EU leaders should support the cross-border merger of banks to bolster the resilience of the Banking Union, European Commissioner for Financial Services Mairead McGuinness said on Tuesday (25 June), warning recent amendments to draft deposit insurance rules risk weakening the very bases of the union.
In a speech delivered at EU policy think tank Bruegel, McGuinness said EU leaders should increase efforts to complete the bloc’s decade-old Banking Union by supporting the consolidation of EU banks across member states.
The Commissioner urged policymakers to overcome their residual “banking nationalism”, which she said remains a major obstacle to the further integration of Europe’s banking sector and impedes critical investments and economic growth.
“Mergers could make banks more resilient to shocks due to greater asset diversification, and they would allow European banks to have more efficient business models, pursue growth strategies and invest in digitalisation [and] cybersecurity, which is always a topic that needs investment,” McGuinness said.
Cross-border mergers would also make EU banks “better equipped to compete with their non-European counterparts”, she added.
McGuinness, however, warned that such cross-border consolidation should be coupled with “appropriate safeguards” to ensure Europe’s financial stability. She also emphasised the “essential” role small and medium-sized banks will continue to play in Europe’s economy.
The Commissioner’s remarks come amid growing calls for EU policymakers to support the “scaling up” of European firms to allow them to compete with their US and Chinese counterparts.
In a much-discussed report published in April, former Italian Prime Minister Enrico Letta emphasised EU companies’ “stunning size deficit” relative to their competitors in the US and China, especially in the financial services, telecommunications, and energy sectors.
Mario Draghi, another former Italian prime minister who the European Commission has tasked with writing a report on the future of the bloc’s competitiveness, has similarly emphasised the “crucial” importance of scale in several recent speeches – with most analysts expecting his study will delve deeper into how to enable that in the European context.
“Our major competitors are taking advantage of the fact that they are continental-sized economies to generate scale, increase investment and capture market share for the industries where it matters most,” Draghi said in Spain earlier this month.
“We have the same natural size advantage in Europe, but fragmentation is holding us back,” he added.
Council’s tweaks to deposit insurance proposal risk ‘re-nationalising’ Banking Union
McGuinness also spoke about how banking nationalism has impeded the progression of one particular Banking Union policy file: the crisis management and deposit insurance (CMDI) framework.
Proposed by the Commission in April 2023 – roughly a year after being urged to do so by eurozone finance ministers – the CMDI aims to improve the resolution process for failing small and medium-sized banks and, in particular, protect taxpayers and depositors in the event of a bank’s collapse.
While McGuinness welcomed the European Parliament’s position on the CMDI file agreed in April this year as one that “would make the framework more predictable and effective than it is today”, she criticised the Council’s amendments announced last week as “frankly very disappointing”.
In particular, she noted that the Council’s proposals would make it harder for banks to access the Single Resolution Fund – an additional emergency fund financed by private institutions that kicks in only if and when the banks’ own investors have already taken losses equivalent to 8% of the bank’s total liabilities.
She warned that this would risk incentivising member states’ financial authorities “to continue to use national tools” outside of the EU resolution framework, including taxpayer-funded bailouts.
Moreover, McGuinness noted that “many” of the additional restrictions proposed by the Council apply only to Banking Union members, which include the 20 eurozone members plus Bulgaria. This will “widen the gap between member states in and outside the Banking Union” and “reduce the attractiveness” of the Union itself, she said.
Overall, the Commissioner warned that the Council’s position, in some respects, represents “a step backwards” by “renationalising some aspects of the Banking Union”.
More specifically, she said the Council’s proposals would “weaken” the EU’s “strong and independent” Single Resolution Board (SRB) by making its plenary session, which is made up of national resolution authorities, have greater authority at the expense of its executive board, which consists of independent board members.
“Unfortunately, the Council negotiating position suggests member states are approaching this reform primarily from a national perspective, and so failing to consider what’s best for the Banking Union,” she said.
“So banking nationalism has not disappeared and may be reinventing itself. So it’s something we need to overcome and address,” she added.
McGuinness’s warnings were echoed by French economist Bruegel senior fellow Nicolas Véron.
“Banking nationalism and national financial repression remain prominent in the way many European policymakers think about their economies and financial systems,” the analyst wrote in a book presented on Tuesday, warning these tendencies still “represent major obstacles to the completion” of the Banking Union.