MILAN: European Union policymakers are renewing calls for cross-border bank mergers to cope with the trillions of euros of investment needed for the region's green and digital transformation.
Plans for a full-scale banking union have stalled, with bankers and regulators saying the lack of a joint guarantee for euro zone depositors is the biggest obstacle to progress.
Below we explain why poorly understood banking regulations and the lack of a European deposit insurance scheme or EDIS make cross-border acquisitions difficult for European bankers, who regularly complain about excessive hurdles.
The eurozone took a big step towards banking union 10 years ago by establishing a single supervisory system under the European Central Bank (ECB) and adopting a single resolution mechanism to deal with failed banks.
But the current rules, enacted after the global financial crisis and a series of bank bailouts, reflect an expectation that countries should deal with any banking crisis at the national level.
This is particularly problematic for so-called host countries such as Belgium, Croatia and Portugal, where large parts of their banking sectors are made up of locally-operated foreign banks, several regulators and bankers told Reuters.
In some cases, these divisions represent a small portion of the parent company's assets and so, although important in the host country, are largely insignificant in the bank's home country.
Under current rules, liquidity and capital are restricted at the national level, meaning cross-border banking groups lose their competitive advantage.
Without a single depository system, overcoming rules to keep banks' capital and liquidity within the borders of the countries where their subsidiaries are located has so far proven impossible.
This so-called “solo” regime gives countries such as Belgium reassurance that banks operating in their home market will not have to rely on their parent companies for support in the event of a crisis.
However, it would prevent bank acquisitions in other jurisdictions because banking groups would be unable to effectively manage their liquidity and capital.
Cross-border banks will be subject to capital, liquidity and loss-absorption requirements at both the group and subsidiary levels, restricting intra-group capital flows.
Excess cash generated in one country becomes “trapped” and cannot move freely across borders to support the banking group's other operations.
In 2021, ECB supervisors calculated that there was around £250 billion of high-quality liquid assets that could not be moved freely within the banking union due to EU and national-level regulations.
Trapped assets are created by multiple sets of rules, both at national and European level.
Member states have adopted EU rules on bank capital requirements, which incorporate the internationally agreed Basel Framework and are therefore subject to national law.
Because capital requirements are based on national law, European regulators cannot waive them and banks must hold capital in each jurisdiction.
However, European supervisors can exempt banks from liquidity requirements at subsidiary level.
This will allow banks to create cross-border liquidity subgroups.
But banks have so far shown little interest in those exemptions, according to people familiar with the matter, in part because member states could void them by applying other rules, they added.
The so-called large exposure rule limits the amount of capital banks can expose to counterparties to 25%. — Reuters
