Top bankers expect EU stress tests to reignite banking M&A

Sun Jan 26, 2014 6:09am EST
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By Lisa Jucca

DAVOS, Switzerland (Reuters) - Bankers expect a thorough European Central Bank (ECB) health check of the euro zone's largest banks to reignite domestic and cross-border merger activity by rebuilding confidence among lenders.

The sovereign debt crises that nearly caused a break-up of the single currency in 2011/12 has generated mistrust among banks and caused an effective breakdown of cross-border bank investment flows as they hoarded capital at home.

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 companies 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 (DBKGn.DE: Quote) CEO Anshu Jain said when asked whether the EU health checks on banks and the move towards banking union would bring cross-border deals.

However, 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 Spanish and Irish banks, even though the countries subsequently asked for bailouts of their banking sectors.

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 80 billion euros raised to strengthen banks over the past couple of years.   Continued...

European Central Bank (ECB) President Mario Draghi attends a session at the annual meeting of the World Economic Forum (WEF) in Davos January 24, 2014. REUTERS/Ruben Sprich