Investors in financial stocks in the Republic and the UK must be wondering what needs to happen to put a floor under the relentless fall in banking and insurance stocks.

The successful takeover of NatWest Bank by the Royal Bank of Scotland has done nothing for the share prices of British banks. Indeed, the share prices of all three banks involved in the bidding war for NatWest are now languishing well below the levels enjoyed prior to the outbreak of hostilities.

Not surprisingly, the outbreak of corporate activity in the related insurance sector was greeted with a yawn by the market. CGU and Norwich Union announced a merger that will make the combined entity Britain's largest insurance group with a global premium income and retail investment sales of £26 billion sterling (€42 billion). Both companies have substantial operations in the Republic and the combined group would become the largest general insurer in the market.

In the life and pensions market the combined group will still be far behind the market leader, Irish Life, but will have a significant 10 per cent share of that market.

For the 80,000 small Irish investors in Norwich Union, the merger will result in them owning a pro rata 48 per cent in the new combined entity. In the short term the merger looks like it will do nothing for the Norwich Union share price that is trading at just under £4 sterling.

There is an outside chance that one of the large European insurers might try to launch a hostile bid for one or both of the merger partners. However, in the absence of such a bid, the share prices of both CGU and Norwich are likely to continue to languish along with the rest of the financial sector.

Despite this, the experience of the army of Irish investors who bought shares at a discounted sterling 265p on the flotation has been quite good. Furthermore, the strength of sterling over the intervening period will have enhanced the returns in Irish pound terms.

Meanwhile, the Irish financial sector remains totally friendless in the stock market. This is exemplified by the fact that Elan and Eircom are now vying with one another for the top slot in terms of market capitalisation. AIB which has been the largest Irish-quoted company for several years is now firmly in third spot.

Indeed, the turbo-charged share price of Baltimore Technologies could result in it enjoying a larger market capitalisation than AIB.

With the process of financial sector consolidation proceeding apace across Europe the derating of the Irish banking and insurance stocks must be causing some serious soul-searching in the respective company boardrooms.

This process of consolidation is serving to directly intensify competitive pressures in the Irish marketplace. Royal Bank of Scotland, the new owner of Ulster Bank, is likely to be a much tougher competitor than NatWest. In the insurance sector, assuming that the CGU/Norwich Union deal goes through, the process of consolidation is likely to speed up.

Technological innovation is clearly reducing barriers to entry in a wide range of financial products and it is no surprise that overseas financial institutions are making their presence felt in the Irish market place. It seems inevitable that the dominant position hitherto enjoyed by the Irish banks in particular will be gradually eaten into over time.

Cost reduction and the embracing of new technology is likely to be the key if Irish-quoted financial shares are to retain their independence and to maintain market leadership. Increasing overseas businesses is also likely to be an important aspect of future strategy.

If the Irish financial institutions do not adjust quickly enough to this new environment, takeovers by larger rivals could well be the eventual outcome. For shareholders such an outcome would probably be unpalatable given that recent mergers and acquisitions in the financial sector have not resulted in any bonanza for shareholders.

A successful response to the rapidly changing markets by the Irish-quoted companies would ultimately prove to be far more rewarding. The multitude of small investors in the Irish financial stocks must be fervently hoping that some new initiatives will arrive soon to lift share prices.