(Bloomberg Opinion) -- When Deutsche Bank AG and Commerzbank AG pulled their merger talks at the end of last month, there was an audible sigh of relief at the European Central Bank.
The deal was bound to raise eyebrows among the supervisors, as it would have concentrated the risk of a mega-bank in a single country, while offering few credible efficiency gains in return. And yet Germany’s finance ministry was a vocal backer of the deal, hoping it would create a “national champion” to serve the interests of the country’s businesses.
The ECB didn’t sit back and watch idly. In March, Andrea Enria, the chair of its banking supervisory board, told the Financial Times that he did not like the idea of national champions. The two banks were aware they would have needed to raise substantially more capital to satisfy the ECB’s regulatory demands and make sure they wouldn’t need to go to back to the market soon after. Then there was the question of savings from the merger, with trade unions fearing that a viable business plan would have involved as many as 30,000 job losses.
Enria’s supervisory board certainly appeared a lot harder on the deal than Bafin, the German finance regulator. As an agency of the country’s finance ministry, the latter was always going to be torn between politics and economics. After all, this was the motivation behind the European Union’s creation of a banking union: Detaching supervisory decisions from domestic politics, so there’s less risk of capture in the national interest.
Yet the Deutsche-Commerzbank talks never really reached a crunch point – when the ECB would have been forced to take the politically toxic decision of whether or not to clear the deal. The two banks were themselves ultimately unpersuaded that the merger made sense, while the political landscape shifted slightly too. In an interview with Bloomberg, Chancellor Angela Merkel was non-committal on the idea. In a sense, the ECB dodged a bullet. Enria’s first major decision as the euro zone’s banking supercop can wait a little longer.
Still, this doesn’t mean he can escape Germany’s banking problems forever. Quite the opposite.
True, analysts now believe Commerzbank may well be in play for a combination with another bank. ING Groep NV of the Netherlands and Italy’s UniCredit SpA are seen as potential partners. These lenders would bring an additional advantage: They would offer the first meaningful cross-border merger since the establishment of the Single Supervisory Mechanism (the system that brings together the banking regulators of EU member states). The ECB doesn’t promote such mergers actively, but policymakers have often regretted that the bloc’s banks don’t seem interested in teaming up with neighbors. It would certainly help to spread financial risk across the monetary union, and prove that there is indeed a “banking union” in Europe.
Unfortunately, Deutsche is a different story and will continue to pose the ECB problems. The bank isn’t suffering from immediate capital or liquidity shortfalls, but there are several areas of concern. These include its inability to cut expenses, high funding costs, a string of scandals, and the destiny of the investment bank. Still, there is a less grandiose alternative for Deutsche: Keep shrinking the lender until it becomes manageable again.
This is primarily the responsibility of the bank’s management, starting with the CEO, Christian Sewing. But supervisors will need to exert more pressure than they’ve done so far, to make sure the bank doesn’t keep missing its targets. Enria shouldn’t let his relief about the failed merger make him forget that the Deutsche problem still needs fixing.
To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Ferdinando Giugliano writes columns and editorials on European economics for Bloomberg Opinion. He is also an economics columnist for La Repubblica and was a member of the editorial board of the Financial Times.
©2019 Bloomberg L.P.