In mid-July, the European Commission published its long-awaited Communication on competitiveness in the banking sector. In it he points out a known problem: the lack of competitiveness of European banks in wholesale markets, especially compared to the American giants. The Commission identifies three reasons: excessive fragmentation, insufficient regulatory proportionality, and a lengthy and complex regulatory system.
Focusing on fragmentation, Communication offers its diagnosis and recipes. Since the sovereign crisis, more than 15 years ago, cross-border operations have become scarce. The shortage is attributed to its poor synergies, which in turn are explained by the European regulatory and supervisory framework. In an intra-community operation, the acquirer must maintain the acquired entity as a subsidiary, which must meet capital, liquidity, resolution (MREL) and concentration requirements, and have a rigorous governance system. These requirements act as firewalls to the circulation of liquidity and capital in the groups and make cost savings difficult.
Why, then, do banks in Europe act through subsidiaries? In the Union, banks have enjoyed their own Schengen area since 1993 (the so-called community passport), which allows them to provide services in other States through a branch or even without a permanent establishment. The community passport was a great advance in Europe; even more so considering that the freedom of interstate establishment in the United States was established between 1994 and 1997 or that the restrictions on opening new branches for Spanish banks were lifted at the end of the seventies (in 1989 for savings banks).
An intra-EU branch has no capital, liquidity or resolution requirements, and can operate with a lighter governance structure. Restrictions on the circulation of intragroup financial flows and difficulties in cost savings can be avoided with a branch. However, intra-community action through branches has been anecdotal, especially for commercial and retail banking, with ING in Spain or Nordea in the Nordic countries being the most notable exceptions.
Among the reasons for this low use is the opposition of national supervisors to losing control over their banks, and of the governments themselves fearful of losing influence over investors in their debt. These fears were vindicated by the debacle during the financial crisis of the Icelandic banks (the famous Icesave), when the Icelandic deposit guarantee fund was unable to meet its obligations to British and Dutch depositors. The creation of the Banking Union was conceived as a silver bullet against fragmentation: a single supervisor, resolution authority and deposit insurance. A European infrastructure that would allow, for example, a Spanish entity to operate in Brussels or Munich as it does in Cáceres. But the Banking Union, more than 10 years later, has not reduced fragmentation: mergers and acquisitions operations are few and mostly national.
And the Banking Union is still not complete and, in the short term, there does not seem to be any political appetite to complete it. The lack of a single European guarantee fund makes it difficult – if not impossible – to convert subsidiaries into branches.
First, because countries will continue to question the solvency of home deposit insurance, as the Icelandic case illustrated; even more so when banking solvency continues to be interrelated with that of the sovereign State in which the entity is located. The Communication mentions legislative initiatives to mitigate the national bias in sovereign investments, underlines that most banking crises will be resolved under the resolution regime and points out the need to strengthen liquidity mechanisms among guarantee funds.
Second, the conversion of a subsidiary into a branch involves the transfer of deposit insurance from the host country to the home country. But it does so without the consequent transfer of the resources that the subsidiary would have contributed to the host insurance throughout its existence. The origin insurance would see its responsibilities substantially increased, for which it would foreseeably have to request new contributions from the rest of the banks. Community rules provide for the transfer of contributions from only the last 12 months, which greatly complicates these operations (see the litigation between Latvia and Sweden in 2024). The solution proposed by the CMDI reform, still in progress, of a maximum of 0.1% of deposits, does not seem sufficient either.
Aware of this, the Commission will try a third way: to ease the prudential requirements of intra-Community subsidiaries, to make them similar to branches. It will propose legislative measures that facilitate capital and liquidity exemptions or waivers, defusing opposition from local supervisors. That is, they will continue to be subsidiaries and their deposits will continue to be guaranteed by the host deposit insurance, but they will have lower prudential requirements, which favor the use of subsidiaries.
A regulatory relaxation of the subsidiary regime will make cross-border mergers more attractive. The Communication estimates the capital and liquidity released with the flexibility of intragroup requirements at 230,000 million euros. Furthermore, the Commission wants to go further, eliminating other national barriers to intra-community concentration processes, including political ones and divergences in national regulations (consumer, mortgage, etc.).
The question is whether this time will be the final one. Time will tell. Efforts by the legislator, the Commission and the ECB to create European champions have had little success to date. Looking back, the golden age of intra-community mergers was in the years prior to the global financial crisis, in a context of high regulatory and supervisory fragmentation and strong barriers to entry, but also of rapid economic growth and great hopes; In short, great optimism. Perhaps that is the lesson and forces us to qualify the Commission's diagnosis: regulators can prevent mergers, but the initiative is not theirs. Clear and fair rules and a quality referee make a good match possible, but the people responsible for the show are the players.
