They are detrimental to financial integration and, therefore, curb the Banking Union’s aspirations to act as a single jurisdiction. It does not seem reasonable that the implications, in terms of capital and liquidity, for a banking group that has a subsidiary in a Latin American country should be very similar to those that would prevail were the subsidiary located in another euro area country. 8/10  Naturally, the introduction of a genuinely European deposit guarantee scheme would complement and largely provide for this step forward in integration. Also, from a regulatory perspective, a sufficiently uniform legal basis is notably lacking in the euro area. Just as specific national regulations had to be harmonised, or recognised as equivalent, to enable the creation of the single market, it is necessary to change specific rules that prevent the development of a truly single market for financial services. It may well not be possible to achieve full harmonisation, but this will probably not be necessary. There are some critical areas, such as the prevention of money laundering, fit and proper rules and bank insolvency regulations, where a common, euro area-wide set of rules would boost market integration. And that would also improve the efficiency of supervision and resolution. The question of doing away with these barriers and harmonising regulations is gaining in importance.
Many consider the lack of cross-border mergers as proof that much remains to be done in terms of market integration and diversification. In any event, scant cross-border consolidation, particularly in a setting of clear overcapacity of the European banking sector, is symptomatic. On this matter, the ECB, in its latest stability report7, published a study on the degree of overcapacity of the sector in Europe and the potential implications for bank business. In keeping with the conclusions of the study, excess capacity may lead to operating below margin in the face of heightened competition. That would preclude making the necessary investments for the future of banks and their adaptation to new technologies and new operators (e.g. in systems), creating “zombie”-like banks that weigh down even further on the sector’s profitability. The study details those banks with a return on equity (RoE) that is lower than the median of 6% over three years, but the most worrying group would be that of banks with an RoE of less than 3%, no less than around 25% of the total. The study concludes with the need to address restructuring and mergers, showing a clear preference for cross-border as opposed to national mergers. On the ever-controversial matter of mergers, I have stated on several occasions that our role as supervisors is not to decide which mergers are desirable and which not.