SSM and bank mergers: Don’t put the cart before the horse

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As political headaches dog efforts to bolster banking integration, fostering European champions through mergers is the least of the single supervisor’s worries.

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In an interview with Euromoney, Single Supervisory Mechanism (SSM) board member Ignazio Angeloni is keen to see cross-border bank mergers in the eurozone, at least in the abstract. It would be a means for regional champions to grow and to take on the US investment banks more effectively, he says. 

This comes at a time when a consensus on European deposit insurance scheme looks more elusive than ever. The debate in some policy circles has turned to whether the supervisor should allow banks to just get on and do it, regardless of the deposit insurance delay, and instead push harder for waivers of national liquidity and capital requirements for cross-border banks. Such mergers might themselves do away with the need for common deposit insurance as risk would be spread within the banks, goes the thinking. 

Angeloni is sceptical of that idea, as he says national supervisors will continue to justify barriers to intra-group capital and liquidity flows, precisely because of the lack of a common deposit insurance scheme.

National variations

In any case, the practical difficulties of intra-eurozone mergers go much deeper, thanks to national variations in everything from insolvency frameworks to governance standards. The all-important retail mortgage market, for example, is riddled with deep-seated national idiosyncrasies. 

Harmonizing all this will take decades and it may never be completely homogenous. As Angeloni points out, even EU directives perpetuate differences, as they give so much scope for variable transmission into national law. 

Given the political risks assailing Europe and the poor recent track record of trigger-happy bank mergers, a sense of caution is understandable. After all, there is still plenty of consolidation to be done at the national level, even among bigger banks, and not just the much-discussed Commerzbank-Deutsche Bank merger.

Meanwhile, Angeloni suggests it was natural for the SSM to demand in 2016 that Banco Popolare raise capital before merging with BPM, given bad-debt issues and the fact that the resulting entity would be bigger and more complex. 

He does not explicitly admit this is partly why it remains the only large eurozone banking merger on the SSM’s watch to occur without a run on deposits to hasten it. 

The lesson is that SSM is most worried about short-term financial stability and, to that extent, it is not so different to the national regulators. 

It also suggests Commerz and Deutsche, which are in many respects just as weak as the Italian mid-tier banks, would need to complete an even bigger capital raising before the ECB would give their merger the green light.