D.he low profitability and the high costs of European banks have long been a thorn in the side of the supervisors of the European Central Bank (ECB). Consolidation, including across borders, is regularly called for by Andrea Enria, Head of ECB Banking Supervision. The ECB wants to facilitate such a process and on Tuesday presented its final guide to the supervisory requirements for mergers and acquisitions.
“This guide to consolidation helps the ECB to be understood, makes supervisory action more predictable and avoids misjudgment of supervisory expectations, which benefits everyone,” Enria said in the press release. So far he has made no secret of the fact that he expects more profitable and more cost-efficient banks after a consolidation process. The Italian also sees this as an incentive to realign and invest more in technology and digitization. The gap to the major American banks is to be reduced.
Although there have been more mergers recently in Spain, cross-border consolidation has been a long time coming. The willingness to take this risk is countered by the corona pandemic and the expected damage to the banks in the coming months, such as the wave of insolvencies and loan defaults. In addition, there have been numerous changes at the top of the board of European banks in recent months, such as at Commerzbank or ING.
The major Italian bank Unicredit is currently looking for a new boss after the Frenchman Jean Pierre Mustier threw in the towel a few weeks ago due to differences of opinion with the board of directors. The CEO of Deutsche Bank, Christian Sewing, wants to continue the transformation until 2022 and thus reduce the gap to competitors such as the French BNP Paribas in terms of market value. Another obstacle to cross-border mergers are the different national insolvency and consumer protection rules.
The ECB wants to provide constructive support
But the ECB does not want to put any major obstacles in the way of the banks. According to the final guideline announced last July, the larger institution emerging from a merger will not face excessive regulatory capital requirements if it has a convincing integration plan. The supervisors want to inform the institutes of their ideas about the capital adequacy used as a loss buffer at an early stage. Banks can temporarily rely on internal models to calculate capital requirements.
After all, the ECB wants to accept what is known as badwill. This income effect arises when the purchase price of a bank is below the balance sheet value of equity. This is the case with almost all European banks because their stocks are currently trading below book value. According to the ECB, the banks should use the badwill to strengthen their equity. However, it may not be used for dividends.