Financial Crisis Dims Hopes for Giant Cross-Border Banks in Europe

FRANKFURT — Only a few years ago, the future of European banking was said to belong to European champions, big border-straddling banks that would compete with the American giants.

Instead, European integration has been replaced by Balkanization.

Because of the financial crisis, banks are retrenching and refocusing on their home markets, all but abandoning ambitions of banking on a Continental scale — or bigger. Strings-attached government rescue plans and basic business logic are driving the change.

So instead of strategies for global conquest, Martin Blessing, the chief executive of Commerzbank, is concentrating on ways to keep credit flowing to the small and medium-size businesses that form the backbone of the German economy.

“We will see a domestic refocusing of banking but not because everyone is turning nationalist or because one or the other governments take stakes,” he said during a recent interview at his office in the bank’s stunning Norman Foster-designed office tower here. “Banks are going to look at where their franchise is strongest.”

These new realities could end up hurting Eastern Europe most. After communism, privatization led to an extended gold rush for Western bankers. Now those investors are having to decide whether to continue lending at home — in France or Austria — or in Poland, the Czech Republic or Hungary. In the global financial crisis, with the health of many banks dependent on the good will of their home governments, the choice is not hard. The thinking at the heart of cross-border expansion in Europe was always straightforward: Europe needed banks that could achieve economies of scale and have the global reach, global clients and global influence to compete with American titans.

Operating on that basis, a handful of European banks moved to grow and consolidate. In 2004, Banco Santander of Spain bought Abbey National of Britain. A year later, Italy’s UniCredit swallowed the bank HVB Group of Germany. In early 2007, Royal Bank of Scotland led a consortium that snapped up ABN Amro of the Netherlands for 70 billion euros, or $92 billion at current exchange rates.

That deal is already coming undone, with the implosion last year of Fortis, one of Royal Bank’s partners.

More broadly, nationalist impulses are on the move across the Continent, with many politicians arguing — as some Democrats are in the United States — that if the government is going to bail out banks, then taxpayers should get some ownership and some say in how they operate.

For example, Gordon Brown, the British prime minister, has said he wants to stay out of the operating side of the banks Britain has bailed out. But his government is under heavy pressure to help small businesses at home, and the documents that created the new British vehicle for investing in banks, United Kingdom Financial Investments, cite domestic lending as its priority.

French and German governments have also injected cash into their banks, both with the goal of keeping money flowing to businesses inside their borders.

Daniel Gros, director of the Center for European Policy Studies in Brussels, called the developments the Balkanization of European finance.

“Whenever governments get into the share capital of banks, even in a small way, of course they think nationally,” Mr. Gros said.

For instance, few banks expanded more rapidly in Germany over the last decade than Royal Bank of Scotland. The British financier muscled onto Continental turf with attractive financing packages for German manufacturers. Today, Royal Bank is majority-owned by the British government after losses in 2008 from £7 billion to £8 billion, or $9.2 billion to $10.5 billion.

According to two senior German executives, Royal Bank is now playing tough with German clients, calling in loans as the bank retrenches in favor of its British business. The executives, who asked not to be identified, because they were not authorized to publicly discuss confidential negotiations, said Royal Bank had demanded that its clients on the Continent sell assets, despite the catastrophic state of financial markets, so the bank could recover its cash quickly, perhaps to lend in Britain.

Most recently, Royal Bank was a major creditor of Adolf Merckle, the German billionaire who killed himself when it became clear the banks — with Royal Bank in the lead, the executives said — would insist on the sale of his prized possession, the generic drug maker Ratiopharm.

Christine Kortyka, a Royal Bank spokeswoman in Germany, denied the bank was retrenching. “We are an international bank with international clients and we will continue to serve them where they need us,” she said.

Mr. Blessing, who took over at Commerzbank just in time to sell a 25 percent stake to the German government to stabilize its finances and complete a major acquisition, does not dispute that governments are angling for national advantage.

Commerzbank styles itself the bank of Germany’s Mittelstand, as this country’s small and midsize companies are known.

Mr. Blessing says he is comfortable with focusing on serving the Mittelstand, because that has always been the bank’s core mission. .

As part of the deal for a cash infusion, the German government received the right to veto major decisions by the bank. That means it can ward off any acquisition from abroad — or any effort at a European expansion.