ECB wants fewer and more profitable banks in bloc
Europe needs fewer but bigger banks, according to the ECB, and officials are considering actions to nudge lenders into cross-border mergers and takeovers in order to foster a less nationally-focused sector.
Fragmentation along national lines, along with excess capacity in some markets, are hampering banks' profitability and performance in some markets, according to the European Central Bank's (ECB) Financial Stability Review. The idea that a lack of cross- border competition is hampering banks' profits flies in the face of experience here, where the Minister for Finance Michael Noonan says new entrants would force the interest charged by Irish mortgage lenders down, dampening profits.
The prospect of new banking entrants to the Irish market appears to be relatively remote, however, based on the ECB report. It said the advent of a so-called banking union has not seen lenders moving into new markets.
"The banking union, including single supervision and resolution mechanisms, in principle provides ideal conditions for banks to capitalise on new cross-border merger and acquisition opportunities," it said.
"However, progress in both domestic and, in particular, cross-border bank consolidation remains limited to date. In fact, EU banks' merger and acquisition activity has significantly slowed since 2007, in terms of both the number and the value of transactions."
Policies should be developed aimed at developing a market with fewer but bigger banks, according to the report. "More efforts could be initiated to foster further cross-border consolidation within the euro area. Ultimately, the euro-area economy needs banks that are large and efficient enough to operate and diversify risks on a cross-border basis within a European single market, but small enough to be resolved with the resources of the Single Resolution Fund."
The ECB said cross-border consolidation would help "reap the full benefits" of the banking union. That could raise hackles in markets, including Germany, that traditionally have large numbers of locally and regionally focused institutions.
It will also raise concerns "too big to fail" banks, that are so large they cannot be safely shut by policy makers, even if mismanaged. Avoiding "too big to fail" banks was seen as a key lesson of the crash in the US in particular.