Supervision requirements for bank mergers and acquisitions in the EU are set to tighten under Basel III’s latest capital requirements directive, forcing European authorities to consider financial stability risks when evaluating prospective deals within the banking industry.
The recently published CRD6 provisions, initially proposed by the European Commission in 2021 and coming into force by the end of 2025, aim to enhance the prudential regulation, supervision and risk management of banks as a response to the global financial crisis of 2007-2008.
The directive will introduce a more “muscular M&A regime”, according to Monsur Hussain, head of research for global financial institutions at Fitch Ratings. CRD6 will set a new pre-approval requirement for banks that intend to make an acquisition or disposal, and grant more power to supervisors to intervene in transactions that raise prudential or money-laundering concerns.
“The current rules only require the acquirer bank to notify the supervisor of the target bank regarding its M&A intentions, rather than its own supervisor, which the incoming CRD6 plugs by requiring the supervisors of the acquiring bank to be notified,” said Hussain.
According to Caroline Dawson, a partner at law firm Clifford Chance, “this has been a point of contention in a couple of situations, particularly in some of the post-GFC acquisitions where banks acquired other distressed banks. In some cases the supervisor of the acquiring bank felt in retrospect that the acquisition should have been reviewed from the perspective of the impact on the combined group”.
The new provisions are intended to harmonise the current patchwork of national regimes within the EU bloc, where some member states include notification requirements, while others do not.
“This is especially important for the [European Central Bank], as its powers currently differ depending on which member state the supervised large bank is sited within. The ECB has the exclusive competence to exercise these national powers for the significant banks it directly supervises,” said Hussain.
The increased need to supervise M&A transactions derives from the fact that the Basel rules might have a relevant impact on the capital levels of the combined entity resulting from a merger, said Jeroen Van Doorsselaere, vice-president of global product and platform management at information services company Wolters Kluwer.
“Suppose you have two entities that have a non-significant trading book on their own. If the combined entities’ trading book breaks a specific threshold, this will trigger higher capital charges. So that’s why regulators are going to check,” he explained.
Regulators in the EU deemed it important to complement Basel rules with increased supervision given the primary role the banking system has in financing the economy. “If such an acquisition goes wrong in Europe, that also means it will have a bigger impact on the economy [of the region],” he added.
According to Michael Born, counsel at law firm Norton Rose Fulbright, the new requirements will be a significant cost and time factor for an M&A transaction of a credit institution. “The relevant supervised entities will therefore need to carefully assess whether a proposed M&A transaction falls within the scope of the new supervisory powers,” he said.
The new M&A regime comes at a time when prospects for cross-border consolidation within the EU remain scarce without further progress on the bloc’s banking and capital markets unions.
European banks have long called for harmonised rules across member states to allow the creation of bigger banking groups that are better able to compete on the global stage.
