Stress tests will ‘reignite mergers’

Bankers expect a thorough ECB healthcheck of the eurozone’s largest banks to reignite merger activity by rebuilding confidence among lenders.

The debt crisis has generated mistrust among banks and has caused an effective breakdown of cross-border bank investment flows.

But the ECB’s asset quality review, an assessment of the balance sheets of more than 120 banks that is due to be completed next autumn, should bring transparency on the quality of banks’ loans and other assets, bankers, and regulators at the World Economic Forum in Davos said.

The initial increase in merger activity is expected to take place within single countries, as weaker firms restructure and accept effective takeovers by domestic rivals, but bankers believe this will then spread to a pan-European level. “The pre-conditions are there,” Deutsche Bank CEO Anshu Jain said.

However, Mr Jain added that progress will not come overnight. “I am not predicting a wave [of deals],” he said.

Bankers say that the latest checks on capital and stress tests of banks’ resilience to shocks must be rigorous, pointing to the 2011 tests that found no weaknesses among Irish and Spanish banks.

European monetary affairs commissioner Olli Rehn said that banks are already preparing for the results of the stress tests by raising capital on the market, with about €80bn raised to strengthen banks in the past couple of years.

Some bankers said that consolidation would not be constrained within the eurozone because banks need to scale up to afford technological investment and cut costs.

One banker said he expected a consolidation wave among Swiss private banks as they move towards a system of automatic exchange of tax information with foreign authorities.

Another executive at a European bank said the banking union under ECB supervision will also bring mergers and acquisitions&: “With time, there will be cross-border mergers.”