Cross-border European mergers would be particularly positive: they would deepen the banking union, reduce the sovereign-bank risk nexus, and provide greater potential for diversification. In this respect, the ECB Guide on the supervisory approach to consolidation in the banking sector specifically aims to enhance the predictability of supervisory actions for the market and thus help banks design merger plans that are prudentially sustainable, such that the resulting institution has a business plan that, when executed correctly, will add value. 10  Conclusions In sum, a banking sector that was initially healthier and more solvent and forceful economic policy action have allowed the initial impact of the shock of the pandemic to be absorbed and helped keep credit flowing to the economy, thereby preventing systemic risks from materialising. However, the ultimate impact of the crisis on the banking sector will depend both on its scale and duration and on the effectiveness of economic policies in alleviating its effects on households and firms. Economic policies (national, European and international; monetary, prudential and fiscal) should continue to support the economy, targeting the hardest-hit firms and population cohorts. In particular, supporting viable firms whose solvency has deteriorated after a year of crisis is crucial, to prevent the productive system and employment from being destroyed, which in turn would also damage the banking sector’s financial position, thereby hindering the recovery.
While impact analyses reveal that the reform would increase capital requirements in some jurisdictions, they also show that certain facets of the reform would lower them. Specifically, some of these latter facets have already been implemented via the European quick fix I mentioned earlier.14 The objectives of this second phase of the Basel III reform, which consist of balancing simplicity, comparability and risk sensitivity, remain wholly in place. Thus, after deciding to defer implementation by one year so as to increase banks’ operational capacity, all members of the Basel Committee on Banking Supervision (BCBS) have committed to its full and consistent implementation on the new date agreed. The economy and financial system will thus have sufficient time to absorb the main effects of this crisis and to progressively rebuild their buffers, if they were used. Domestically, the coordinated supervision of the risks to financial stability has been strengthened in recent years through the creation of the Spanish macroprudential authority 14  For example, in relation to the digitalisation of the banking sector, this reform exempts from deduction from CET1 investment in software development, databases and database management; the related amortisation, however, must still be deducted. This is because such investment is considered a basic input for banks to pursue their activities amid the economy’s and society’s growing digitalisation, and for banks to be able to better compete with BigTech firms, which are software asset-intensive.