Banking risk: what is it and why is it triggered?

Explore what banking risk is and how it justifies the extra profits earned by banks.

What is Risk Banking? No, it’s not the latest expansion of your favourite board game, although the dynamics of conquest and strategy that govern it bear a striking resemblance. This term, cleverly borrowed from the famous board game, describes the recent trend among credit institutions—especially those with a bit of extra capital—to engage in mergers, acquisitions (M&A), and amalgamations. It’s akin to when you’ve gathered enough armies in the game to start eyeing your neighbour’s territories with interest.

One key macroeconomic factor associated with banking risk is the change in interest rates, a topic frequently discussed in our articles due to its significant impact on various markets, including the cryptocurrency market. When central banks raise interest rates to combat inflation—while many of us witnessed rising mortgage payments—it’s often a boon for bank profits. These additional earnings will likely be reinvested to promote growth and expansion. So, prepare yourself; the banking risk landscape for 2025-2026 is shaping up to be quite eventful.

The health of Italian banks

Before exploring the main topic, it is helpful to briefly review the health of credit institutions to understand the context in which this risky phenomenon develops. In recent years, banks have greatly benefited from central banks’ decisions regarding interest rates.

In 2023, Italy’s largest listed banks reported a combined net profit of EUR 21.9 billion, which increased to EUR 31.4 billion in 2024. At the European level, the earnings of the twenty largest banks reached approximately EUR 100 billion.

The primary driver of growth during this period was the European Central Bank’s decision to raise interest rates in an effort to combat inflation. From July 2022 to October 2023, reference rates increased from 0% to 4.5%. This rise led to an improvement in the net interest margin, which is the difference between the interest income generated from loans and the interest expenses paid on deposits. In simple terms, banks raised lending rates on loans more quickly than they increased the interest offered on deposits.

However, the positive results were not solely due to this factor. There was also a rise in net commissions, particularly from asset management services. These elements have contributed to the current situation where banks, having accumulated substantial profits—akin to conquered territories or bonus cards in a game—now possess significant liquidity, or ‘armies.’ The next step for these banks, in both contexts, is to invest these resources for further expansion.

The banking risk

The metaphor of banking risk is particularly fitting, as the sector is increasingly resembling a competitive arena. However, unlike a board game, the push for consolidation among banks is driven by several strategic motivations that are essential for their growth and stability. Here are the main factors:

1. Seeking economies of scale: the primary objective is to unify operational structures and optimise costs through the rationalisation of internal processes and the integration of technology platforms.
2. Geographical and product diversification: expanding territorial presence and broadening the range of services offered enables banks to mitigate the risks associated with concentrating on specific markets or customer segments, while simultaneously increasing cross-selling opportunities and, consequently, revenues.
3. Increased competitiveness: larger banks generally have greater bargaining power and a higher capacity to invest in new technologies, human resources development and marketing initiatives, thus strengthening their market position.
4. Strategic response to industry challenges: M&As are seen as a response to accelerating digitisation, the need to comply with increasingly stringent regulations (e.g., on capital and liquidity requirements), and the urgency of addressing cross-cutting issues such as environmental and social sustainability.
5. Shareholder pressure: A relevant factor is the constant pressure exerted by shareholders to maximise the value of shares and dividends, and to attract new investors.

The banking risk: the most emblematic cases

The Italian banking landscape has experienced notable mergers and acquisitions (M&A) that have reshaped the credit sector. The merger between Intesa Sanpaolo and UBI Banca, finalised in 2021, is seen as a pivotal moment that sparked the latest wave of banking consolidation. This merger not only solidified Intesa Sanpaolo’s leadership but also catalysed further integration within the industry.

Another significant example is Crédit Agricole Italia’s acquisition of Credito Valtellinese (CreVal) between 2020 and 2021, which highlights the growing interest of foreign groups in enhancing their presence in key regions of Italy. Additionally, BPER Banca has remained an active participant in the market, acquiring Banca Carige in 2022 and engaging in ongoing discussions about a potential merger with Banca Popolare di Sondrio.

In the background, several hypotheses involving major players are circulating. There has been extensive discussion about UniCredit‘s interest in increasing its stake in Germany’s Commerzbank, as well as previous talks about a potential merger between UniCredit and Banco BPM. Currently, Banco BPM is working to finalise its takeover bid for Anima SGR, which is also attracting interest from UniCredit, with a bid exceeding EUR 10 billion. 

Meanwhile, Unipol, having been excluded from the recent sale of public shares in Monte dei Paschi di Siena, is focusing on facilitating a merger between Bper and Popolare di Sondrio, in which it holds a significant stake. 

Banca Monte dei Paschi di Siena (MPS) remains a central element in the mergers and acquisitions (M&A) dynamics, with the Italian government seeking market-based solutions for its eventual stabilisation and privatisation. In this context, there has been renewed speculation about a possible involvement of UniCredit..

What will be the following developments?

What will be the outcome of this phase of banking risk? It is complex to provide a clear answer, mainly because there won’t be an absolute or definitive winner. Banking risk, unlike the dynamics of a board game, is a continuous process that adapts to the changing economic and financial seasons.

The current period is undoubtedly critical. With interest rates falling, the exceptional profit margins that banks have enjoyed in recent years may begin to normalise. This situation prompts banks to reevaluate their strategies and develop new plans to maintain profitability and strengthen their competitive positions.

As a result, we can expect further consolidation within the industry. Large banking groups may seek to fortify their positions to compete effectively on a global scale, while smaller institutions will need to take action to avoid being left behind. This could involve forming strategic alliances or pursuing mergers to create national or specialised leaders in the market.

What about the customers and the economy as a whole? Proponents of these operations often emphasise the anticipated benefits related to increased stability, efficiency, and investment capacity. It will be crucial to monitor whether these significant manoeuvres lead to real advantages in terms of effective competition, service quality, and support for the real economy. In summary, the dynamics of banking risk are still ongoing, and the upcoming developments will continue to shape the future of the credit sector.

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