Bank consolidation - shrink to fit Say it enough and it may come true. Deutsche Bank's Anshu Jain reckons that consolidation will leave only half a dozen big universal banks standing. Lousy lending has been the main catalyst for US and European bank consolidation since 2008; the eurozone sovereign debt crisis has also taken its toll. But the German bank's co-chief executive says consolidation is an unintended consequence of new regulations. He has a point: banks have had to deleverage hard to meet Basel III and other regulatory capital ratios. The resulting revenue hit has added to pressure to cut costs. But if consolidation happens at all, it will be through continued shrinkage as banks retreat to core markets and play to their strengths. The eurozone and property crisis-induced mergers and closures of Greek, Irish, Spanish and UK banks are one thing. But it is hard to see a large merger working. Even some of the big guys are on life support from stimulus packages. Regulators everywhere are too gun-shy. In the eurozone (where most consolidation is needed) the European Central Bank could veto mergers. And there is a built-in disincentive for banks to size up anyway: regulators want "global systemically important financial institutions" (such as Deutsche) to hold even more capital than Basel's 7 per cent minimum. In four years of deleveraging, banks in the eurozone have cut non-domestic assets by about two-fifths ($7tn), Morgan Stanley notes. UBS is all but exiting its fixed income, currencies and commodities trading activities, apart from those needed by private bank clients. Royal Bank of Scotland has given up the ghost in its equities business to concentrate on its debt market strengths. Both hope better capital allocation will lift returns. With merger-driven consolidation a no-no, upside will increasingly lie in those banks that can shrink to focus on what they're best at fastest.