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In its 2017 annual report, the European Central Bank (ECB) reiterated that greater consolidation of the banking sector would improve cost-efficiency and that cross-border   mergers and acquisitions would enhance retail banking integration. There are many reasons why the ECB’s wishes have not yet become reality, some of which are legal in nature. However, change could be drawing near.

Legal and regulatory reasons hindrances to cross-border bank mergers

The persistent fragmentation in national markets, which does not encourage this type of merger, is rooted in a number of causes. Firstly, even though the single supervisory and resolution mechanisms have brought us considerably closer to a banking union, prevailing regulations allow for many different national options and discretions. In addition, in the CRD IV, the EU is not treated as a single jurisdiction for the purposes of defining the cross-border activity that characterizes systemically important credit institutions and attracts greater capital requirements. This clearly does not pose an incentive for creating Europe-wide players. Lastly, the European deposit insurance scheme has yet to be implemented, and banking contracts and consumer protection have not yet been fully harmonized from a legal standpoint.

On the flip side, however, there is reason to be optimistic about a future shift toward more banking mergers. For one thing, doubts about prudential capital requirements are being dispelled. For another, strides are being taken in harmonizing civil and commercial legislation, such as in the recent mortgage credit directive and the proposed directives on insolvency, extrajudicial collateral enforcement and the modernization of EU consumer protection rules. These advances in harmonization of the EU legal environment for banks pave the way toward possible cross-border banking mergers.

Challenges in deal execution

Some of the legal challenges to cross-border mergers relate specifically to the complexities entailed in carrying out the deals. The different national systems for securing administrative authorization for changes in control over banks give rise to uncertainties and draw out timelines. In Spain, all mergers, divisions and similar operations involving credit institutions require the approval of the prudential supervisor and of supervisors of the subsidiary financial institutions, as well as approval by competition authorities and the Ministry of Economy, even if the deal involves another EU institution.

These corporate moves also entail somewhat thorny legal issues including: (a) the mandatory prior communication to depositors in the case of mergers, divisions or similar operations, whereby depositors are entitled to withdraw their deposits or transfer them to another entity at no cost; (b) exit rights of minority shareholders voting against the cross-border merger if the surviving company is not Spanish, which would require the bank to redeem their shares, potentially affecting the post-merger entity’s capital levels; (c) the need to prepare multiple and successive financial statements, audited and closed at different dates, in order to comply with national and foreign corporate, tax and supervisory requirements.

With respect to the corporate design of these cross-border operations, European law sheds light on some aspects while keeping us in the dark about others. For example, although one directive specifically regulates cross-border mergers, it does not address in its current text cross-border divisions. Another directive harmonizes at least the legal treatment for divisions and therefore helps to some degree, but the treatment for hive-downs is less clear, and hive-downs are not always understood in the EU framework to avail of the benefit of universal succession. Moreover, questions arise about more specific figures such as partial assignments of banks’ assets and liabilities, a unique modality in Spain established in additional provision three of Law 3/2009 on Structural Modifications to Commercial Companies.

Yet again, there are still reasons to be optimistic: European practice tends toward convergence, supported here by the interconnection of European commercial registries and the European Commission has just proposed a new directive modernizing the cross-border merger regime and even regulating cross-border divisions. With sufficient groundwork and preparation, even the most complex cross-border structural changes are indeed possible.

In terms of competition, the growing concentration in each national market will surely raise concern among antitrust authorities, which means that inorganic growth through cross-border deals has greater upside precisely because national fragmentation of markets makes overlap more unlikely.

In short, while the path is not yet fully clear for bank mergers and acquisitions between institutions in different EU Member States, we should keep a close watch on shifts in the legal framework, given that a sea change may be coming. And it is in banks’ best interest to be ready when it does.