QuickTake

On 12 January 2021, the European Central Bank (ECB) acting in its role at the head of the Banking Union's Single Supervisory Mechanism (SSM) published its long-awaited details and supervisory expectations in the form of a "Guide on the supervisory approach to consolidation in the banking sector" (the SSM M&A Guide).1 The publication followed a consultation process that closed in October 2020 accompanied by a feedback statement, which is useful for framing the context of the final version.2

The final version of the SSM M&A Guide now in force clarifies that:

  • the use of supervisory tools by the ECB-SSM to facilitate sustainable consolidation projects;
  • credible business and integration plans are not penalised with higher capital requirements (Pillar 2 capital);
  • temporary use of existing internal models, subject to a strong roll-out plan and governance will be accepted

The ECB-SSM has reiterated that it is now, more so than ever, important to have a strong banking sector to provide resilient and reliable funding to the European economy. This is crucial in supporting the EU's efforts in delivering on its digital transition aims and the Green Deal. In the longer term, the ECB-SSM considers that consolidation is seen as a means to redress structural issues, such as overcapacity and low profitability in the European Banking sector.

It is conceivable that the SSM M&A Guide may be updated further in the future so as to accommodate new developments but also to drive greater supervisory coordination and convergence amongst Banking Union authorities including across the wider European System of Financial Supervision. One key critique that was expressed clearly (and indeed rightly) by a number of commentators during the feedback process of too many authorities acting as obstacles, in particular to cross-border consolidation.

This Client Alert considers the objectives and requirements in the SSM M&A Guide, in particular given that it will likely be of interest for Banking Union supervised institutions and other non-Banking Union and/or non-EU financial services providers, as well as corporate finance advisors, looking to seize opportunities as EU-27 financial services policymakers begin to plan for beyond the pandemic in 2022 and beyond.

Key takeaways from the SSM M&A Guide

Scope

The SSM M&A Guide marks the clearest sign of support by the ECB-SSM for further consolidation in the Banking Union and it also marks an evolution in its institutional mandate. The final guidelines also provide better certainty in how future deal activity might be viewed in the SSM context and by the ECB in its SSM supervisory expectations.3 Importantly the SSM M&A Guide distinguishes between how it applies to directly ECB-SSM and indirectly ECB-SSM supervised BUSIs. The SSM M&A Guide does not apply to BUSIs under resolution.

In the ECB-SSM's view, consolidation can remove excess capacity (notably as many BUSIs operate too domestically), enhance cost efficiency and promote more focused and credible business models. Equally cross-border consolidation supports greater risk diversification and contributes to financial market integration - a core objective of the Banking Union.

The SSM M&A Guide equally marks a move by the ECB-SSM to pull all of the supervisory principles, including those in its own (internal) Supervisory Manual, that are applicable to M&A and consolidation transactions into a central and core set of guidelines, that set out supervisory expectations for firms. It is also relevant for national authorities in the Banking Union. Specifically, it states (para. 3.) "This Guide should enhance the transparency and predictability of supervisory actions and help credit institutions design prudentially sustainable projects".

The SSM M&A Guide covers the following themes:

  1. The overall approach to the supervisory assessment of relevant transactions/projects related to banking sector consolidation (the Relevant Transactions);4
  2. The supervisory expectations related to the Relevant Transactions and execution risk i.e., the risk that a Relevant Transaction is not executed (including as planned) or is not completed due to financial or non-financial factors, including challenges of competing cultures as well as IT systems;
  3. The supervisory approach to key prudential aspects of the Relevant Transactions;
  4. The ongoing supervision of the newly combined entity including how to move the new entity to the ECB-SSM's administered Supervisory Review and Evaluation Process (SREP), which is a core supervisory tool; and
  5. The application of the SSM M&A Guide to those BUSIs that are for Banking Union supervisory purposes are categorised as "Less Significant Institutions" (LSIs) and thus indirectly supervised by the ECB-SSM and directly supervised by the relevant national competent authorities (NCAs).

General considerations

The ECB-SSM's role in banking sector M&A i.e., consolidation, depends on the type of transaction BUSIs choose. If the transaction involves or implies an acquisition of a "qualifying holding"5 or the creation of a new BUSI, and/or the proposed transaction involves BUSIs that qualify as significant and the law in the respective Banking Union Member States grants powers6 to the supervisor to approve a merger or similar transaction, then the ECB-SSM will have a formal role as the ultimate decision-making authority for Banking Union regulatory and supervisory purposes. The same applies where the new entity requires a new license to operate as a BUSI.

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Footnotes

1 Available here.

2 Available here.

3 As in the draft version of the SSM M&A Guide, the final version is drafted and do read more as expectations as opposed to, as has been the case in other guidelines that do read more like rules. That being said, the draft and final versions in contrast to other ECB(-SSM) publications refers to paragraph numbers with the symbol "§", which in most civil law jurisdictions but also in the United States is used for referencing individually numbered sections of a document but more traditionally used when citing sections of a legal code. We assume that this is a mere coincidence, as it does not fall within the EU institutions (Intra-institutional Style Guide) and thus the drafting style of the ECB(-SSM).

4 This includes circumstances where one or more BUSIs merge as well as proposed acquisitions of one BUSI by another BUSI. The SSM M&A Guide also applies, with certain adaptations for cases when a non-bank or a non-BUSI is involved.

5 Every acquisition of a participation in a bank that represents 10% or more of the shares and/or voting rights in that bank or crosses other relevant thresholds.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.