When the European authorities call on banks to strengthen their balance sheets, they are referring to the increasing number of bank mergers and acquisitions. The European Central Bank (ECB) is encouraging banks in this direction.
ECB involvement in bank mergers
Typically, at the time of a banking union, the parent companies join forces to create a new, larger entity. As a result, the balance sheet of the new banking group combines the assets and liabilities of the two banks involved in the merger. The involvement of the ECB at the time of a bank merger depends mainly on the legislation of the country or countries concerned, where the banks are headquartered. Mergers are generally governed by national law, not European law. If national law confers merger powers on the European Central Bank, the latter can exercise its merger powers. In Germany and Luxembourg, for example, the national supervisory authority does not have the power to approve mergers, while the ECB examines the situation as part of its ongoing supervision of banking institutions. Conversely, in Italy, Belgium and Greece, the national supervisory authority has the power to approve mergers or to be involved in the approval process.
ECB supervision at the time of a merger
The role of ECB prudential supervision in bank mergers is determined by the type of operation the banks choose. It fulfils a formal function, for example, when the operation involves the acquisition of a qualifying holding or the creation of a new bank. However, bank mergers and acquisitions are always subject to in-depth scrutiny as part of ongoing bank supervision. The ECB assesses the viability of the deal, analyzing the business plan and its projections, and its credibility.
ECB to facilitate bank consolidation
Banking consolidation not only helps to reduce surpluses, but also to increase cost efficiency. It allows business models to be consolidated and perfected, making them more stable, more credible and, above all, better defined. Given the current economic situation in the sector, mergers are encouraged, particularly in view of the low interest rates that are impacting balance sheets and damaging banks' structural profitability. In this respect, Andrea Enria, Chairman of the ECB's Prudential Supervisory Council, has announced his intention to provide banks with more information on how the supervisor operates during the process of analyzing a bank merger. He also said he was "open to the possibility of facilitating the granting of cross-border liquidity waivers at individual level, to the extent possible within the current legislative framework". At a time when balance sheets are being cleaned up by European regulators, bank mergers are being encouraged.