France’s top central banker has called for Brussels to allow EU subsidiaries of pan-European banks to have less capital, removing a hurdle that lenders view as a big barrier to cross-border banking acquisitions in the region.
François Villeroy de Galhau, Banque de France governor, said on Friday that European lawmakers could encourage more banking consolidation by loosening the rules on the capital buffers they must have.
His comments come as the issue of banking consolidation has resurfaced in Europe — after almost a decade without major deals in the sector — prompted by merger talks between Deutsche Bank and Commerzbank in Germany. Italy’s UniCredit is preparing a rival bid for Commerzbank should the talks with Deutsche fall through.
“A useful step towards forming genuine pan-European banking groups could be to lower capital requirements of European subsidiaries, while safeguarding their financial position through credible cross-border guarantees provided by the parent company, which could be triggered both in normal times and in crisis situations,” Mr Villeroy de Galhau said in Bucharest on Friday.
“This would be based on European Union law and enforced by European Union authorities,” added Mr Villeroy de Galhau, one of the leading candidates to succeed Mario Draghi as European Central Bank president later this year.
More leeway from European authorities would make it more attractive for well capitalised European banks to acquire smaller or weaker rivals in other EU states.
At present, bank subsidiaries must abide by globally agreed capital rules, which supervisors believe has prevented some from taking advantage of having a strong parent and limited the consolidation in the sector during Europe’s banking crisis.
Analysts welcomed the move. John Cronin, financials analyst at Goodbody, said: “I believe this would provide significant impetus towards cross-border consolidation in a European banking context.”
Mr Villeroy de Galhau indicated that less stringent capital rules would be warranted as more cross-border banking meant more risk-sharing among member states.
A waiver on those global capital rules has in the past garnered support from the ECB, which supervises the biggest eurozone banks via its Single Supervisory Mechanism unit.
“The ECB generally supports the introduction of the possibility for a competent authority to waive the application of prudential requirements on an individual basis to a subsidiary whose head office is located in a member state different to that of its parent undertaking, which is consistent with the establishment of the SSM and the banking union,” said Mr Draghi in a legal opinion from November 2017.
But governments and supervisors from smaller EU countries have traditionally been reluctant to assume that subsidiaries on their territory will be able rely on parent companies for support in a crisis.
They fear being left high and dry in a financial emergency — a risk highlighted by Lehman Brothers pulling funds out of its London subsidiary shortly before its 2008 collapse. These so-called “host” countries have fought tenaciously in Brussels to retain rights to ring fence capital and liquidity in the bank units that they oversee.
The ECB and others have argued that the creation of a eurozone banking union renders such ringfencing outdated, given that banks are now supervised at European level. In response, some host countries say the banking union project remains incomplete.
Supporters of efforts to further develop the banking union by creating a common scheme to guarantee bank deposits have argued that the measure would help reassure countries that are wary of giving up control.
Mr Villeroy de Galhau’s remarks were part of a broader push for the European authorities to take advantage of Brexit to create a more integrated financial market in the rest of the union.
The Banque de France governor reiterated calls for the euro to become a more important global reserve currency.
Get alerts on European banks when a new story is published