EU policymakers are advocating for cross-border bank mergers to facilitate the financing of the European Union’s green and digital transformation. However, a fully-fledged banking union plan has stalled due to the absence of a European deposit insurance scheme. Little-understood banking rules and lack of EDIS make cross-border takeovers challenging for European bankers, creating excessive hurdles in the process.
Despite significant steps taken towards a banking union, including a single oversight system and resolution mechanism, current rules reflect the expectation that countries would handle banking crises at a national level. This presents a challenge for host countries with significant portions of their banking sector controlled by local units of foreign banks. The ring-fencing of liquidity and capital at the national level deprives cross-border banking groups of potential competitive advantages.
The ‘solo’ regime, where liquidity and capital are managed at the regional level, discourages cross-border banking takeovers as it hinders the effective management of resources. Banks with a cross-border presence face limitations on moving excess cash between countries, resulting in trapped assets. Various rules at the national and European levels contribute to this issue, with national laws on bank capital requirements preventing waivers by European supervisors.
In the absence of a European deposit insurance scheme, banks are unable to freely shift assets across borders, making liquidity management a costly challenge for cross-border groups. Regulations like the large exposure rule and collateral requirements further complicate liquidity management, reducing the appeal of international expansion for banks. Despite the potential benefits of cross-border mergers, the current regulatory environment poses significant obstacles for European bankers seeking to navigate the complex landscape of banking rules and regulations.
