- INTERVIEW
Interview with Euromoney
Interview with Edouard Fernandez-Bollo, Member of the Supervisory Board of the ECB, conducted by Dominic O’Neill on 21 June 2022
8 August 2022
We’ve seen domestic consolidation, but not so much cross-border consolidation. How keen are you to see cross-border deals in the banking union?
We are keen to see deals that increase resilience. From the perspective of the European Central Bank (ECB), consolidation within the euro area is a form of European integration. Of course, the European market still has national borders, which we take into account because we supervise both the individual banks and the entire group. The European banking market is much more resilient than it was ten years ago, but it has still not returned to the level of integration it had in 2008.
One of the structural challenges facing European banks is their lower profitability compared with, for example, US banks, or even – to a lesser degree – UK banks. So further integration clearly offers potential gains in efficiency.
We are in the process of integrating regulation, to align it at European level. Of course, it’s not finished, and we need to make more progress, but it is already a big step in the right direction. And then with the ECB Banking Supervision there is integrated supervision. It’s normal for integrated supervisors to look at how banks can benefit from more market integration. We are certainly not placing demands on banks to make deals, and we made that very clear when we published our guide on consolidation. This should be a market-driven process, and any deals must be based on sound rationale. We are prudential supervisors, so what we want is integration that bolsters resilience. We think there is room for that. When we published our ECB guide on consolidation, our first goal was to give the market a clear picture of our role. There were misconceptions. Market participants thought we were against consolidation and that when we saw deals we increased capital requirements, which obstructed them. Of course, sometimes we do prescribe higher prudential requirements. After all, we are a prudential supervisor and when we see risks we have to take measures to tackle those risks. But when we see opportunities, we recognise them too, and that was our message. As a prudential supervisor we assess deals – we don’t instigate them, we assess them – and we are willing to examine deals and provide clarity. We provide clarity about the important points for our assessment, where we see potential for increasing resilience in consolidation and where we see any red flags. By clarifying our expectations, we allayed the market’s misgivings about our attitude towards consolidation.
However, this in itself didn’t change the economic situation. The last two years were disrupted by many exogenous shocks, and the most obvious thing to do was to look for synergies. It is true that you reap more synergies when you have overlapping national networks than when you are crossing borders. Cross-border consolidation is good for increasing revenues and diversifying risk, but the benefits are less immediate in terms of synergies and cutting costs. So it’s perfectly understandable from an economic perspective that important moves in national consolidation came first.
There has been some cross-border consolidation too – nothing game-changing, but what we have seen is consolidation by business line, consolidation in particular segments of the market. We have seen some developments in asset management, structured finance and consumer finance. We have also seen some movement towards upscaling, where banks that already have a market presence strive to expand their operations.
Another development was a consequence of Brexit, when certain third-country banks moved to the euro area. Interestingly, they have done so in an integrated way, with branches and cross-border service provision. This is another form of integration that is working.
So there has been some progress towards further integration of the banking system. What are the prospects ahead? The last two years may not be representative of the future because of the succession of shocks we have seen. Normally, these exogenous shocks spur consolidation in some way, such as the technological shock that demonstrated that online banking was much easier than people had imagined. Even retail customers are more used to online banking now than they were before the pandemic. Again, it is up to the banks to decide, but such developments should provide some impetus. Moreover, these shocks failed to undermine banks. After demonstrating their resilience, banks are now in a better position to expand where there are opportunities to do so. Funding the transition to a greener economy is one such opportunity.
What else can be done to make it more likely that cross-border M&A deals result in cost synergies?
Pursuing regulatory integration. Pursuing the capital markets union. Pursuing harmonisation in areas not directly related to prudential supervision, because prudential supervision is already largely harmonised. This is why we support all the initiatives that do that, including the banking package and the two proposals under the EU’s digital finance package: the Digital Operational Resilience Act (DORA) and the Markets in Crypto-Assets Regulation (MiCA). Everything that leads to further harmonisation, not only in prudential supervision but also in other areas that are very important for banking supervision, will favour that.
This is one of the reasons why we so eagerly support the creation of the EU’s new anti-money laundering authority – AMLA. Regulation in this area was extremely fragmented. Banks reported facing compliance costs rising in an unharmonised manner, driven by scandals and problems in various parts of the European landscape. Some of the regulation will be fully harmonised, one example being onboarding of customers. Of course, there will still be consumer protection issues, but from an AML perspective, a fully harmonised approach to customer due diligence is a notable contribution to our market integration.
After 2008 there were concerns about the difficulty of transferring capital and liquidity between countries. Is that still a barrier?
We have of course been advocating further steps in this area. For instance, cross-border capital waivers are not yet available. Cross-border liquidity waivers are available, but there is still considerable mistrust. We saw this topic popping up again in discussions on the banking union. We support anything that will further advance the banking union, which could for instance begin with improving the harmonisation of the crisis management framework. That was in the latest Eurogroup statement. We would of course have liked to see even more progress, but all progress is welcome.
Prior to the banking union, there was a home supervisor and a host supervisor. In the event of a crisis, the home supervisor was bound by its national mandate; it was committed to saving the parent company, even at the expense of the subsidiary in a host country.
This is no longer the case. The ECB is impartial and has an equal responsibility to the subsidiary and the parent company. When the ECB’s Supervisory Board convenes, all the supervisors are around the table, and, by the way, there are more host supervisors than home supervisors. So you have a supervisory process involving everybody, where decisions are based on consensus. An impartial European authority is best placed to find the right balance. We are not here to sacrifice the subsidiaries for the sake of the parent companies. As a supervisor, we see the local dimension of our European mandate as part of our mandate. That’s why we are saying – and maybe this is a way out – please make it explicit, please give us a clear mandate to do this, because this is what we will do anyway.
Some of the balance sheets of the big European banks are already huge. Cross-border deals would certainly mean big banks becoming even bigger. Is that a problem in your view?
We took measures to mitigate the problem of banks being “too big to fail”, and there is a framework for dealing with this issue. Globally, banks are still growing. We don’t think that in future banks will stop growing completely. They are still growing – of course not at the accelerated pace they did before the 2008 financial crisis, but they are still growing. What is important is that this growth is managed in a prudent and resilient way.
There is a lot of room for integration that does not amount to a merger of big banks. A big bank mega merger would attract a lot of attention, including from us. We think it’s possible in Europe because, when you compare the degree of concentration in the US and Europe, we are still, in fact, behind. The UK is much more concentrated than the euro area, given the size of the market. So there is a possibility. We aren’t ruling it out, but we’re also not saying that we need a very, very big European bank.
We are not looking for one European super-bank. In fact, we are not looking for anything. We want diversity in the banking system because diversification also brings resilience.
What we are saying is there is room for European banks at all levels to make deals that improve resilience and profitability, including in the domestic market. There can also be integration that is disruptive to resilience, so, again, we will be looking at it.
What also matters is how the deal is executed. The same deal can turn out to be a blessing or a curse, depending on how it is done. It is very important to look at how much capacity there is for doing the deal.
Banks are trading at 0.7 times book value. Isn’t that an obstacle? We hear complaints suggesting that the ECB is partly to blame for the dividend ban. What do you think about that?
At some point you can also make money from the fact that the prices are low. But that’s really an investor decision. It is certainly not for us as prudential supervisors to decide when is the right time to invest. This situation could actually facilitate some deals, and there is clearly an economic case for more consolidation in Europe. But, again, it should be done by the market when participants are seeking a profitable investment and have a project. Consolidation should follow the investment logic of the market.
Our recommendation to not pay dividends was a very exceptional measure in exceptional circumstances, and clearly it did not change the prospects for European banks. The price-to-book value was very low before, and it hasn’t been lower since. On the contrary, at the end of last year it was rising.
In addition, when you have a lot of uncertainties, you think twice before making a big investment. That’s normal. There may be more movement when the uncertainty isn’t as great as it is today.
From a banking supervisor’s perspective, how close do you think we are to the stage where rising interest rates stop being a positive thing for banks?
What is very important in the situation we are in is to ensure that banks don’t just worry but that they also operationalise their worries, that they get ready. This is our work. You have fears? Well, do something about them: make preparations, draw up sensitivity scenarios, book provisions. Banks should be ready for the different scenarios that could arise.
How confident are you that the AML project as it stands will be up to speed in terms of its potential to change the dynamic?
We are very much in favour of the project because it represents Europeanisation not only of supervision but also of regulation, which is very important. This is a major step forward. Our advice is to be as ambitious as possible from the start, because the situation is one of massive fragmentation, even more fragmentation than there was on the prudential side. From the ECB’s point of view, we have an extremely interesting perspective because we already cooperate with all the AML and countering the financing of terrorism (CFT) supervisors. Since the Fifth Anti-Money Laundering Directive in 2018, we have a Memorandum of Understanding with 54 AML supervisors. So we see the diversity, and the task is huge.
That’s why we think it’s very important to be as ambitious as possible. For instance, the new European anti-money laundering authority should be in every EU country to have the global reach to understand the problems everywhere and to make the 27 countries converge. In terms of means, presence and powers, a bit more ambition would be welcome, so we are pushing for it.
In part I think we’ve been heard. We’ll see how it ends but, for instance, we are pleased to see that the European Parliament has taken up a lot of our ideas in its report. What the final equilibrium will be remains to be seen.
We are not just saying “be more ambitious”, we are also ready to offer help. We need positive interaction between prudential supervision and the new AML authority.
The European Banking Authority (EBA) has been a place where prudential and AML supervision came together very naturally. This needs to continue under the new framework. I think the EU’s new anti-money laundering authority will be extremely happy to be able to rely on a very good cooperative relationship with the prudential supervisor. Given the enormous task, it will need to be able to exchange information, rely on the ECB’s data and have a strong interaction between the two. For instance, it needs to be sure that the specific rules it makes and the expectations on the AML side fit well with what is on the prudential side regarding compliance, governance, etc. That would be very useful.
We need synergies rather than frictions in the framework. So, we are saying try to be more ambitious, and we are ready to help in any way that will make the two kinds of supervision converge smoothly.
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