On Feb. 8, the European Parliament held its latest spirited debate on the need for a single market in financial services. Numerous members declared that progress is too slow and criticized European Union governments for delays in breaking down national barriers. No one in Parliament, though, singled out the worst offenders: the national central banks, which have done so much to block creation of the pan-European banks needed to make the single financial market a reality.
The central banks willingly gave up their power to set interest rates when the euro was launched on Jan. 1, 1999; now, monetary policy is the province of the European Central Bank. But the central banks jealously guard their remaining prerogatives. And one of those powers is their ability--formal or tacit--to veto bank takeovers on their turf and keep outside banks at bay. Repeatedly in the past two years, central banks have blocked cross-border mergers. "It's hardly what you'd expect from people who claim to be good Europeans," says the chief executive of a French bank.
It's what you'd expect from die-hard protectionists, however. Early last year, Bank of Italy Governor Antonio Fazio undermined the efforts of Spain's Banco Bilbao Vizcaya Argentaria to merge with UniCredito Italiano. The Bank of Italy also prevented BBVA from increasing its 10% stake in Banca Nazionale del Lavoro. In 1999, when France's Banque Nationale de Paris launched a bid for Societe Generale and Banque Paribas, the Bank of France made it crystal clear that no foreign white knight could join the fray.
CLEARANCE. To be sure, smaller border-hopping deals have gone through: Britain's HSBC Group acquired Credit Commercial de France last year, for example. Europe still has too many banks, though, and it needs giant mergers and, more so, acquisitions to clear things up. Yet today, BNP couldn't possibly get clearance to merge with Germany's Dresdner Bank, a deal that European financiers have long considered sensible.
The irony is that, unless a merger falls afoul of EU competition rules, central banks should have no real grounds to block a well-financed deal. And the central banks rarely oppose a cross-border merger openly. They don't have to. All it takes to scupper a financial-sector takeover is a hint of central bank opposition. Few bank CEOs will defy their chief regulators.
Even when central bankers appear to openly flout EU dictates, they get away with it. That happened in 1999, when the Bank of Portugal and the Portuguese Finance Ministry flatly refused to authorize the acquisition of Antonio Champalimaud's financial services group by Spain's Banco Santander Central Hispano. BSCH and the EU threatened legal action. The impasse ended only when Champalimaud's group was divvied up between BSCH and Portugal's state-owned savings bank, Caixa Geral de Depositos. The message is clear: "Even if the European Union brings in new rules, central banks will still be able to stand in the way of progress," says the French banker.
Central bankers don't like cross-border banking mergers because they sap their authority. It is, after all, the central bank that is ultimately responsible for national bank supervision under EU law. But that's not the whole story. Central bankers argue in private that local control of large banks is in the national interest, since they play a key role in financing the economy. They also want at least one of their banks to become a so-called national champion, capable of competing on the European stage. That means getting domestic banks to merge before letting in foreign predators.
Ultimately, protectionism weakens the banks it supposedly shelters. Italian banks are among the best protected in Europe, but apart from a few institutions like Unicredito and SanPaolo IMI, they're bloated and inefficient, as are others in France and Germany.
It's time for the central banks to give up the backroom maneuvering. Maybe Brussels can help here. Under pressure from big banks and their clients, the European Commission is pushing to break down barriers between national financial services industries. Meanwhile, financiers are hoping the introduction of euro notes and coins next year will make it tougher for central banks to stand in the way of borderless finance. "When the euro is a reality, it will change public perceptions," says BBVA Co-Chairman Francisco Gonzalez. Dismantling the barriers cannot happen too soon. So long as central bankers distort the free market, Europe's great monetary experiment will never live up to its full potential.
By David Fairlamb
Fairlamb reports on European finance from Frankfurt.