Merger talks between troubled Deutsche Bank and its far smaller rival, Commerzbank, have sparked a glut of activity by investment bankers, as other banks try to figure out what a deal could  mean for them. Should «DeutSchmerz» come to pass, the deal will have far-reaching implications for the European banking industry. 

How those changes look depends on whether the two manage to reach a deal, the conventional thinking goes. If the two unite into a «German champion», Europe's rival banks would probably respond with a similarly, nationally-motivated response.

Italy Ready to Pounce

In order to keep up with the newly-amped German heavyweight, more mergers in other countries are likely. The idea would be to create banks with adequate heft to compete with U.S. rivals, which left their European counterparts in the dust in investment banking league tables after the 2008/09 financial crisis.

Even if Germany doesn't produce a deal, Europe's banks face huge changes: Italy's Unicredit, for example, is ready to pounce should Deutsche retreat from Commerzbank, according to  the «Financial Times» (behind paywall).

Lucrative Advice

A German-Italian deal is emblematic for what investment bankers have been urging: cross-border or even international consolidation, following years of griping by Europe's battered banks that they are suffocating under a mosaic of regulation and protectionism by some countries.

To be sure, investment bankers would be the first to benefit from a wave of dealmaking. The risks attached to M&A in a sector still beset by bad loans and other crisis-era issues is obvious from a glance at the ill-fated acquisition of ABN Amro by the Royal Bank of Scotland in 2007 (the deal contributed to RBS' nationalization in 2008. Britain said last year it intends to sell off its nearly two-thirds stake in the bank by 2024).

Paralyzed for Years

Risks in the deals is rife in strategic missteps – against the backdrop of deals urged by politicians and regulators, as opposed to fundamental business logic. Before major synergies kicked in, big deals in banking would result in a bloodletting of thousands of staff, paralyzing firms for years in the process.

Despite the horror jobs scenario, Europe clearly needs to rethink its banking sector – Switzerland included. Since the financial crisis, American banks have earned more than those on the continent, where too many banks are fighting for very few new clients.

«Size Matters»

Policymakers see the urgency: European Central Bank chief Mario Draghi views consolidation as «very significantly needed» he said last week. UBS Chairman Axel Weber told «Bloomberg» Europe's banks are too puny to keep up with their North American rivals: «What Europe needs in order to catch up with American firms is European champions, banks that are larger in size», the former central banker said.

More Profitable – At Least

Whichever scenario plays out, the desire by Achleitner, Draghi, and Weber for a more competitive European banking sector will probably be fulfilled. Even if banks in Europe, working in a far more feeble economy than the U.S., can't quite pull even with their U.S. counterparts, they can at least become more profitable.

To be sure, employees are on the short end of the stick: estimates predict that 30,000 jobs could be eliminated by a Deutsche-Coba deal. If investment bankers get their way, those purely German numbers can be extrapolated onto a European scale.