Explainer: ECB’s Role in Potential UniCredit and Commerzbank Combination, According to Reuters

FRANKFURT (Reuters) – UniCredit, Italy’s second-largest bank, has acquired a 9% stake in Germany’s Commerzbank and is pursuing permission to potentially increase this stake to 29.9%. Sources indicate that the bank remains open to the possibility of a full takeover bid.

To elevate its ownership in Commerzbank beyond 10%, UniCredit will need the approval of the European Central Bank (ECB), which oversees the euro zone’s largest financial institutions.

When Does the ECB Get Involved?

The ECB requires approval whenever a shareholder seeks to acquire 10% or more of a regulated bank. Additional thresholds exist at 20%, 30%, and 50%. However, if a party is already approved for a larger stake, it may bypass interim reviews.

What is the ECB Looking At?

UniCredit will need to disclose its ultimate objectives to the ECB, which will assess the proposal accordingly. The ECB will consider various factors, including the reputability of the buyer, the qualifications of proposed board members, the financial stability of the buyer, and the target’s ability to meet regulatory requirements.

Essentially, the ECB must determine whether UniCredit has the financial capacity to purchase Commerzbank while maintaining its own stability, and whether this merger would create a stronger banking group. UniCredit currently boasts a strong capital position, with a common equity tier 1 (CET1) capital ratio of 16.2%, surpassing its target of 12.5%-13.0%, despite a robust dividend and share buyback strategy.

Will the ECB Support a Merger?

Without knowing UniCredit’s specific goals, it’s difficult to predict the ECB’s stance. Nevertheless, indications suggest that if the merger is structured effectively, it could gain ECB support. The central bank has often stated that cross-border mergers are advantageous due to the inefficiencies and high costs within the euro zone’s banking sector, particularly compared to larger U.S. banks.

ECB President Christine Lagarde recently noted that many authorities are hopeful for cross-border mergers, signaling interest in how this situation develops in the upcoming weeks. Meanwhile, Bundesbank chief Joachim Nagel has maintained a neutral position but outlined essential requirements for any potential merger support, emphasizing the need for strong banks that can effectively support future business financing.

What Do Past Mergers Indicate?

In the largest bank acquisition this year, the ECB approved a €12 billion bid by BBVA to acquire the smaller Spanish bank Sabadell, although the deal was ultimately blocked by the Spanish government. This illustrates that obtaining ECB approval may not be UniCredit’s most significant challenge, as a takeover of Commerzbank could carry substantial political implications, particularly given the significance of Commerzbank as Germany’s second-largest bank.

How Long Will the Process Take?

The ECB has a maximum of 60 days to approve a request, with the potential for a 30-day extension. Typically, the review process consumes most of this time, indicating that a quick decision is unlikely.

Who Makes the Final Decision?

The ECB’s supervisory board, which includes representatives from all euro zone nations, must approve any agreement, and the Governing Council will also participate in a non-objection procedure.