The Commerzbank AG headquarters stand beyond a Deutsche Bank AG bank branch in Frankfurt, Germany, on Monday, March 18, 2019. Rothschild & Co. and Goldman Sachs Group Inc. are advising Commerzbank on its merger talks with Deutsche Bank, according to people familiar with the matter. (Bloomberg)

Is Europe’s long-awaited banking industry consolidation finally at hand? Merger talks between Germany’s Deutsche Bank AG and Commerzbank AG ended in failure, but Italian, French and Dutch competitors are eyeing their own moves for the smaller lender. Key hurdles -- such as the lack of continent-wide rules and a large dose of nationalism -- haven’t gone away.

1. How would mergers help European banks?

Europe has too many banks making too little money, and combining them could reduce costs drastically. That means cutting jobs -- one of the motivations that had been behind the proposed tie-up of Deutsche Bank and Commerzbank -- but it’s also about developing broader sources of revenue to finance rising information-technology expenses. Smaller lenders in Germany, Spain and Italy have been merging for a while now, but the barriers are much higher for the larger competitors, especially for cross-border deals. One attraction of big international players is their ability to break the “doom loop” between banking systems and public finances. Local failures nearly bankrupted Ireland, Cyprus and Spain in the euro crisis and numerous governments still depend to a high degree on domestic banks to fund their debt.

2. But isn’t Europe a single jurisdiction?

Yes and no. Policy makers in Brussels agree on rules for all 28 members of the European Union, but the states get to tailor some of them 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 EU regulations, have spent a lot of time harmonizing national standards, such as which assets qualify as capital for shouldering losses. But progress is lacking in other areas, like how to judge 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 SpA has a unit in Germany, but authorities there can stop it from wiring reserves from Munich to Milan. Some experts on Germany say that rule was justified during the sovereign debt crisis, when there was real doubt about Italy’s ability to stay in the currency union and honor its euro-denominated debts. The game started to change in 2014, when the ECB first started supervising 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. But many member states have proved skeptical, wanting to restrict capital flowing out of their countries.

4. Is there a window to change that?

EU policy makers recently completed a major overhaul of banking regulations, but they scrapped a proposal that could have allowed banks to move capital and liquidity across borders more freely, in response to opposition from smaller member states. That hasn’t stopped France from continuing to push for the idea. The so-called banking union also features prominently in an ongoing revamp of the euro area. Another group was set up recently in Brussels to look at the shortcomings of the project with fresh eyes, with a report to leaders targeted for June. Still, with European Parliament elections in May, any major changes would probably have to wait until at least next year.

5. What about the hurdles within a single country?

Beyond the political resistance to large-scale job cuts, making big banks bigger is still a tough sell. The ECB is rigorous in its examinations of proposed mergers because it wants to avoid being blamed should the resulting bank run into trouble down the line. Then there’s the fact that bigger and more complex banks need more capital than smaller, leaner ones and such higher requirements generally hurt a lender’s profitability.

6. Are banks also to blame?

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.

7. 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 more than one state wants a share of 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 the courts, 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.

8. 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. Germany and other fiscally conservative countries have so far rejected that idea, saying banks in southern Europe need to reduce their bad loans before their savers can take on the risk of shouldering losses elsewhere.

To contact the reporters on this story: Nicholas Comfort in Frankfurt at ncomfort1@bloomberg.net;Alexander Weber in Brussels at aweber45@bloomberg.net

To contact the editors responsible for this story: Dale Crofts at dcrofts@bloomberg.net, Ross Larsen, Leah Harrison Singer

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