(Bloomberg) -- Ten years after the financial crisis, Europe has too many banks making too little money. One reason is that rock-bottom interest rates have eaten into lending revenue. Meanwhile, misconduct fines and losses on bad loans have eroded profit, and mobile technology has made many branches redundant. The answer for bankers and some of their supervisors is to merge. But the continent’s still-fragmented regulation and overriding national interests make that harder than it sounds.
1. How would mergers help?
At a systemic level, the charm of cross-border banks lies in their ability to break the "doom loop" between banking systems and national governments. Local bank failures nearly bankrupted Ireland, Cyprus and Spain in the euro crisis. Numerous governments still depend to a high degree on domestic banks to fund their debt. Cross-border banking groups can absorb a sovereign default better than a local bank with more concentrated exposure to its home government. At the level of individual banks, the benefit comes mainly from lowering costs. That means cutting jobs, but it’s also about developing broader revenue streams with which to finance high information technology expenses. Smaller banks in Germany, Spain and Italy have been merging for a while now, but the hurdle is much higher for their larger competitors, especially cross-border deals.
2. But isn’t Europe a single jurisdiction?
Yes and no. The European Commission, the EU’s executive arm, drafts rules for all 28 members of the European Union, but national lawmakers get to tailor some of those to reflect facts on the ground (and to defend their traditional privileges). The European Central Bank, which supervises the euro area’s largest banks, and the European Banking Authority, which fixes the finer points of the Commission’s drafts, have spent a lot of time harmonizing national rules, such as what qualifies as capital for shouldering losses. But progress is lacking in other areas, like standards for judging whether executives are fit to run their banks, according to the ECB. There’s also been inconsistent application of European rules for handling seriously troubled banks, with Italy using a loophole to inject taxpayer money into lenders.
3. What do the banks want to see changed?
High on the list is the ability to move capital and liquid funds like deposits freely from one country to another. Italy’s UniCredit has a unit in Germany, and authorities there can stop it from wiring reserves from Munich to Milan. Some German experts say that was justified during the sovereign debt crisis, when there was real doubt about Italy’s ability to stay in the currency union and honor euro-denominated debts. The game started to change in 2014, when the ECB first started supervising the biggest banks. The European Commission has tried - with the support of the banks - to move to the ECB any remaining powers that local supervisors could use to pursue national interests at the expense of the broader region. But many member states have proved skeptical, wanting to restrict capital flowing out of their countries.
4. Are banks also to blame for the lack of cross-border mergers?
Certainly. Many European banks, especially in southern countries, have dragged their feet on getting rid of bad loans, which makes them unattractive targets and leaves them without the strength to buy competitors. Banks in France and Germany still hold large amounts of hard-to-value assets, some of which are leftovers from the financial crisis.
5. What else could lawmakers and regulators do?
Harmonizing tax and insolvency laws would be a big help. The EU has made progress on taxes, with an agreement on resolving disputes that arise when multiple member states tax companies for the same earnings. Still, inconsistent treatment by tax authorities causes uncertainty. Differing insolvency laws are also a barrier: In Italy it can take banks several years to chase borrowers through court while lenders in other countries can repossess collateral in a matter of months. Italy overhauled its bankruptcy rules in 2017 and the EU has proposed speeding up the process of banks seizing collateral on European corporate loans.
6. Could joint deposit insurance help?
Yes, but that’s a long way off. Pooling deposit insurance across Europe would increase the confidence of depositors in banks, regardless of where they’re located. But, Germany has so far rejected that idea, saying banks in southern Europe need to reduce their bad loans before German savers take on the risk of shouldering losses elsewhere. That puts plans for common deposit insurance on hold.
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