Is eurozone consolidation happening behind the scenes?

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By:
Dominic O’Neill
Published on:

A crisis is forcing a spike in small bank mergers in Italy. It is a more tentative trend in Germany, although these banks’ common desire for independence might make such crises inevitable.

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Talk about bank mergers rarely comes to fruition – especially in Germany and Italy, where it is most needed. A degree of cynicism about bank consolidation is therefore forgivable.

However, when Euromoney speaks to Ignazio Angeloni, board member at the ECB’s Single Supervisory Mechanism, he says that bank consolidation is happening quite rapidly, especially in Italy and Germany; albeit mainly among the small banks, particularly the mutual lenders.

If true, this is nevertheless important, as the continued independence of hundreds of small, often politically linked local banks is a big reason for the sector’s low profitability and sometimes poor governance. 

His comments spring from our discussion about the dangers of ECB-induced low interest margins and poor asset quality, and how mergers could help.


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A look at the data shows Angeloni is partly right. Consolidation is happening more rapidly than ever in the Italian cooperative bank sector but not in the German cooperative and savings banks networks, even if mergers there have started to pick up.

That is in sync with what seems to be happening in Italy’s savings banks – as in the recent UBI Banca and Crédit Agricole Italia takeovers – and in the mid tier, with the Banco Popolare/BPM merger. 

There is no recent equivalent to the Popolare/BPM deal in Germany, where regional wholesale banks remain publicly owned.

Around the turn of the millennium the German mutual banks merged at a pace almost as rapid as the Italians are doing now and perhaps for similar reasons. 

Back then, high unemployment and the hangover from a post-reunification boom meant far more German cooperatives had to call on the National Association of German Cooperative Banks’ institutional protection scheme than is the case today, says Ralf Benna, head of the scheme. Germany, like Italy now, was the sick man of Europe.

Now the mergers happening in the German mutual banking sector are about the drip-drip burdens of increasing regulation and negative rates rather than asset quality. No wonder it is slower.

Flashpoint

Without the push of a crisis, these banks are less likely to merge. That is also true in the mid tier. It took the ECB to brand the two Veneto banks “failing or likely to fail” last year before Intesa Sanpaolo could take over what remained. Now the flashpoint is Genoa’s Banca Carige, which is crying out for a merger despite the protection of a local businessman owner.

The reality is that banks everywhere remain repositories of local interests and pride, which can be hard to overcome even at the regional and municipal level, never mind the national. 

This is particularly true in Italy and Germany because of their late unification as nations. It generally means more political involvement and a higher risk of patronage-based lending.

A reformist government can help. Matteo Renzi’s administration forced the conversion of Italy’s bigger mutual banks, or ‘popolare’, into joint stock firms, spurring the Banco Popolare/BPM merger. 

In August, on the other hand, his successors in government suspended a deadline for the mutuals to enter one of three holding companies. The mutual banks have railed against the reform, which Renzi initiated to strengthen their support mechanisms.

As in Spain a few years earlier, Italian banks are so hard up that they increasingly have no choice but to merge. This is thanks to the ECB’s badgering of them to clean up their balance sheet; and Renzi’s reforms gave them another push.

European authorities have less leverage in Germany, where their advice, and that of the IMF, holds far less weight as the sovereign balance sheet is extraordinarily strong and a decent economy has kept bad debt low. 

In fact, Italy already privatized savings banks in the early 1990s and while political links persisted through the foundations system, there are far fewer of them today. Similarly, there are still far fewer cooperatives in Italy than Germany, even allowing for the difference in population size.

Supervision

The other question is whether or not mergers would accelerate if national authorities did not retain direct supervision of the smaller banks. Again, the answer is yes, but not as quickly as in a crisis.

From this year even smaller eurozone banks will follow a common methodology for the supervisors’ annual assessment (SREP). But the multiplicity of rules and standards, including those on governance, will persist. As Angeloni points out, it is perfectly legal for local politicians to chair savings banks’ boards in Germany, as ‘fit and proper’ rules are national; they even deem it beneficial.

A recent study by the Peterson Institute found politician-chairmen of Sparkassen are particularly common in Bavaria, which like Italy’s Veneto region has an independist streak. Let’s hope that common mistrust of central authority does not imply Bavaria’s local banks would be as risky as their Venetian peers.