risk levels of Deutsche Bank, BNP Paribas and Commerzbank.

📊 [CHART 2: Derivatives Volume vs. Economic Risk – Major European Banks]
→ Compares notional vs. real exposure for Deutsche Bank, BNP Paribas, and Commerzbank.

The chart depicts the market position of different entities in OTC derivatives clearing operations across Europe during 2024.

📊 [CHART 3: Market Share in OTC Derivatives Clearing (Europe, 2024)]
→ Illustrates concentration in clearing: UBS dominates with 30%.

The clearing market shows strong concentration because UBS controls 30% of the market.

Mergers Increase Complexity – and Interdependence

The Targobank/OLB merger along with the possible Unicredit/Commerzbank acquisition delivers scale benefits but increases the structural risks within the organization.

Risk models remain unaligned to the expanded balance sheets that result from leverage activities.

The process of consolidating data produces accounting inconsistencies because different valuation methods exist especially for derivatives during integration.

Portfolio Overlap: In the case of a Commerzbank takeover, analysts estimate up to 18.5% of shares may be controlled via derivatives. When a market downturn occurs it will force margin requirements on the shares owned by Commerzbank due to overlapping portfolio positions.

📊 [CHART 4: Timeline of European Bank Mergers & Acquisitions (2022–2025)]

→ The process of consolidation continues to grow faster starting from 2022.

Stress Test: What Happens in an Interest Rate Shock?

A stress test scenario includes a 200 basis point interest rate increase. Such a move would make a strain on hedging strategies (interest rate derivatives) and lead to margin calls across the board which would result in instant liquidity needs.

📊 [CHART 5: Margin Call Simulation – 200bp Rate Shock]

→ The simulation reveals that Deutsche Bank and Santander alongside other solid financial institutions would experience significant liquidity reduction.

Regulatory Dilemma: Stability vs. Competition

The political support for these mergers comes with ECB-approved relaxed ownership limits but market concentration issues continue to grow. People now face a critical regulatory decision that affects the banking industry.

Stronger banks demonstrate better resistance to worldwide shocks.

But: The system becomes more sensitive to failures because of increased interconnection among institutions that have core clearinghouses as systemic entities.

The Federal Reserve in the United States eased its planned capital requirements for large banking institutions. Unicredit received permission from the ECB to acquire a 29.9% stake in Commerzbank through their pragmatic approach.

• When Collateral Falls Short: The Crash Scenario Takes Place

• Several international experts describe a “black swan” threat that could strike Europe's banking industry:

• Counterparty failure – e.g. The European derivatives market relies on UBS to clear approximately thirty percent of its volume.

• Margin Calls – caused by rising interest rates leading to derivative losses

The situation becomes worse due to the combination of fire sales with deposit withdrawals and decreasing market confidence.

Systemic breakdown – when IT systems fail post-merger and balance sheets are improperly consolidated

Conclusion: Consolidation Is No Silver Bullet

The current mergers produce institutions that become larger and more competitive at the same time. Through consolidation banks gain resources to invest in digital services and customer platforms as well as modern business models. The consolidation of financial institutions increases the systemic danger of derivatives alongside real estate loans and information technology connections.

Risk reduction needs structural methods rather than current standards of risk reduction which include valuation standards and clearing buffers alongside transparency. Becoming larger does not automatically translate into better understanding of operations.

The main inquiry now shifts from:

How large can banks expand their operations?

But also:

At what level of resilience must a bank operate during the upcoming crisis?