5 April 2019
The role of ECB Banking Supervision in the consolidation of banks depends on the type of transaction the banks choose. The ECB has a formal role if the transaction between banks implies an acquisition of a qualifying holding or the creation of a new bank, or if the merger involves significant banks and the law in their country gives the power to approve mergers to the supervisor.
In any case, the transaction will be reviewed as part of the ongoing supervision of the institutions involved. This means that the supervisors assess the viability and sustainability of the deal made by the banks to ensure that the resulting banking group will be able to continuously comply with all prudential requirements in the foreseeable future. To this end, supervisors examine the business model of the bank that will result from the transaction. In particular, they check if the bank has adequate levels of capital and liquidity and if it will be able to maintain them over time. They also assess if the bank has strong governance with proper steering and is able to generate profits. To sum up: the ECB looks at the business plan, the projections in that plan and their credibility (including execution risk and comparison with peers) and assesses whether the resulting entity can ensure continued compliance with all requirements and buffers.
Bank consolidation can play an important role in removing excess capacity, enhancing cost efficiency and promoting more focused and credible business models. Cross-border consolidation could also support greater risk diversification and contribute to financial market integration, an important objective within the banking union. Still, it is not the ECB’s role to actively promote (or avoid) any form of bank consolidation. As a supervisory authority the ECB has to maintain a neutral stance and assess each project put forward by banks purely on technical grounds.
A merger (e.g. merger by absorption) generally means that the parents of two banks come together to create a new joint parent heading a bigger banking group. The balance sheet of the new banking group contains the assets and liabilities of the merging banks.
The ECB’s involvement in a merger depends on the law of the country or countries where the merging banks are headquartered. That’s because mergers are not regulated by European law, but by national law. If the law of the country in question grants powers to the national supervisor in this regard, the ECB exercises those powers when it comes to mergers of significant banks supervised directly by the ECB.
For example, in Germany, Luxembourg and some other jurisdictions the national supervisor does not have the power to approve mergers. In these cases, the involvement of the ECB is that the transaction is reviewed as part of the ongoing supervision of the institutions involved. However, a merger could trigger a qualifying holdings procedure, which requires the ECB’s approval (see below for more on this). Also, if two or more banks merge into a newly created entity, a new banking licence may become necessary, which means that the ECB would be involved as it grants all banking licences in the euro area.
On the other hand, in Italy, Greece, Slovenia and Belgium for example, the national supervisor has the power to approve mergers or is involved in the approval process. Consequently, if two or more significant banks from these countries decide to merge, the ECB Supervisory Board will assess the impact of the merger on the resulting bank’s profitability, solvency and liquidity and on its organisational structure, as well as its technical capacity to comply with governance requirements (as laid down in the Capital Requirements Regulation and the Capital Requirements Directive).
The ECB needs to approve every qualifying holding, meaning every acquisition of a participation in a bank that represents 10% or more of the shares and/or voting rights in that bank or crosses other relevant thresholds.
As to the process, the bank planning to acquire a qualifying holding has to notify the national supervisor. The national supervisor and the ECB assess the proposed acquisition against the five criteria set out in the Capital Requirements Directive:
|Reputation of the proposed acquirer||Has the proposed acquirer the necessary integrity and trustworthiness, e.g. no criminal records or court proceedings? Another aspect is the acquirer’s professional competence, i.e. their track record in managing and/or investing in the financial industry.|
|Reputation and experience of the proposed new managers||Does the acquirer intend to implement changes to the bank’s managing bodies? If so, a fit and proper assessment of the new board members must be carried out.|
|Financial soundness of the acquirer||Is the proposed acquirer able to finance the proposed acquisition and maintain a sound financial structure for the foreseeable future? This is assessed in the context of examining the credibility of the business plan and the ability of the target bank to ensure continued compliance with supervisory requirements.|
|Impact on the bank||Will the bank still be able to comply with prudential requirements? For example, a bank should not be put under stress because part of the acquisition was financed by debt. Also, the structure of the acquirer should not be so complex as to prevent the supervisor from effectively supervising the bank.|
|Risk of links to money laundering or terrorist financing||Can it be verified that the funds involved are not the proceeds of criminal activity or linked to terrorism? The assessment also looks at whether the acquisition could potentially increase the risk of money laundering or terrorist financing.|
For more on qualifying holdings, read our explainer.
The ECB has no bias against size and does not discourage banks from becoming bigger on principle. Regarding too-big-to-fail, there are internationally agreed standards in place that require large and systemic banks to maintain additional capital buffers and/or loss-absorbing capacities. More specifically, the Financial Stability Board classifies banks according to a specific metric and, as a result, supervisors may request capital add-ons and loss-absorbing capital. The same rules apply to all banks at the global level.
Moreover, all banks, regardless of their size, have to be resolvable at all times. To ensure their resolvability, they need simple legal structures and good resolution plans.
The Single Resolution Board is responsible for the resolvability assessment and for determining the minimum requirement for own funds and eligible liabilities (MREL) banks need to hold.