Germany’s extraordinary response to UniCredit’s (UCG) overtures to Commerzbank may have just killed the European banking union and made a mockery of what was thought to be long-term political support for it. Political support that events have proven to be false, or at least a blatant case of Nimbyism (ie, not in my backyard).
The plan for an EU banking union was conceived in the wake of the global financial crisis (GFC) of 2007-08 and formally adopted by member states in 2012. The intention was, and still is, to create a centrally supervised, deeply integrated, single banking market in the EU. The Banking Union sits alongside a similar plan for the Capital Markets Union. Both are great ideas in principle. Both have made progress. None of them are complete.
EU policymakers and national politicians have supported the banking union – at least publicly – as an integral part of the bloc’s economic and financial sovereignty. Politicians have long lamented what they have referred to as banking parochialism, where activities tend to be conducted within national borders. The urgent quest to create European banking masters to compete with US and Chinese banks has been overdone in my opinion, but the fundamental ambition to create European banks large enough to provide the necessary banking services on a large scale to support the needs at multinational EU companies globally and global multinational companies in the EU is reasonable.
But here’s the problem: banking union requires a process of transformative cross-border consolidation to reduce fragmentation. Europe has too many small banks and too many mid-sized banks (relative to their American peers). The irony is that the heavy-handed banking reregulation implemented in the wake of the GFC to eliminate the possibility of a repeat has made cross-border bank consolidation uneconomical and extremely cumbersome.
But the thinking has been that as long as there is political support, a union will eventually be forged as the rules are updated over time to recognize two realities: First, that EU banks are in much better shape today from a profitability, solvency and capital; secondly, that the legislative priorities from 2008 have been withdrawn and new priorities have emerged (such as economic and financial security). So that excessively strict rules can be relaxed without undermining the integrity of the legislative framework that has been put in place.
Anywhere but here
But remove political support and the construction of banking union risks stalling. Then to Commerzbank… Germany’s aggressively negative reaction to a potential takeover of Commerzbank – the bank, in which Germany’s federal government still holds a 12.11% stake (a hangover from the GFC) of UniCredit, the Italy-headquartered pan-European banking group that already has a large stake in German banking through its ownership of HypoVereinsbank – was surprisingly mildest spoken.
Surprising, that is, in light of the big push in recent months from official task forces and high-level reports spearheaded by EU senior statesmen (Mario Draghi, Christian Noyer and Mario Monti) to push forward and complete unfinished aspects of banking and capital markets trade unions and to improve European competitiveness. It was barely a year ago that German Chancellor Olaf Scholz and French President Emmanuel Macron effusively supported the Franco-German road map for capital market union.
The events surrounding UCG and Commerzbank have been front page news for weeks, so there is no need to go into detail. Since UCG first announced to the market on September 11 that it had acquired approx. 9% of Commerzbank shares, its stake has risen to 21% and a statutory application has been submitted to allow an increase of up to 29.9%, just below the level at which it must launch a formal takeover.
Enter rampant media and investor speculation about a full takeover; a series of gushing, no doubt carefully crafted comments from the UCG about its intentions; but above all a vicious political backlash in Germany, starting from the top. “Unfriendly attacks, hostile takeovers are not a good thing for banks, and that is why the German government has clearly positioned itself in this direction,” Chancellor Scholz is reported to have said of UCG’s actions.
And it got personal: during a protest outside Commerzbank’s headquarters in Frankfurt, its deputy chairman Uwe Tschaege was reported to have said, referring to comments by UCG CEO Andrea Orcel about improving the German bank’s operational efficiency: “I feel like to vomit when I hear [Orcel’s] promises of cost savings.” Meanwhile, German trade union Ver.di, fearing more job losses if a merger of HypoVereinsbank and Commerzbank goes ahead, said it would fight with all means for Commerzbank’s independence. Hard to see where UCG goes in the face of such opposition.
Interestingly, the UCG invoked banking union as part of its narrative around Commerzbank, saying that union is key to boosting the EU’s economic success and the prosperity of its nations, as well as ensuring the growth and competitiveness of the German banking sector.
Given the circumstances, it’s almost funny.