16 September 2020

Bloomberg: The EU Needs Banks to Merge Across Borders

The euro region has taken several steps to centralize banking regulation and supervision, but there is little sign that lenders are interested in seeking to merge beyond national borders. Two recent deals — one has been proposed in Spain, the other occurred in Italy — show that, for all the good intentions, Europe’s “banking union” remains incomplete.

The European Central Bank — the euro zone’s top supervisor — will be content with domestic mergers for now, since these can still help reduce excess capacity in an overcrowded industry. But politicians and regulators must redouble efforts to harmonize the rules in the monetary union, so that bankers have more reasons to look abroad. The euro area needs more cross-border mergers not just as a further show of unity, but as an essential step to boost financial stability.

Yet domestic mergers are still the only game in town. Two weeks ago, CaixaBank SA and Bankia SA said they were exploring an all-share deal that would create Spain’s largest domestic bank. The announcement came only weeks after Intesa Sanpaolo SpA took over rival Ubi Banca SpA to become Italy’s largest lender by assets.

There is no doubt that, especially during times of crisis, the most obvious combinations are those not far from home. The easiest rationale for merging banks is that cutting costs and redundant branch networks can yield significant savings.

However, cross-border mergers offer excellent opportunities for revenue diversification. These may be less obvious during a pan-European recession, but they are especially helpful when an economic shock hits one market more than others.

The ECB has no preference between domestic and cross-border mergers. A national combination can help increase a country’s financial stability when it leads to higher profitability or combines a stronger bank with a shakier competitor. In theory, allowing weak banks to exit the market in an orderly way can also reduce systemic vulnerabilities, but Europe has proved stubbornly incapable of letting lenders fail. A merger is often the only realistic alternative.

But transnational deals offer additional gains to supervisors: Above all, they can loosen the dangerous ties between a bank and its home state. This means that when a country is in trouble, the lender will suffer less; and when the bank is in poor shape, its difficulties will be spread across different economies. This diffusion can be particularly beneficial in the euro zone, since a shared currency and monetary policy means individual governments have fewer tools to address isolated crises.....more at Bloomberg

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