ECB will not block credible bank mergers
Move seen as a way to fix Europe’s banking sector
BRUSSELS: The European Central Bank (ECB) said it won’t block the kind of bank mergers that could help Europe’s beleaguered industry, spelling out for the first time how it views possible deals.
Highlights of the watchdog’s announcement Wednesday include that merged banks don’t automatically face higher capital requirements, and that certain accounting gains should be used to make them safer rather than boost short-term shareholder returns.
“A certain degree of consolidation would be useful in addressing some of the structural challenges that eurozone banks are currently facing,” Edouard Fernandez-bollo, a member of the ECB’S supervisory board, said in a blog posting on Wednesday. “It may boost the low profitability of eurozone banks by helping them achieve economies of scale, become more cost-efficient and improve their capacity to face a future that is increasingly digital and definitely global.”
Even before the coronavirus slammed Europe’s economy, the region’s banks were reeling from intense competition and the fallout from negative interest rates. A wave of mergers has long been touted as a way to remove overcapacity and boost profitability, yet bankers often blame regulation for standing in the way of cross-border deals.
The central bank provided insight on three key aspects of its approach to takeovers:
> The new firm will need to clear a minimum bar for capital that’s made up of the weighted average of the demands placed on the firms before they merged. Depending on the circumstances, that “starting point” can then be increased or lowered.
> The merged bank should use gains from an accounting quirk known as badwill to increase reserves for bad loans, shoulder costs from the transaction and make other investments. Those gains shouldn’t be paid out as profits to shareholders until the new bank’s business model is sustainable.
> The ECB will temporarily allow the new bank to use previous calculations of how much risk it faces, as long as those models are clear and can address any issues created by the merger.
The ECB also recommended that banks considering a tie-up engage with the central bank early on in order to allow for preliminary feedback. The ECB has asked banks and the wider public for comments on its guide to consolidation by Oct 1.
Andrea Enria, the ECB’S top banking watchdog, had promised earlier this year to provide transparency on the ECB’S approach to mergers. But when it came to removing barriers to banks moving liquid funds from one country to another, Enria faced more difficulty and called for European politicians to remove “regulatory impediments to an integrated management of capital and liquidity,” in a newspaper interview last month.