Bank Stress Tests to Boost M&A Activity?

Written by | Wednesday, January 29th, 2014

Observers are expecting an elaborate health check of the biggest banks of the currency block, which is hoped to bring back cross-border M&A trading and investment by boosting confidence among lenders. The health check is to be performed by the Frankfurt-based European Central Bank (ECB). The sovereign debt crisis that almost brought about the bankruptcy of the 18-country club three years ago has generally cultivated a substantial lack of confidence among investors. Based on the ECB asset quality review, about 120 banks will have had to provide their balance sheets, loans, and assets for examination by next fall.
It is believed that the results of these stress tests will increase merger activity among eurozone member states as well as they will eventually spread beyond eurozone borders. The CEO of Deutsche Bank, Anshu Jain, said that the conditions are such that cross-border deals should be on rise once the tests are over. He added though that an increase in M&A activity would not come overnight and no one should expect a sudden wave of mergers.
Bankers and investors insist that the newly designed checks should be as rigorous and strict as possible, not like the 2011 examinations that failed to reveal problems among Irish or Spanish banks even though both countries were calling for bail-out aid.
Oli Rehn, European Monetary Affairs Commissioner, added that the banks are already preparing the outcomes of the stress tests by raising capital. So far, about 80 billion euros have been accumulated in order to fortify banks with cash. Although there is no further consolidation expected in Spain’s banking sector, which has decreased the number of banks from about 50 before the crisis to the current 10 players, Italy is still believed to have some way to go. For instance, the country’s biggest banks, such as Banca Monte dei Paschi di Siena and Banco Popolare, are still trying to acquire more capital, whereas Italian middle-size banks are attractive candidates for mergers.

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