Cross-border mergers in Europe would help diversify banks: from Cos to the ECB

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FILE PHOTO: FILE PHOTO: The headquarters of the European Central Bank (ECB) is pictured in Frankfurt, Germany July 8, 2020. REUTERS / Ralph Orlowski

MADRID (Reuters) – European monetary policymaker Pablo Hernandez de Cos on Monday called for cross-border banking consolidation in Europe to strengthen the European banking union and increase the geographic diversification of lenders.

European banks are under increasing pressure to join forces to deal with rising bad debts and record interest rates as they battle the fallout from the novel coronavirus pandemic.

“European transnational operations would be particularly positive and would also favor a larger potential clientele to share the burden of technology investments,” De Cos said at a financial event.

He added, however, that their immediate contribution to reducing costs would likely be minimal.

De Cos, who is also the governor of Spain’s central bank, said there was more scope for consolidation in Spain and other European countries to reduce excess capacity and improve bank profitability.

Amid the COVID-19 crisis, De Cos said banks’ non-performing loan ratios are expected to “increase dramatically” over the next few quarters, even under a more favorable scenario.

So far, bad debts have been contained among European banks thanks to mitigation measures from regulators and state-guaranteed loans from governments.

De Cos, who sits on the ECB’s governing council, said banks should remain cautious about their dividend policy regardless of the European Central Bank’s future decision on shareholder compensation.

The ECB is expected to review its recommendation to eurozone banks not to pay dividends in December and could take a more flexible case-by-case approach.

Reporting by Jesús Aguado and Emma Pinedo; Editing by Inti Landauro and Jan Harvey

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