Any moment now, bankers in Europe expect a wave of cross-border deals among its many universal banks.¹ But no such wave has come yet, and for good reason: because of differences among Europe’s national banking markets, regulations, and business cultures, banks would gain smaller synergies from cross-border mergers than from domestic ones. Conditions favoring greater cross-border synergies are beginning to emerge, but shareholders of some European banks are pressing so hard for growth that international mergers may occur before conditions are ideal.

The structure of Europe’s banking industry means that one or two mergers will quickly trigger many more. Banks are at risk for getting swept into inopportune deals. Which banks would make the best partners, and what should be their postmerger strategy? To help bank leaders decide, we have imagined what the European banking system might look like in ten or so years, when competitive conditions are more uniform. Europe, we believe, will have three types of banks, all much bigger and more specialized than most of its banks are today, as well as large regulated monopolies providing the necessary infrastructure, such as payment platforms and stock exchanges. A bank that decides now what type it aspires...