The European Banking Union Also Means Cross-Border Bank Consolidation

Few things may seem further removed from the delicate politico-constitutional dynamics of EU integration than cross-border bank consolidations. However, a heated debate on the benefits and risks of EU’s unfinished-effort to establish a Banking Union erupted on 11 September 2024, when the Milan-based UniCredit announced that it had amassed an equity stake of 9% in the Frankfurt-based rival Commerzbank. The German Chancellor quickly labelled UniCredit’s move an “unfriendly attack,” adding that its government considered the Italian bank’s possible acquisition of (or merger with) Commerzbank a threat to German financial stability. Undeterred, on 24 September Unicredit further increased its stake in Commerzbank to 21% and, in accordance with the SSM Regulation, requested the European Central Bank (ECB) to be authorised to own up to 29.9% of the German bank. As markets and policy-makers alike await the outcome of the ECB’s decision, we show that EU law should protect cross-border bank consolidations from national political resistance. First, we argue that German authorities can hardly provide a legally-compelling justification to convince the ECB to reject UniCredit’s request on financial stability grounds. Second, we contend that any hypothetical attempt by the German government to prohibit a further increase in the UniCredit’s stake in Commerzbank for similar reasons would violate the EU rules on the freedom of movement of capital.

The benefits and risks of cross-border bank consolidations

In 2013, the Banking Union was launched as the most ambitious step in EU economic integration since the creation of the euro in 1999. In the aftermath of the Eurozone crisis, the project aimed to strengthen the financial stability of the lopsided Economic and Monetary Union by overhauling the EU’s institutional framework for banking supervision. In addition to establishing the Single Resolution Board but failing to create a European Deposit Insurance Scheme, the EU Council adopted the SSM Regulation to confer supervisory tasks over Eurozone banks on the ECB within a “Single Supervisory Mechanism”.

Although incomplete, the Banking Union is today widely regarded as successful. The direct supervision of significant Eurozone banks by the ECB, in particular, strengthened their capital structure and reduced their non-performing loans, decoupling the so-called “sovereign-bank nexus” between their credit worthiness and that of their home Member State. Having strengthened financial stability, the Banking Union can now benefit the Eurozone’s economy in another respect: it can open the door to cross-border investment in financial institutions as well as mergers and acquisitions between banks from different Eurozone countries.

In the EU’s single market, cross-border bank consolidations could generate economies of scale, creating larger Eurozone banks with enhanced lending capacity and better chances to compete globally. While consolidation remains a market-driven process, under the Capital Requirements Directive supervisory authorities can block the increase in the equity stake built by a bank’s shareholder for prudential considerations. Although the SSM Regulation has transferred this power from national authorities to the ECB more than a decade ago, this regulatory simplification has not yet resulted in any major consolidation. In this sense, UniCredit’s attempt to build a larger stake in Commerzbank is the first real opportunity to test whether the SSM Regulation and the EU law in general can be effective at preventing national politics from interfering with cross-border consolidations.

The financial integration that comes with cross-border bank consolidation, however, results in increased interconnectivity between Member States’ economies. It is precisely in this respect that the German Chancellor has argued that allowing UniCredit to acquire Commerzbank could threaten the economic and financial stability in Germany. If a financial crisis were to break out in Italy, the argument goes, the wobbly budgetary stability of the Italian government could dent the soundness of UniCredit, dry liquidity out of Germany and possibly even require a bail-out of the Italian bank from the German federal budget. The first question that we ask is: does such an argument bear any legal merit in the ECB’s pending decision to authorise UniCredit to own up to 29.9% in Commerzbank?

Acquisitions of qualifying holdings and the ECB’s independence under the SSM Regulation

Under Article 4(1)(c) SSM Regulation, it is for the ECB to “assess notifications of the acquisition and disposal of qualifying holdings in credit institutions” in the Eurozone. A “qualifying holding” is, pursuant to point 36 of Article 4(1) of the Capital Requirements Regulation, “a direct or indirect holding in an undertaking which represents 10% or more of the capital or of the voting rights”. Such a regulatory approval seeks to ensure the suitability and credibility of a bank’s major shareholders. According to the criteria listed in Article 23(1) of the Capital Requirements Directive, in fact, the potential acquirer’s suitability is assessed on the basis of a set of criteria that include their “financial soundness” and their “reputation”, also in relation to anti-money laundering and terrorist financing risks.

Pursuant to Article 15 SSM Regulation, the procedure leading to the approval of UniCredit’s request is administratively “composite”, as it involves determinations by both the ECB and the national supervisory authority of the Member State where Commerzbank is based: the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin). As a first step, BaFin “shall assess the proposed acquisition, and shall forward the notification and a proposal for a decision to oppose or not to oppose the acquisition” to the ECB. As a second step, the ECB “shall decide whether to oppose the acquisition”. Crucially, in case C-219/17 (Berlusconi and Fininvest v Banca d’Italia and IVASS, paras 48, 54 and 55) the CJEU clarified that the proposals drafted by national supervisory authorities within the SSM composite procedures are “preparatory acts” that do not bound the ECB to a specific course of action. When assessing UniCredit’s request, according to Article 19(1) SSM both the ECB and BaFin must “act independently” of politics, “in the interest of the Union as a whole” and without taking instructions from other EU institutions or Member States’ governments.

We can draw two conclusions from such rules. First, it seems clear that the financial stability argument formulated by the German government simply cannot be taken into account by BaFin or the ECB, as it exceeds the prudential grounds listed in Article 23 of the Capital Requirements Directive. Any pressure by the German government to consider factors other than UniCredit’s suitability as a shareholder should be rebuffed by both BaFin and the ECB, which must act “independently” and “in the interest of the Union as a whole”. As the final word in the procedure lies with the ECB, then, it appears unlikely that the latter deems UniCredit unsuitable, since the Italian bank is already considered suitable to fully own its subsidiarity Hypovereinsbank in Germany. Blocking UniCredit’s request could thus violate the principle of supervisory consistency that the ECB adheres to according to its own guidance on qualifying holdings procedures.

Second, in assessing the financial soundness of UniCredit, the ECB will already take into account the impact of any adverse financial stability developments on the Italian bank. After all, the ECB, in cooperation with the European Banking Authority, carries out stringent annual stress tests of Eurozone banks. Therefore, the argument raised by the German government should not be able to influence the ECB’s decision to approve UniCredit’s request under the SSM Regulation.

Financial stability concerns and restrictions on the EU’s freedom of movement of capital

If UniCredit is authorised by the ECB to build up its stake in Commerzbank, the German government could well choose not to sell the substantial stake that it still holds in Commerzbank since the financial crisis. In this respect, however, it bears reminding that in 2009, when the Commission authorised state-aid by the German government in the form of an acquisition of an equity stake in Commerzbank, that government committed to sell its stake in the bank eventually (SA.28436, paras 58 and 59). But could the German government use the exceptions to the freedom of movement of capital under the EU Treaties to legally prohibit other investors in Germany from selling their Commerzbank shares to UniCredit?

According to Article 63(1) TFEU, “all restrictions on the movement of capital between Member States […] shall be prohibited”. In case 7/78 (Thompson, p. 2261), the CJEU clarified that capital also means money that “give[s] rise to investments which produce returns”. Furthermore, the CJEU held in case C-483/99 (Commission v France, para 37) that “direct investment in the form of participation in an undertaking by means of a shareholding or the acquisition of securities on the capital market constitute capital movements within the meaning of Article 73b [now Article 63] of the Treaty.”

However, Article 65(b) TFEU allows for derogations from the freedom of movement of capital for the purpose of “prudential supervision of financial institutions” and for reasons “which are justified on grounds of public policy or public security”. While the preservation of financial stability is a legitimate public policy objective (T-107/17, Steinhoff v ECB, para 105 and 106), the only two episodes of capital restrictions in the EU – those imposed in 2013 by Cyprus and in 2015 by Greece – have never been assessed by EU courts. Still, derogations from the free movement of capital for achieving legitimate objectives of public policy or public security are justified only when they are suitable to attain those objectives and do not go beyond what is necessary for that purpose (C‑478/19, UBS Real Estate, para 60). Crucially, the CJEU clarified in C-282/04 (Commission v Netherlands, para 32) that “the free movement of capital may […] be restricted by national measures justified on the grounds set out in Article [65 TFEU] or by overriding reasons in the general interest […] to the extent that there are no [EU] harmonising measures providing for measures necessary to ensure the protection of those interests”.

We can draw the following conclusions from such rules. First, a prohibition on the sale or purchase of shares in Commerzbank is unlikely to be suitable for the purpose of protecting financial stability in Germany, because Commerzbank is only one of many banks in the country. In addition, financial stability is contingent on multiple factors, not just economic conditions in Italy, and the sale of shares by itself is not a source of instability. Such a prohibition would, therefore, be disproportional.

Second, and more importantly, since the coming into force of the SSM Regulation, the ECB enjoys an exclusive competence to supervise Eurozone banks (C-450/17 P, Landeskreditbank v ECB, paras 38 and 49). According to Article 1 SSM Regulation, that competence must ensure “the stability of the financial system within the Union and each Member State”. Besides the SSM, other important EU safety-nets such as the Single Resolution Fund and the Direct Bank Recapitalisation Instrument of the European Stability Mechanism ensure financial stability in case a large Eurozone bank with cross-border activities is at the risk of failure. It seems unlikely, thus, that restricting the freedom of movement of capital by prohibiting the further sale of Commerzbank’s shares can be deemed necessary by the CJEU to maintain (German) financial stability. Several EU measures and mechanisms are already in place, in fact, to ensure the same objective.

A watershed moment for the future of the Banking Union

If the German government were successful in stopping the UniCredit-Commerzbank tie-up by any means, it could undermine the very credibility of the Banking Union. First, it would demonstrate that the EU Council’s latest committment to complete the Banking Union remains mere virtue-signalling.  Second, and perhaps worse, it would signal to investors that Member States may protect their banks under the guise of financial stability. However, EU law prohibits national efforts to interfere with ECB authorisations under the SSM Regulation or to unjustifiably restrict the purchase of bank shares by other EU investors. Accordingly, the potential UniCredit-Commerzbank tie-up should be governed by market dynamics and reviewed by the ECB solely under the prudential standards laid down in EU banking regulation. In conclusion, enforcing EU law in the face of national obstinance may well be the only way to unlock the benefits of the Banking Union and transform Eurozone banks into stronger, cross-border, and truly European players.