ecb, november. 3 see constancio, v. ( 2017 ), “ challenges faced by the european banking sector ”, speech at the risk & supervision 2017 conference organised by associazione bancaria italiana, rome, 14 june. 4 see klaus, b. and sotomayor, b. ( 2018 ), “ bond funding of euro area banks : progress in the issuance of loss - absorbing instruments ”, financial stability review, ecb, november, box 7. 5 see huljak, i., mikkonen, k., more, c. and perales, c. ( 2018 ), “ digitalisation and its impact on banks ’ costs and profitability ”, financial stability review, ecb, november, box a. 6 see ecb ( 2017 ), financial integration in europe, may. the report also provides an in - depth review of the literature studying the costs and benefits of bank consolidation. 7 see andersson et al. ( 2018 ), op. cit. 4 / 4 bis central bankers'speeches

involving severance payments and 2 / 4 bis central bankers'speeches it investment, while the potential profitability gains may only accrue over the medium to long term. 5 digitalisation can be an important and permanent cost - saving strategy for banks, particularly in countries with a dense branch network. but it needs to be underpinned by certain structural requirements. banks ’ ability to cut costs will depend on factors such as labour laws, population density and the overall level of digitalisation in society. the scandinavian ( and benelux ) countries provide examples of successful cost optimisation strategies through digitalisation. in addition to cutting costs, many banks will also need to improve their income - generating capacities. one possible avenue for better income diversification is by enhancing fee and commission - based activities. however, the extent to which banks can diversify into areas generating more fee and commission income is likely to depend on their specific business models. in particular, banks that rely heavily on maturity transformation business to generate income could benefit the most from increasing the amount of their total income accounted for by fee and commission - based activities. consolidation can further bolster efficiency through cost - cutting synergies. evidence suggests that domestic mergers and acquisitions ( m & as ) tend to focus on achieving cost synergies, while cross - border m & as appear to be driven more by expansion opportunities. 6 this is mainly because banks have greater scope to streamline overlapping distribution networks within their domestic market. so domestic consolidation is crucial. domestic m & as can deliver substantial cost savings, particularly in less concentrated banking markets. this can be achieved through economies of scale, for example, lower administrative expenses and branch rationalisation, and through revenue synergies, such as lower funding costs for the merged unit. however, consolidation across countries is an indispensable complement to domestic m & as. banks that are more geographically diversified have tended to display stronger revenue performance in recent years. 7 furthermore, cross - border holdings of deposits and loans can help bolster economic resilience within the euro area by helping to smooth shocks through income - sharing. these private sector risk - sharing channels play an important role in smoothing shocks in the united states but are of a much smaller magnitude in the euro area. there are still some significant obstacles preventing us from reaping the full benefits of crossborder consolidation. in order to facilitate larger m & as within the euro area banking sector, we must make further progress towards completing the banking union and the