Thought November 29, 2019 / 04:34 pm UTC

Spanish Banks Merger Could Be A Game Changer

By Giacomo Pallaro

A merger between two Spanish banks offers an opportunity to see if the ECB has changed its strict approach of requiring banks to raise more capital before giving supervisory approval. A less capital-demanding ECB could encourage more banks to consolidate and help profitability in an overcrowded market.

Two medium-size Spanish banks, Unicaja and Liberbank, have recently resumed talks over a merger, with the major shareholders of the two companies working to find an agreement.

Provided a deal is reached, the merger will come under the scrutiny of the ECB in the form of the Single Supervisory Mechanism (SSM) and this is where things become interesting.

The market’s take on the SSM approach to bank mergers is to require more capital from the merged entity even if each of the combining institutions is well capitalized to start with. This is something the Supervisory Board Chair Andrea Enria remarked in a recent speech, stressing that this is not necessarily the case and that “the capital we require from any entity, whether newly merged or not, is based on a medium-term assessment of the relevant business plan”.

Enria appears to be less strict than his predecessor Daniele Nouy and if the merger between these two less than infallible banks (Unicaja is rated Baa3/BBB-, Liberbank is Ba2/BB+) is allowed to go through without need for extra capital to be raised, it could be a game changer, fostering more mergers.

Given its excess capacity, consolidation in the European banking sector is needed and it would boost profitability and possibly strengthen the transmission of monetary policy. Besides national mergers, cross-border mergers would be welcome as they would allow to achieve greater integration and help risk diversification. However, they are more challenging, at least until the (elusive) completion of the banking union.

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I, Giacomo Pallaro, the lead analyst certify that the views expressed herein are mine and are clear, fair and not misleading at the time of publication. They have not been influenced by any relationship, either a personal relationship of mine or a relationship of the firm, to any entity described or referred to herein nor to any client of Continuum Economics nor has any inducement been received in relation to those views. I further certify that in the preparation and publication of this report I have at all times followed all relevant Continuum Economics compliance protocols including those reasonably seeking to prevent the receipt or misuse of material non-public information.