January 23, 2021

The ECB wants to chew bank mergers


Correspondent in Berlin

Updated:

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The European banking regulator wants to facilitate acquisitions and mergers of financial institutions. In the guide presented today by Andrea Enria, in charge of the ECB’s banking supervision, lowers expectations about capital requirements (Pillar 2) and practically encourages operations with a sustainability criterion. What Mario Draghi did not achieve based on recommendations, Christine Lagarde, current president of the ECB, seems willing to do it with ease. “This guide comes to help the ECB to make itself understood, to make the supervisory role more predictable and to avoid errors of judgment,” said Enria, who now foresees “more prudent expectations that benefit everyone.”

In this document, the ECB explains to entities what it expects of them in merger or acquisition projects. Your vice president, Luis de Guindos, was the last position in Frankfurt to encourage cost cutting and merger operations, as one of the tools to respond to situations derived from the health crisis. This guide shows the way and abounds in the perception of the European banking system as a splintered reality, in addition to criticizing that European banks are lagging behind their competitors in the US, both in terms of market value and profits. The Spanish banking system is one of those that receives the most pressure in this regard, given that in our country there is a particularly relaxed “tempo” in operations and an excessive number of entities for the size of the market.

The guide, prepared after a consultation process that concluded on October 1, offers general guidelines, such as the use of the “badwill”, the difference between the book value and the price paid by the entity that acquires, as part of the final capital combined, rather than paying out dividends before all elements of the merger have become viable. But it also recognizes that no two mergers are the same and admits that there will be no “one size fits all” supervision, and insists that it will review and support each operation on an individual basis, “on a case-by-case basis.”

The analysis of each operation will be based, on the other hand, on proportionality with respect to the basic principles set out in this guide and will use the supervision tools “to facilitate sustainable consolidation projects” and based on a “credible” project of activity that respects governance and risk management standards. The Pillar 2 (P2R) capital requirements and Pillar 2 Guidance (P2G) “They will be established in principle according to the weighted average of the levels applicable to the two entities before consolidation,” says the document, and will be adjusted later depending on the evaluation of each case, taking into account factors such as the sustainability of the model business or your risk profile.

But this whole process will not have to be done by banks blindly. As soon as they communicate their intention to acquire or merge, they will receive concrete indications of the levels of capital to be maintained in the combined business, so that they will have very set previous objectives. The intention of the ECB is for banks to trust the supervisor and enable you to get involved in the operation as a collateral companion. “This would allow the ECB to provide preliminary feedback on each project,” says the guide.

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