European banks push for lower cross-border hurdles
Call for end to ‘fragmented approach that is trapping capital and liquidity’ and putting lenders at disadvantage to US rivals
European banks are intensifying their calls for regulators to remove obstacles to cross-border banking services in the EU, claiming they are increasingly being put at a disadvantage against bigger US rivals.
In a report released on Tuesday, many of the top lenders in Europe criticise regulators for trapping hundreds of billions of euros in capital and liquidity behind national barriers, being too slow to approve mergers and failing to harmonise EU rules.
“In theory, you can collect deposits in Germany and make loans in Italy — just like you can get deposits in Kansas and lend them in California — but in reality you can’t because of national barriers,” said a senior executive at a large European bank.
The Association for Financial Markets in Europe, which published the report, called on the European Central Bank and national authorities to remove many of the hurdles to cross-border banking services, saying this was necessary to boost EU financial stability and growth prospects.
“For banks operating within the banking union on a cross-border basis, their profitability is severely hindered by the fragmented approach that is trapping capital and liquidity,” said Adam Farkas, head of the AFME. “Changing this would be transformational in terms of economic efficiency.”
The renewed lobbying effort comes as US and UK regulators adopt a more bank-friendly approach in response to political pressure to reduce the burden of regulation on the sector — raising fears of European lenders being left behind.
EU banks have long been frustrated by a political impasse over creating a pan-European deposit insurance scheme. But Farkas said that even without this “there is still plenty that can be done to significantly improve how the banking union functions”.
The EU has been slower to cut red tape despite the shake-up recommended in last year’s landmark report by Mario Draghi, the former Italian premier and head of the European Central Bank.
Draghi called for the EU to set up a 28th regime for the largest banks in the bloc that supersedes the rules of its 27 member countries. Brussels is consulting on creating such a regime — but one aimed at innovative start-ups, not big banks.
The AFME said it had identified “a number of critical implementation gaps” in the Eurozone’s banking union, citing ECB estimates that €225bn of capital and €250bn of liquidity have been trapped by national restrictions that impede cross-border activities.
Cross-border mergers between EU banks have “consistently declined over the last two decades, limiting consolidation and efficiency gains”, the report said, blaming “cumbersome authorisation processes involving multiple authorities”.
Banking mergers and acquisitions in the EU took 285 days to complete on average over the past three years, 100 days more than a decade ago, the AFME said. That compares with 219 days for the average US banking deal, 173 days in the UK and 85 in Switzerland.
There have been signs of a pick-up in cross-border EU banking deals, such as the €6.4bn bid by France’s BPCE for Portugal’s Novo Banco in June. But such moves often stir up political opposition, as with the investment by Italy’s UniCredit in Germany’s Commerzbank.
Last year the number of mergers between Eurozone banks rose slightly, but it remained at one of the lowest levels for the past three decades, according to Dealogic.
Once Eurozone banks grew beyond €451bn of total assets, the AFME estimated they suffered from negative synergies, as their administrative costs started to rise in relation to total assets. “The limits to economies of scale and the lack of a completed banking union means that EU banks cannot match the size and profitability of their US counterparts,” it said.
The lobby group said the EU had more onerous requirements than the US or UK for banks to raise an extra layer of debt that regulators can wipe out or convert to equity in a crisis — known as MREL, or minimum requirement for own funds and eligible liabilities.
It also called for waivers to free up trapped capital and liquidity and a simplification of national macroprudential capital buffers in different EU countries. “If you can’t move funds across borders, what is the point of expanding cross-border?” said the senior executive at a large European bank.