More than 10 years have passed since the creation of the European Banking Union (UBE), and its balance—despite not being finalized—is clearly positive. European supervision is a global example, and our banks operate with levels of profitability, asset quality, solvency and liquidity that were difficult to imagine a few years ago. European companies and families have their financial needs covered much better. The successes in the field of financial stability have not been reproduced in their other – no less verbalized, less important – great objective: the promotion of European banking concentration. The consensus in Brussels and Frankfurt is that our banks lack scale and that concentration is required for “European champions” to emerge that can look the American and Chinese giants in the eye, just as they did before the 2008 crisis. And this is the unfinished business of the UBE. Contrary to what one might imagine, the UBE has not spurred the concentrations. The largest pan-European integration processes remain for the history books (Unicredit-HVB in 2005 or the acquisition of ABN Amro by a consortium in 2007) and were developed under conditions and premises very different from those of today. It does not seem that recent attempts can change the dynamic. An inorganic alternative to undertake pan-European expansion is the establishment of branches under the “community passport”, in force for more than 30 years. But the use of branching is quite limited among European banks, the result of the wounds caused by the bankruptcies of Icelandic bank branches in 2009, which have not yet completely healed. The precedent of the Dutch ING in Spain, with an active branch in retail banking since 1999, still persists as the most emblematic. And although in recent years the emergence of neobanks and the corporate businesses of some commercial banks have once again popularized branching, banks continue to channel their cross-border activities predominantly through subsidiaries. The key to the success of pan-European mergers and acquisitions lies precisely in the confluence of these two dimensions. That is, to what extent is it possible to acquire an entity and then merge it and convert it into a branch? As in any sector, the economic rationality of banking integrations depends on their possible synergies, on whether – as a result of the business combination – costs can be reduced to achieve at least similar income. And these lower costs usually derive from the possible overlap between the operational structures of the acquired and the acquirer. Another key aspect in banking concentrations are regulatory restrictions, given that multiple requirements to different units of the group can give rise to capital and liquidity “traps”, which constrain the freedom of circulation of financial flows in the group. For example, a subsidiary may have difficulty financing large local companies due to its individual limits on concentration. The lion’s share of these synergies can only be achieved if the acquired entity merges. If the concentration is implemented with a simple purchase and sale of shares without a subsequent merger, the acquired company maintains its legal personality and begins to operate as a cross-border subsidiary (subsidiary). As such, it must maintain its operational and governance structure, and is subject to capital, liquidity, MREL and concentration requirements. Your deposits remain guaranteed by local deposit insurance. On the contrary, if the operation is articulated through a cross-border merger, the acquired entity is extinguished and its banking activity in the destination country is branched. The branch lacks legal personality, with a government and operational structure that have nothing to do with those of a subsidiary. Additionally, the branch is not subject to individual capital, liquidity, MREL, and concentration requirements; but their deposits would become guaranteed by the deposit insurance of the acquiring entity. Therefore, the branching of the acquired entity will always be more advantageous than its subsidiary, due to its greater synergies and fewer regulatory restrictions. However, the transfer of deposit insurance is a major obstacle to its execution. And the UBE remains orphan of its third pillar: the single deposit insurance. In the case of a cross-border merger, the acquiree’s deposit coverage obligations would be transferred to the acquirer’s deposit insurance, although with an important nuance: funds contributed by the acquiree over the years to its domestic deposit insurance would not be transferred to the acquirer’s deposit insurance. That is, the obligations would be transferred, but not the financial assets that cover them. You can perfectly imagine the look on the face of the rest of the banks in the acquirer’s home country when they are informed that they have to increase their periodic payments to their deposit insurance to “accommodate” the new deposits. For this reason, the “factual” viability of cross-border mergers seems difficult if the acquired entity has a relevant volume of deposits. Subsidiarization of the acquired company is the only “realistic” option, despite its lower efficiency. Is there a third way to subsidiary and branching? It would be possible if the subsidiary entity were allowed to operate with waivers or exemptions, so that it would not be subject to compliance with prudential requirements. A subsidiary without requirements could operate with a much lighter structure and without generating inefficiencies in the free circulation of funds in the group. This option would allow most of the advantages of branching to be achieved, but without the inconvenience of the change in deposit insurance, although the exemption would probably be accompanied by a requirement for the parent company to guarantee the liabilities of the subsidiary. This route has recently been defended by the ECB as an alternative to overcome the obstacles to European banking integration. However, it is by no means free of difficulties. First, because the current regulatory regime does not allow the granting of cross-border capital and MREL waivers (liquidity waivers), so this option would require a legal modification. Currently, capital waivers are only possible for entities in the same Member State. Second, because, although cross-border liquidity waivers are provided for in the regulation, they remain unprecedented. Third, because it would be necessary to deal with the discomfort of the host States of the acquired entities, whose deposit insurance would continue to cover the obligations of entities that they have stopped controlling and regulating, although this opposition should be relativized in the context of the UBE. In any case, it seems clear that, for the moment, only with creativity and will can the pending issue of pan-European concentration be promoted. Sometimes it is convenient to take shortcuts, also in the construction of the UBE. Carolina Albuerne is a lawyer for Uría y Menéndez.
