Western Europe: M&A will not solve banks’ problems, warns SSM’s Angeloni

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By:
Dominic O’Neill
Published on:

Brexit-sparked competition from US banks a good thing, ECB supervisor says; Italian populism ‘a burdensome tax’ on banks.

One of Europe’s top banking supervisors has sounded a cautious note on the prospects for more bank M&A, as speculation mounts for a new wave of European mergers.

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Ignazio Angeloni

Ignazio Angeloni, board member at the Single Supervisory Mechanism (SSM) and a frontrunner to replace outgoing chair Danièle Nouy, said the European Central Bank (ECB) is not against the possibility of large mergers.

“We want the banking sector to be safe and efficient, to be capable of providing high-quality services to individuals and firms, and ultimately promoting growth and collective welfare,” he tells Euromoney in an interview in Frankfurt.

“Consolidation can be a means to achieve this, under certain conditions.”

However, regarding domestic deals – and in comments that might be relevant to a lately much-discussed merger between Deutsche Bank and Commerzbank – Angeloni said it is crucial for bigger banks to strengthen their risk profile first, especially when the banks are weak.

“When we receive a proposal, our main concern is that the resulting entity is strong from the beginning, right after the merger,” he says. “The merger of two weak banks does not per se produce a strong bank; the opposite may in fact happen, because the merger is in itself a difficult operation. The resulting bank is bigger and more complex than the constituent entities.

“If we want the new banks to be strong from day one, we need to impose prudential requirements that are appropriate to the size and complexity of the new entity.”

Stance 'validated'

Angeloni defended the ECB’s demand for Banco Popolare to raise €1 billion in capital before merging with Banco Popolare di Milano in 2016. He said the ECB’s stance had since been validated, despite bankers’ complaints at the time; and despite the subsequent lack of other big eurozone mergers except fire sales such as Santander’s acquisition of Banco Popular last year.

“I would venture to say that the leadership of the bank [Banco BPM] today is probably not unhappy to have achieved a higher level of capitalization, since this puts them in a safer and stronger competitive position,” he says.


The negative shock has been absorbed without much effect on the cost and supply of credit, but this is unlikely to continue if the spread increases further 
 - Ignazio Angeloni

Meanwhile, Angeloni echoed frequent complaints made to Euromoney by senior European bankers, saying the institutional conditions for intra-eurozone cross-border mergers remain largely absent: mainly as the lack of a Europe-wide deposit insurance scheme means host countries are still unwilling to roll back national ring-fencing.

“Part of our mandate is to favour banking integration in the euro area, and cross-border mergers are one powerful way of helping to achieve that goal. But most important of all, the mergers have to be right,” he says.

“Mergers have to be considered to be profitable. Today, when you merge, you cannot expect to be able to exploit all potential benefits. For example, cross-border banks cannot efficiently allocate capital and liquidity among their subsidiaries in different countries.”

He said it mattered that US rather than European banks dominate investment banking, even within Europe.

“European banks may better understand the business environment and habits in this continent, and be more able or willing to provide high-quality, tailored banking services to our firms,” says Angeloni. “They may also know their European clients better and have long-lasting business relations with them.

“These advantages should not be overlooked.”

Nevertheless, Angeloni thinks more competition on the continent itself by US banks, because of Brexit, is a good thing, saying: “There should be synergies between this development and the strategic plan to create a capital markets union in the EU.”

Overall, he said banks are moving forward in detailing their plans to the ECB for how to deal with an end to EU passporting between the UK and the EU, but uncertainty around the scope of a Brexit transition period is not helping.

“Banks are naturally hesitant to make costly decisions until they know exactly what is going to happen,” he says.

“For the incoming banks, the key thing for us is to ensure that they put in place all the structures that are needed to conduct sound banking here [in the EU]. Establishing a legal entity on the continent cannot merely be a formality. They have to have a real structure here; have full control over and responsibility for the business they do; and have the necessary prudential safeguards, as well as high-quality staff, internal controls, risk management, and so on.”

Italian worry

Angeloni is most encouraged by consolidation among the eurozone’s smaller banks.

He says: “Much of the consolidation that we have seen recently, and continue to see today, is in the very small bank segments, particularly in the countries that have many small cooperative banks. Small-bank consolidation has been quite fast, for example in Germany, and in Italy.”

Concerning non-performing loans, Italian banks “are more resilient, better capitalized and stronger on the assets side” than they were during the 2016 Italian banking crisis.

However, the former Bank of Italy economist also called widening sovereign bond spreads in Italy “a burdensome tax weighing on everybody in the country, including the banks”. Investor concerns around the new populist government’s economic policies have caused losses in sovereign bonds, eroding banks’ capital base, he noted.

“Italian banks have suffered in the stock market, and the losses in sovereign portfolios have eroded their capital base,” says Angeloni. “So far, the negative shock has been absorbed without much effect on the cost and supply of credit, but this is unlikely to continue if the spread increases further.”