Outlook: French connection gets banks guessing

ANOTHER DAY, another banking merger. The French being the French, this one is a strictly Gallic affair but with the added bonus that most of the cost savings, and therefore most of the job losses, will be in London, not Paris. Where exactly the merged Societe Generale Paribas ranks in the pecking order of world banks is not terribly clear.

Never mind, it is a national French champion, knocking Credit Agricole off its perch as the number one bank on the other side of the Channel. What's more it may just be the kick in the derriere the overbanked French market needed.

The creation of SG Paribas gives the French a seat at the big boys' table. It also neatly dispenses with one of the main obstacles to the French government's sale of Credit Lyonnais. No wonder the finance minister Dominique Strauss-Kahn was jumping for joy at the merger yesterday.

As with the SBC-UBS merger, it is not hard to see where most of the pain will be felt among the 78,000-strong workforce. The overlaps are mainly in London where both companies run large investment banking operations from sumptuous offices. Paribas may be longer established in the City. But SG has been making up ground fast. It has added the banking division of Hambros to its equities business, Strauss Turnbull, and is bankrolling Nicola Horlick's dream of creating a fund management business with pounds 5bn under management.

The target of pounds 560m in cost savings within three years gives the management plenty to aim at. Paribas' opulent new headquarters in Marylebone may be one early casualty while the wine bars of the City should be filling soon with fixed income dealers and equity analysts drowning their sorrows and looking for new employment.

Inevitably questions will now be asked of that dwindling band of European banks which still remain outside larger national or transatlantic groupings. Consolidate or die certainly makes for an easy catchphrase. Given the pace of merger activity among Continental banks, there is a danger that Don Cruickshank's review of the UK banking scene could look even more parochial by the time he publishes his conclusions.

But the UK banking industry is structured in a way that makes it difficult, if not impossible, to adopt the same national solutions as the Swiss, the French and the Spanish, as the failure of Barclays and NatWest to merge shows.

The word from Paris yesterday was that SG Paribas has ambitions to spread its wings further. There is also talk that Banque Nationale de Paris will be obliged to look overseas for a partner. Sitting on their fat market capitalisations and hemmed in by domestic monopoly constraints, it may be time for the UK clearers to strike pre-emptively across borders.