loss accounts are especially difficult to interpret in banking. and there is considerable uncertainty about what the correct business choices should be regarding scale, combinations of activities and technologies. to simplify the analysis, i will focus on the direction and pace of change rather than on a more ambitious comparison between current conditions and some ideal benchmark. enterprises need to cut costs and branch networks while at the same time converting them to higher value - added services. in the process, at least in the medium term, employment would have to fall and skills be upgraded. there is widespread agreement on the desirable features of the restructuring. there should be fewer and on average, larger financial institutions in europe. concentration, therefore, is set to increase as it is in most other geographical areas. consolidation can help to withdraw capital, to alleviate destructive competition, and to reach the minimum critical size needed to support the required expenditures on infrastructure. it can thus contribute to achieving efficient production and distribution, notably in wholesale segments such as investment banking and the processing business ( eg global custodians ). while generalisations are hazardous, it seems fair to say that in addressing these challenges, by comparison with the united states and even the united kingdom, the banking industry in continental europe has faced particularly testing conditions which may explain its relatively slow pace of adjustment. first, the degree of excess capacity appears to be greater, especially when assessed in relation to the goal of an area - wide single market. this does not emerge so much from comparisons of the number of institutions or size - concentration measures. it is, however, more apparent from indicators of profitability such as returns on assets and costs, especially labour costs, and ( on some measures ) branch density, which tend to be less favourable in much of continental europe. this may be the legacy of the more sheltered environment provided by governments. second, corporate governance structures have been less sensitive to market forces. in particular, government ownership and other forms of support have been more pervasive. in addition, for historical reasons, savings, cooperative and mutual banks have accounted for a relatively large share of the overall market. in a sheltered environment, the coexistence of different types of ownership structure was of little consequence. but with growing competition, it has become a significant factor influencing the means and incentives of the various players to adjust, and hence the speed and pattern of the restructuring. the degree of discretion enjoyed by management, the determination of acceptable profit targets, the ability and willingness to take on risks

functional operations, where very different lines of activity and business cultures are brought together. in addition, assessments have varied across countries, taking into account the specific environmental factors likely to impede necessary adjustments. the fact that, at least until recently, cross - border mergers in europe have been comparatively rare, especially in the retail segment, is difficult to assess. on the one hand, it can be judged positively in that it reflects a prevailing view of differences in business cultures and of limited prospects for increasing profits in the retail sector. cross - border mergers seen to date have tended to take place in regions where certain cultural affinities have been in place. on the other hand, the paucity of cross - border mergers may also stem less positively from obstacles that would prevent the restructuring required to reap higher profits. it is probably not a coincidence that rating agencies have tended to be less optimistic about m & a deals in those cases where the environmental impediments to cost cutting and to the adoption of potentially higher - productivity technologies have been greater. iv. lessons if the foregoing analysis is correct, a number of lessons follow, both for the official sector and for market participants. as noted, the key challenge for the public authorities is to ensure that their policies are supportive of a speedy and orderly restructuring. besides monitoring developments closely, they can make a positive contribution through policy initiative in four broad areas. first, the authorities can lessen the obstacles to the adjustment of labour and capital. some significant progress has indeed been made in reforming labour markets in europe, but this has not been uniform across countries, nor have all the steps taken necessarily been in the right direction. as regards the adjustment of capital, the issues are considerably more complex. in particular, taken at face value the empirical evidence on the benefits of m & as might suggest that an even more restrictive attitude might be justified. if m & as involving financial firms do not add value, and if at the same time the systemic risks inherent in ever larger and more complex firms are increased, then facilitating m & as through changes in take - over or, more indirectly, tax codes might not seem warranted. however, it would be rash to draw such a conclusion in view of the solace it would give to national, rather than european, interests and to the supporters of the status quo. it is particularly important to ensure that it is economic rather than political considerations that guide policy decisions ; and in this context, a number of non - transparent imped