(Bloomberg) -- Deutsche Bank AG (DE:DBKGn) and Commerzbank (DE:CBKG) AG’s financial reserves will probably be key to winning approval on any merger from the European Central Bank, which has a history of telling lenders to do better.
“They should expect a rigorous examination,” Ignazio Angeloni, a member of the ECB’s supervisory board, said in an interview. The ECB looks at whether banks present realistic business plans and may push them to “different conclusions in terms of the capital and liquidity they may have.”
Deutsche Bank and Commerzbank moved deeper into merger talks this week, recognizing that a series of turnaround plans have failed to restore revenue growth following deep cuts to their investment banking units. While the lenders are said to have broached the topic discretely with regulators, they haven’t submitted formal plans because the structure of the deal is still unclear, with asset sales and fundraising among the possible options.
The German banks will want to preempt the kind of demands the watchdog placed on a 2016 merger of two Italian lenders. In that instance, the ECB pushed Banco Popolare SC to raise its capital levels with a 1 billion-euro ($1.1 billion) stock issuance before combining with Banca Popolare di Milano Scarl.
If a deal goes ahead, Deutsche Bank may need to raise about 8 billion euros from shareholders or through sales of holdings such as its DWS Group asset management business, according to an estimate by Christian Koch, a DZ Bank analyst.
Job Focus
Another important aspect of a tie-up between Deutsche Bank and Commerzbank would be savings from eliminating staff, notably in Germany where both banks have significant overlap. The deal may require 30,000 job cuts to make sense, people familiar with the matter have said.
“You often see a certain amount of optimism when these plans are presented,” said Angeloni. “Banks tend to paint a rosy picture when they present themselves to investors. It’s up to us to make sure things are safe and sound.”
The ECB doesn’t have a preference between whether banks should merge with domestic competitors or peers from other states, Angeloni said. “Of course, we are part of a set of European institutions that regard integration as a positive, desirable goal,” he said. “So we’d welcome sound cross-border mergers.”
One big stumbling block for international mergers is the fact that lenders can’t move capital and liquid funds freely between countries, he said. “They still can’t reap the full benefits of a merger given the current state of the law,” he said. “Those impediments need to be removed to make big banks more European.”
Angeloni, who helped set up the ECB’s supervisory arm in 2014 and is scheduled to step down from its board this month, also said:
- Money laundering “is something that we haven’t seen the end of” and Europe needs a dedicated authority to chase dirty funds
- European authorities should be given powers to push banks to raise capital levels to weather a economic downturn because efforts by national watchdogs haven’t been sufficient
- The ECB can now be less hands-on in pushing banks to shrink their bad loans because they “are now moving by themselves”
- The ECB’s review of how banks calculate risk will likely have an impact on their capital ratios which will be “more significant for some banks”