European bank mergers still face hurdles

PARIS, Oct 12 (Reuters): Health checks on Europe's banks may reveal takeover targets, but because protectionist regulation across the region has yet to be addressed, any post-"stress test" tie-ups are likely to be along national lines and could make a splintered industry more so.
The European Central Bank takes direct authority over the currency area's 120 top banks on November 4 after publishing the results of its review of their balance sheets on October 26.
But prospects for subsequent cross-border mergers have faded since Europe has yet to address national regulators' power to stop capital moving across borders, company law requiring subsidiaries to be run independently and secrecy laws.
All have a chilling effect on cross-border investment.
"There are two key obstacles," said a senior bank executive with long experience of cross-border operations, who spoke on condition of anonymity to avoid antagonising regulators.
"One is fragmentation that takes various forms - capital, liquidity, legal and structural. The other is that it is inherently more difficult to generate synergies with cross-border mergers."
Bank mergers prompted by the launch of the euro in 1999 have stalled since Lehman Brothers collapsed in 2008 - an event that prompted then Bank of England governor Mervyn King to observe that "global banks are global in life but national in death".
Data compiled by the news agency show cross-border banking mergers and acquisitions in the euro area peaked in 2007 - the year a consortium led by Royal Bank of Scotland bought ABN AMRO of the Netherlands in a deal that turned disastrous for all parties.
Deals have since dwindled to barely $1.5 billion in value in the first nine months of this year as bankers were put off by the cost of unwinding soured mega-deals and new rules which make major banks more expensive to run.
Nonetheless, some European banking experts are optimistic the obstacles will diminish over time, once the ECB settles into its role as single supervisor and gets to work.
The European Commission, which polices the EU's single market, is working with the European Banking Authority to try to curb restrictions on the free movement of capital. And Danielle Nouy, the head of the ECB's supervisory board, has pledged to stop countries "ring-fencing" their banks.
"There may not be a wave of pan-European consolidation immediately, given the uncertainties that will continue to weigh on the European banking sector after the balance-sheet review, but it is likely within three to five years," said Nicolas Veron, a specialist at the Bruegel economic think-tank and the Peterson Institute for International Economics.
"Beyond accelerating the creation of pan-European banking groups, banking union should also strongly favour the internal integration of banks that are already active in several eurozone countries such as BNP Paribas, Deutsche Bank or UniCredit."
Bankers with experience of the constraints are less sure.
The introduction of a single supervisor is arguably the biggest leap forward in European integration since the launch of the euro in 1999. But putting the ECB at the head of a network of country regulators seems unlikely to end the "banking nationalism" demonstrated in a series of regulatory spats.
Early in the financial crisis, Polish regulators restricted Italy's UniCredit from shifting funds from its well capitalised subsidiary Pekao SA to Italy, fearing retrenchment by foreign banks could drain their economy of liquidity.
At the height of the crisis in 2011, Germany's financial regulator BaFin took similar action, banning Italy's UniCredit from transferring billions of euros from its German subsidiary back to its Milan headquarters.
BaFin feared Italy might need a eurozone bailout and the transfers could leave German depositors exposed to supporting UniCredit, Italy's largest bank by assets.
Following Germany's move the Bank of Italy increased its scrutiny of Deutsche Bank's Italian operation - an apparent act of retaliation - and pushed it to become financially self-sufficient.
The dispute was eventually settled after talks between the Bank of Italy and BaFin, with UniCredit agreeing to a smaller transfer, sources familiar with the case said.
"Ring-fencing is a European problem. It happens in all the countries not just Germany," said UniCredit chief executive Federico Ghizzoni.
"The indication from the ECB is that in the eurozone this problem of liquidity should no longer exist once the ECB takes on the single supervision. We just have to wait and see."