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German finance minister: Without market integration, EU will lag US banks

Fragmentation in the banking and capital markets across the EU is among the main reasons that the bloc's lenders have fallen behind U.S. peers, German Finance Minister Olaf Scholz said.

In any comparisons to the U.S., it should be taken into account that institutions there take advantage of economic opportunities created in a large integrated market place, Scholz told an audience at the Handelsblatt Banking Summit in Frankfurt on Sept. 5.

Urgent projects

In the EU, however, part of the available economic potential remains untapped because of the incomplete banking union, the minister said. Bringing the project to a successful end is "urgent" and should be on the agenda of the next ECB President, he said.

The EU has launched two initiatives aimed at integrating the banking and capital markets across the 28 EU member states and centralizing supervision — the banking union and the capital markets union.

Progress had been made on both projects over the past two years, but there is much more to be done Scholz said. Regarding the capital markets union, the European Securities and Markets Authority has to set goals that it wants to pursue together with EU authorities, he said. Unlike in the U.S., there is no centralized capital markets supervision in the EU. ESMA shares responsibility with the national competent authorities of the EU member states.

The banking union is closer to completion with the main hurdle remaining an agreement on a common Insurance Deposit Guarantee Scheme for all EU member states. Germany has been the main opponent to establishing the scheme before nonperforming bank loan levels in the bloc are reduced. The country has argued that risk reduction should precede risk-sharing because this would ensure that savers in member states with low NPL risk would not pay for bank loan defaults in high-risk member states.

Deeds, not deadlines

Scholz said there should be a discussion about how the individual problem-ridden banking markets can continue to function in the future, after the banking union is completed, and what consequences the winding up of operations would have. However, he stressed the need to find solutions as soon as possible.

Instead of setting deadlines for the completion of the project, politicians should commit to it and come out and say it is the right way to go, Scholz said. This will pave the way for many to overcome their initial misgivings, support the project and look for creative solutions to complete it.

The minister's call for market integration "as soon as possible" was backed by senior bankers attending the conference, many of whom said the current fragmentation nips any cross-border consolidation attempts in the bud.

Bankers' view

"The main question in cross-border consolidation is can you actually get cost synergies," ING Groep NV CEO Ralph Hamers said during a stage interview at the conference. Banks will consider a cross-border merger on that factor alone and without a complete banking union, "not a lot will be happening" in the foreseeable future, he said.

Société Générale SA CEO Frédéric Oudéa also said he was happy to hear Scholz urging for the completion of the banking and the capital market union projects. "At the end, we would like to see this market as a single one, with no contradiction between EU and national regulation," Oudéa said. Europe needs an integrated market to strengthen its banks, he said. Given the current trade tensions between the U.S. and China, it would be very risky to let European savings and financing in the hands of banks that are under the influence of one of these global powers, he said.

Oudéa also does not expect any cross-border bank deals until the banking union project is complete, as the "general conditions" for consolidation are not currently met, he said.

Top financiers from across the Atlantic view the fragmented banking and capital markets as Europe's Achilles' heel.

Goldman Sachs Group Inc. CFO Stephen Scherr said European banks' business models would inevitably change if they were raising financing for clients in "a broader, bigger capital market that is not atomized country by country."

"In terms of the banking union, the question is where banks can cross borders and create opportunities, generate synergies and build scale that is not limited to the narrow border that confines their home market," he said, advising European peers to push for market integration.

BlackRock Inc. Chairman and CEO Larry Fink also said Europe needs a deeper and more developed capital market. German and French savers have been wrong for 30 years to keep their savings in bank accounts instead of getting the high returns offered by capital markets, Fink said. "It is financial craziness to keep your money in a bank."