08 August 2022

Euromoney Interview with Edouard Fernandez-Bollo, Member of the Supervisory Board of the ECB

One of the structural challenges facing European banks is their lower profitability compared with, for example, US banks, or even – to a lesser degree – UK banks. So further integration clearly offers potential gains in efficiency.

We’ve seen domestic consolidation, but not so much cross-border consolidation. How keen are you to see cross-border deals in the banking union?

We are keen to see deals that increase resilience. From the perspective of the European Central Bank (ECB), consolidation within the euro area is a form of European integration. Of course, the European market still has national borders, which we take into account because we supervise both the individual banks and the entire group. The European banking market is much more resilient than it was ten years ago, but it has still not returned to the level of integration it had in 2008.

One of the structural challenges facing European banks is their lower profitability compared with, for example, US banks, or even – to a lesser degree – UK banks. So further integration clearly offers potential gains in efficiency.

We are in the process of integrating regulation, to align it at European level. Of course, it’s not finished, and we need to make more progress, but it is already a big step in the right direction. And then with the ECB Banking Supervision there is integrated supervision. It’s normal for integrated supervisors to look at how banks can benefit from more market integration. We are certainly not placing demands on banks to make deals, and we made that very clear when we published our guide on consolidation. This should be a market-driven process, and any deals must be based on sound rationale. We are prudential supervisors, so what we want is integration that bolsters resilience. We think there is room for that. When we published our ECB guide on consolidation, our first goal was to give the market a clear picture of our role. There were misconceptions. Market participants thought we were against consolidation and that when we saw deals we increased capital requirements, which obstructed them. Of course, sometimes we do prescribe higher prudential requirements. After all, we are a prudential supervisor and when we see risks we have to take measures to tackle those risks. But when we see opportunities, we recognise them too, and that was our message. As a prudential supervisor we assess deals – we don’t instigate them, we assess them – and we are willing to examine deals and provide clarity. We provide clarity about the important points for our assessment, where we see potential for increasing resilience in consolidation and where we see any red flags. By clarifying our expectations, we allayed the market’s misgivings about our attitude towards consolidation.

However, this in itself didn’t change the economic situation. The last two years were disrupted by many exogenous shocks, and the most obvious thing to do was to look for synergies. It is true that you reap more synergies when you have overlapping national networks than when you are crossing borders. Cross-border consolidation is good for increasing revenues and diversifying risk, but the benefits are less immediate in terms of synergies and cutting costs. So it’s perfectly understandable from an economic perspective that important moves in national consolidation came first.

There has been some cross-border consolidation too – nothing game-changing, but what we have seen is consolidation by business line, consolidation in particular segments of the market. We have seen some developments in asset management, structured finance and consumer finance. We have also seen some movement towards upscaling, where banks that already have a market presence strive to expand their operations.

Another development was a consequence of Brexit, when certain third-country banks moved to the euro area. Interestingly, they have done so in an integrated way, with branches and cross-border service provision. This is another form of integration that is working.

So there has been some progress towards further integration of the banking system. What are the prospects ahead? The last two years may not be representative of the future because of the succession of shocks we have seen. Normally, these exogenous shocks spur consolidation in some way, such as the technological shock that demonstrated that online banking was much easier than people had imagined. Even retail customers are more used to online banking now than they were before the pandemic. Again, it is up to the banks to decide, but such developments should provide some impetus. Moreover, these shocks failed to undermine banks. After demonstrating their resilience, banks are now in a better position to expand where there are opportunities to do so. Funding the transition to a greener economy is one such opportunity.

What else can be done to make it more likely that cross-border M&A deals result in cost synergies?

Pursuing regulatory integration. Pursuing the capital markets union. Pursuing harmonisation in areas not directly related to prudential supervision, because prudential supervision is already largely harmonised. This is why we support all the initiatives that do that, including the banking package and the two proposals under the EU’s digital finance package: the Digital Operational Resilience Act (DORA) and the Markets in Crypto-Assets Regulation (MiCA). Everything that leads to further harmonisation, not only in prudential supervision but also in other areas that are very important for banking supervision, will favour that.

SRB

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