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There Is an Alternative for Deutsche Bank

There Is an Alternative for Deutsche Bank

(Bloomberg Opinion) -- When Andrea Enria became Europe’s top bank supervisor this year, many expected him to spend his time dealing with his own country, Italy. Instead his first big test is in Germany, where Deutsche Bank AG and Commerzbank AG are discussing a merger that would create the EU’s third-largest banking group by assets.

The European Central Bank’s supervisory board – which Enria chairs – should demand strict conditions before allowing this tie-up. The political pressure in favor of the deal is enormous but the risks for financial stability are just as big. The ECB will be gambling with its reputation if it allows the birth of a fragile giant.

Since taking over from national authorities as the euro zone’s main banking supervisor, the central bank has forced lenders to be more honest about their asset quality and to strengthen their balance sheets. Critics argue that this hasn’t happened quickly enough and that stress tests remain too lenient. There has been progress, though, particularly on non-performing loans. According to ECB data, the volume of bad loans on the balance sheets of big institutions fell from 1 trillion euros ($1.1 trillion) in early 2015 to 628 billion euros in the third quarter of 2018. In Italy, bad loans have fallen to 9.4 percent of total loans from 11.9 per cent a year earlier, despite resistance to the ECB’s more aggressive demands.

The difficulty posed by the Commerzbank-Deutsche talks is possibly even greater. Germany’s finance ministry has rallied behind the combination, in the hope of creating a “national champion” to support German companies around the world. Some see the tie-up as the last chance to save the two banks, which have struggled to cut costs and find new revenue streams. The argument that “there is no alternative” puts the supervisors in a tight spot.

There Is an Alternative for Deutsche Bank

The ECB should resist being cornered. A deal makes sense if, and only if, the combined entity has both adequate capital and sufficiently healthy prospects. The Financial Times reported that Deutsche was considering raising up to 10 billion euros in fresh equity as part of the potential merger (although the lender said it was too early to make such an assessment). The biggest problem, however, is more about future stability than the present. With fierce opposition from the unions, could the combined bank cut enough jobs to deliver the necessary savings from this merger? And where exactly will the new customers come from, given that the local banking market is already saturated?

The danger is that the German authorities are acting defensively rather than intelligently. Europe’s economic outlook has darkened and banks might come under renewed pressure in the coming months. Berlin and Frankfurt worry that the two weak banks may become the target of a bigger foreign rival. Economic nationalism is on the march everywhere in the EU, and Germany’s no exception.

Enria is right to say that the ECB isn’t in the business of promoting national champions. But words aren’t enough. The next step is to set the bar high when demanding guarantees on the financial position of the merged entity, so taxpayers can be confident that they won’t end up having to bail out a mega-bank that can’t stand on its own feet. If not, just let the two lenders – Deutsche especially – shrink until they become manageable again. If a foreign buyer comes along, so be it. 

Obviously, Berlin will be pretty implacable in defending its historic banking giant. Enria will face intense lobbying to clear the merger. BaFin, Germany's financial regulator, might not be a strong ally for the ECB in this fight because of its ties to the country’s finance ministry. There will no doubt be accusations of excessive intrusiveness from the supervisory board. It’s pretty new, so this will be a huge challenge.

The ECB has little choice but to stand firm, though. The Deutsche-Commerzbank proposal is a sign that something is wrong at the heart of the euro zone’s half-formed banking union. The structure was meant to make it easier to find cross-border solutions to problem lenders, instead of relying on domestic rescues. A weak response from Enria would just show that external oversight of the region’s banks doesn’t work against domestic pressure. In essence, local politics would trump the banking union.

A well-functioning euro zone needs strong institutions, including credible banking watchdogs. As he ponders his first big decision as Europe’s supervisor-in-chief, Enria should remember what’s at stake.

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.

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