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Bank of France head: Regulation should not act as brake on cross-border mergers

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Bank of France head: Regulation should not act as brake on cross-border mergers

New financial regulation should not act as a barrier to continuing consolidation, which is key to the development of the European banking system, according to Banque de France governor and European Central Bank governing council member François Villeroy de Galhau.

In a speech at a conference in Paris, he said the development of cross-border banking was "essential" in order to strengthen the single market and boost savings and investments in the eurozone.

"Healthy and solid cross-border mergers would allow banks to diversify their risks better in the whole of the eurozone and to direct savings more efficiently toward productive investment," he said, noting that the region had much to do to catch up with the U.S.

The five largest U.S. banks have a market share of more than 40%, whereas the market share of the five largest in the eurozone is less than 20%, he said.

Reports that Germany's Commerzbank AG could be an acquisition target for two other large European lenders, UniCredit SpA and BNP Paribas SA, has recently reignited the debate surrounding cross-border consolidation.

Calls for cross-border consolidation among European banks have been growing, but observers see national supervisors blocking deals as one of the hurdles to such mergers.

Exemptions on liquidity, equity

Villeroy de Galhau said that within a monetary and banking union, "a cross-border merger should not cause any more difficulties and complications than a domestic merger." There had to be an end to barriers on cross-border consolidation within the eurozone, he said.

Several levers need to be put in place to encourage more cross-border consolidation, including exemptions from supervisory intervention with regard to liquidity and equity to allow a more flexible allocation of capital and to limit ring-fencing, he said.

European banks will be subject to new rules from the beginning of 2018, which require them to hold enough debt to absorb losses if they run into trouble, known as the minimum requirement for own funds and eligible liabilities, or MREL. Internal requirements for MREL, which set the rules within banking groups, should not be calculated on a national basis, but within the European Banking Union and considered as a single jurisdiction, he said.

As a first step to encourage more cross-border consolidation, he called on the European Banking Authority, known as the EBA, to put together a list of the obstacles to cross-border mergers resulting from regulation and supervision.

Paris won the seat of the EBA on Nov. 20 in a tight race between other financial centers in Europe, such as Frankfurt and Dublin, after the body moves from London because of the U.K.'s decision to leave the EU. Villeroy de Galhau said the success of Paris' bid demonstrated its attractiveness as a financial center and the move was a "good omen" for other relocations by financial institutions after Brexit.