On January 12, the ECB published final guidance on its new supervisory approach to bank consolidation.
It will allow an acquirer to count the difference between book value and the price paid for a target – the badwill so plentiful among European banks trading at wide discounts – towards the capital of the combined entity.
That is, so long as management doesn’t try anything crazy like paying it out as dividends.
The ECB wants acquirers to hold on to that capital to make merged banks more sustainable, by which it means ensuring they can absorb losses on a target’s bad loans.
Regulators have been urging European banks to merge for over two years. In-country consolidation has kicked off again in Spain and Italy, but the ECB knows that for large European banks to solve their profitability problems and achieve scale to compete against the US leaders, they must be regional champions not national ones.
Last year, Andrea Enria, chair of the supervisory board of the ECB, acknowledged that national supervisors’ insistence on ring-fencing local capital and liquidity is an obstacle to large cross-border European banking groups.
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