Health checks on Europe’s banks may reveal takeover targets, but because protectionist regulation across the region has yet to be addressed, any post-“stress test” tie-ups are likely to be along national lines and could make a splintered industry more so.
The European Central Bank takes direct authority over the currency area’s 120 top banks on Nov. 4 after publishing the results of its review of their balance sheets on Oct. 26.
But prospects for subsequent cross-border mergers have faded since Europe has yet to address national regulators’ power to stop capital moving across borders, company law requiring subsidiaries to be run independently and secrecy laws.
All have a chilling effect on cross-border investment.
“There are two key obstacles,” said a senior bank executive with long experience of cross-border operations, who spoke on condition of anonymity to avoid antagonizing regulators.
“One is fragmentation that takes various forms – capital, liquidity, legal and structural. The other is that it is inherently more difficult to generate synergies with cross-border mergers.”
Bank mergers prompted by the launch of the euro in 1999 have stalled since Lehman Brothers collapsed in 2008 – an event that prompted then Bank of England governor Mervyn King to observe that “global banks are global in life but national in death”.
Data compiled by Reuters show cross-border banking mergers and acquisitions in the euro area peaked in 2007 – the year a consortium led by Royal Bank of Scotland bought ABN AMRO of the Netherlands in a deal that turned disastrous for all parties.
Deals have since dwindled to barely $1.5 billion in value in the first nine months of this year as bankers were put off by the cost of unwinding soured mega-deals and new rules which make major banks more expensive to run.
Nonetheless, some European banking experts are optimistic the obstacles will diminish over time, once the ECB settles into its role as single supervisor and gets to work.
The European Commission, which polices the EU’s single market, is working with the European Banking Authority to try to curb restrictions on the free movement of capital. And Danielle Nouy, the head of the ECB’s supervisory board, has pledged to stop countries “ring-fencing” their banks.
“There may not be a wave of pan-European consolidation immediately, given the uncertainties that will continue to weigh on the European banking sector after the balance-sheet review, but it is likely within three to five years,” said Nicolas Veron, a specialist at the Bruegel economic think-tank and the Peterson Institute for International Economics.
“Beyond accelerating the creation of pan-European banking groups, banking union should also strongly favor the internal integration of banks that are already active in several euro zone countries such as BNP Paribas, Deutsche Bank or UniCredit.”
Bankers with experience of the constraints are less sure.
The introduction of a single supervisor is arguably the biggest leap forward in European integration since the launch of the euro in 1999. But putting the ECB at the head of a network of country regulators seems unlikely to end the “banking nationalism” demonstrated in a series of regulatory spats.
Early in the financial crisis, Polish regulators restricted Italy’s UniCredit from shifting funds from its well capitalized subsidiary Pekao SA to Italy, fearing retrenchment by foreign banks could drain their economy of liquidity.
At the height of the crisis in 2011, Germany’s financial regulator BaFin took similar action, banning Italy’s UniCredit from transferring billions of euros from its German subsidiary back to its Milan headquarters.
BaFin feared Italy might need a euro zone bailout and the transfers could leave German depositors exposed to supporting UniCredit, Italy’s largest bank by assets.
Following Germany’s move the Bank of Italy increased its scrutiny of Deutsche Bank’s Italian operation – an apparent act of retaliation – and pushed it to become financially self-sufficient.
The dispute was eventually settled after talks between the Bank of Italy and BaFin, with UniCredit agreeing to a smaller transfer, sources familiar with the case said.
“Ring-fencing is a European problem. It happens in all the countries not just Germany,” said UniCredit chief executive Federico Ghizzoni.
“The indication from the ECB is that in the euro zone this problem of liquidity should no longer exist once the ECB takes on the single supervision. We just have to wait and see.”
While the crisis has blown over – and UniCredit no longer needs to move capital – German regulators say the rules still apply despite the European Commission’s introduction of the single supervisory mechanism (SSM) that put the ECB in charge.
“The law that requires any German bank to have a certain level of capital and liquidity will still exist after the introduction of the SSM,” a German regulatory source said.
“Regulators have to avoid a German bank parking liquidity overnight at its parent abroad and bearing the risk of not getting it back.”
The Polish Finance Ministry said the advent of joint supervision should reduce barriers to the flow of funds within multinational banks although some regulations would remain.
It’s not hard to find other examples of nationalistic regulatory decisions: Britain’s Financial Services Authority has pressured large euro zone banks operating in the City of London to set up subsidiaries that would be subject to British regulation, rather than branches, which are not.
And Austria introduced rules that set tougher conditions for its banks to lend in central Europe than at home, although it eventually backed down after they complained to the EU.
From a multinational bank’s perspective, such obstacles and other national legal constraints make it hard to achieve cost savings that are a key attraction of mergers in other sectors.
Aware of the problems, the European Commission launched a survey of national practices in January 2013. Some measures “raised questions about their proportionality”, a Commission spokesperson told Reuters in response to detailed questions.
The unpublished report showed that in certain cases “national supervisors decided to take action unilaterally, without consulting the other supervisors concerned, even when they were obliged to cooperate under EU banking legislation,” the spokesperson said.
EU executives hope new harmonized rules on how much liquidity banks should hold to see them through any crisis will promote confidence and cooperation among national supervisors – to whom the Commission has written urging them to act “to prevent the risk of unduly restrictive practices.
The first test cases of the M&A climate could arise if banks such as Italy’s number three lender Monte dei Paschi di Siena or Germany’s number two, Commerzbank, are forced to look for a partner by the stress test results.
Commerzbank said in August it felt “well positioned to pass these tests”. MPS’s chief executive has said the bank’s capital raising efforts put it on a stable footing but a big shareholder said late last month it was uncertain whether the health checks would result in further capital requirements.
Lawyers and bankers specialized in M&A say Britain’s Barclays, France’s BNP Paribas and Spain’s Banco Santander might all be interested in bidding for Commerzbank, but regulatory problems make such a deal unlikely.
Any foreign bank trying to take over Commerzbank would be shackled by German company law, which requires a German subsidiary to have a supervisory board independent of the parent company, the senior bank executive noted.
Then there are the legal constraints to consider. For example: Directors of foreign-owned German banks are criminally liable for up to 10 years after the event for decisions deemed to have been counter to the interest of the bank in Germany.
“I just don’t see any game-changing, bet-the-bank M&A,” one London-based lawyer said. “We’re seeing national retrenchment everywhere. Political, regulatory headwinds just aren’t conducive to big M&A.”
More likely, lawyers and bankers say, banks may divest non-core activities and sell off loan portfolios, mostly to domestic rivals but with Chinese and Japanese banks potentially getting involved in small deals.
Source : Reuters