Consolidation in the European banking sector: challenges and opportunities

Keynote speech by Edouard Fernandez-Bollo, Member of the Supervisory Board of the ECB, at a lecture on Corporate Banking Law at the University of Bologna

11 June 2021


It is a great honour to be speaking at the world’s oldest university, and to some of Europe’s youngest and brightest minds. The ECB greatly values its interactions with younger generations, which is why the ECB’s board members often visit European universities. We feel that coming to speak with you is coming to listen to the future, so one must listen carefully. It is with that same spirit that look forward to our discussion today.

I would like to discuss one of my main areas of interest as a member of the ECB’s Supervisory Board: the consolidation of the European banking sector. This consolidation poses many challenges but also offers numerous opportunities, and it is important for the stability of our financial system as a whole – particularly as we try to leave this crisis behind us and prepare the ground for a post-pandemic future.

Consolidation, profitability and financial stability

The ECB is firmly committed to safeguarding financial stability in Europe. In essence, this means that through both our monetary policy and our supervisory actions we want to help foster a financial system that can withstand severe shocks to the economy – including shocks that do not originate in the financial sector, like the coronavirus (COVID-19) pandemic.

Banks play a key role in this financial system; they are the largest providers of credit to the euro area economy, so their profits are a key source of the new capital that is needed to support economic growth. Moreover, banks with a strong capital base can absorb the most immediate losses in an economic downturn, without compromising their ability to keep lending to the real economy. This robust credit supply then facilitates the recovery.

All of this means that ensuring individual banks are safe and sound is central to maintaining financial stability. ECB Banking Supervision – the supervisory arm of the European Central Bank – is devoted to precisely this: by implementing the highest standards of banking supervision for European banks, from the very largest to the very smallest, we ensure a level playing field for all banks in Europe and a safer financial system for society as a whole.

Naturally, banks were affected by the COVID-19 shock. With economies on ice, banks posted some of their lowest returns in years. Some have since recovered and look poised to help boost our economic recovery. But others face mounting pressures – and not just as a result of this crisis. Some of the issues that have been afflicting European banks have been around for a good decade now.

There is no doubt that the COVID-19 shock has further damaged the profitability of the European banking sector, especially that of banks that were already struggling before the pandemic. Although most European banks have so far proven resilient to the shock, this has in part been due to the unprecedented public support that was put in place to maintain the flow of credit to the economy during the most critical period of the crisis. The better-than-expected first quarter that European banks had in 2021 should not mask the fact that the underlying profitability trend has not regained its pre-pandemic level – which was already rather mediocre. The profitability of European banks has fallen from just under 6% at the end of 2018 to around 1.5% at the end of 2020, and throughout this time it has remained well below that of US banks, whose return on equity stood just below 8% at the end of 2020[1].

Broadly speaking, the European banking sector still has too many banks with heavy cost structures competing for the same customers. A comparison with the United States after the great financial crisis makes this extremely clear – between 2009 and 2011, the number of banks in the United States fell roughly three times as much as in Europe.[2]

The excess capacity in our financial sector has resulted in persistently low profits and returns that are below the cost of equity, rendering many European banks incapable of investing to become better equipped for the future. For these banks, choosing to consolidate can be a solution worth exploring.

Sustainable consolidation projects have the potential to create economies of scale across the European banking sector. This would help banks become more cost-efficient and better able to invest in large-scale digitalisation, and spark the transformation of their business models while also opening the door to diversifying their products and therefore their revenue sources. The technological leap forward that the pandemic has forced on us has certainly shown how far we can go in terms of relying on new technologies to provide banking services.

Challenges of consolidation

To summarise what I’ve said so far, some European banks aren’t sufficiently profitable, cost-efficient, or digitalised – and, in theory, consolidation could help address that. So why haven’t we seen much of it in the last decade?

The obvious answer is that consolidation isn’t an easy process, and it often takes many failed attempts for a successful deal to be sealed. Any consolidation enterprise is a resource-intensive, time-consuming project for the banks involved. The acquiring party needs to spend a lot of time gathering all the necessary information about the other party, studying their business model and understanding which metrics are the most relevant to assess the viability of a deal.

In addition, trying to improve the market position of any bank is currently an inherently challenging project in most of Europe. Several national banking sectors are already highly concentrated, leaving very limited room for further consolidation. These are also mature markets where there is structural pressure on bank profitability, so there aren’t that many opportunities to close profitable deals. In some cases, difficulties in evaluating the intrinsic value of the banking business have likely discouraged bidding, as the costs of consolidation (such as restructuring charges) seem difficult to absorb without raising new, costly capital, which could dilute existing shareholders.

Given these constraints at the national level, why aren’t cross-border consolidation projects more common? In reality, scaling up the market to euro area level isn’t easy either.

Although the European regulatory framework has become much more harmonised since the creation of the banking union in 2014, there are still significant regulatory impediments to cross-border mergers. Cross-border banking groups are often unable to manage their capital and liquidity on a fully consolidated basis. This is mostly because of limits on large exposures that exist at the national level, as well as ring-fencing of capital and bail-in-able liabilities in the local subsidiaries and a general reluctance at national level to facilitate the pooling of liquidity on an ongoing basis without a credible plan about what would happen in the event of a liquidity crisis.

From a longer-term perspective, we need to remove incentives for ring-fencing by creating pan-European safety nets, notably the European deposit insurance scheme. We also need to establish a genuinely single rulebook for banking, free from the national discretions and home biases that prevent capital and liquidity from being transferrable within cross-border banking groups.

In the shorter term, one way to lessen the incentives for national ring-fencing could be to link the granting of cross-border liquidity waivers to the presence of adequate intragroup financial support agreements included in banks’ recovery plans. These agreements would map out the appropriate triggers for providing intragroup support at an early stage, which would be well before the bank might be considered failing or likely to fail, thus granting the supervisor the power to enforce the provision of support under specific circumstances.

The role of the ECB: guide on the supervisory approach to consolidation

All this being said, consolidation needs to be a market-driven process. Although ECB Banking Supervision recognises that consolidating the European banking sector may result in substantial benefits, we remain neutral on specific consolidation projects, which should first and foremost be driven by market forces and the economic interests of the parties involved.

The role of a supervisor is not to promote specific actors or consolidation projects, but rather to assess any consolidation proposal that is submitted to us from a prudential perspective, focusing on the current and future ability of the combined bank to comply with prudential requirements.

To make our supervisory approach and expectations as clear as possible, in January we published a guide[3] that clarifies our supervisory approach to consolidation – particularly to three key prudential issues that are often discussed in this context: how we set Pillar 2 capital requirements for newly formed entities; how we treat badwill from a prudential perspective; and how we treat and assess internal models. Let me briefly touch on each of these three issues.

First, our guide makes clear that the ECB will not penalise credible integration plans by setting higher Pillar 2 capital requirements. We also intend to give the entities involved an indication of the capital levels that the combined bank will need to maintain, as early in the process as possible, and still during the application stage.

Second, the ECB expects the profits stemming from badwill (the difference between the re-evaluated book value of a bank and the price the acquirer pays) to be considered as capital of the combined bank. This means that banks are expected not to pay out profits stemming from badwill via dividends until the sustainability of the business model has been firmly established. The ECB expects the acquirer to take advantage of a relatively low acquisition price to increase sustainability.

Finally, the guide also clarifies that we will accept the temporary use of existing internal models that are migrated to the new bank, so long as they are subject to a strong roll-out plan.

All in all, we expect the entities involved in a consolidation project to provide ECB Banking Supervision with a robust, credible and informative group-wide integration plan that allows us to carry out an accurate preliminary assessment of the expected sustainability of the business model of the combined entity. The strategy underlying the consolidation transaction will then be assessed according to its objectives in terms of capital, business and profitability (including expected efficiency gains), and risk profile (including quality of assets and operational risk of the combined entity).

This approach is the starting point for the supervisory dialogue, where the specificities of each bank will be duly considered. The flexible approach described above will apply to consolidation projects that do not trigger substantial supervisory concerns. Of course, for all consolidation proposals, the most appropriate supervisory measures will be determined on a case-by-case basis. Supervisors will then closely monitor the newly combined entity and the implementation of the agreed integration plan.

By clarifying our supervisory approach to consolidation, we hope to foster consolidation projects that generate synergies, improve cost efficiency and result in new entities that are well capitalised and resilient to shocks. This should foster more sustainable banks, and therefore a more resilient banking sector that is better equipped to survive in a post-pandemic world.


Too many European banks have low profits and high costs. This compromises the resilience of our banking sector – and therefore the stability of our financial system. Consolidation can help. By enabling investment, unlocking economies of scale and allowing diversification, consolidation should help banks prepare to face long-term challenges – be it the most immediate ones posed by the pandemic, or the longer-term ones that will emerge as digitalisation irreversibly changes customers’ preferences, and with them the banking landscape.

However, consolidation in the euro area banking sector has been slow since the end of the global financial crisis. This is due to both the general challenges associated with consolidation projects and to some specific impediments that remain at the European level. But while we wait for legislative progress in this area, the ECB has moved ahead with clarifying its supervisory approach to consolidation projects.

Consolidation projects are about the projecting the future. They require forward-thinking and a clear vision on what people will expect from banks in some years, when you, the young Europeans, become their main customer. Your preferences and your questions will steer the future. So I am delighted at the opportunity to hear from you today, and I look forward to our discussion.

[1]ECB (2021), “Supervisory Banking Statistics”; Fernandez-Bollo, E., Andreeva, D., Grodzicki, M., Handal, L. and Portier, R. (2021), “Euro area bank profitability and consolidation”, Financial Stability Review, Banco de España.
[2]Pagano, M., et al. (2014), “Is Europe Overbanked?”, Reports of the Advisory Scientific Committee, No 4, European Systemic Risk Board, June.

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