Joachim Wuermeling during his speech at the Bundesbank’s 2019 banking symposium ©Frank Rumpenhorst

Wuermeling: Sustainable business model crucial for bank mergers

Bundesbank Executive Board member Joachim Wuermeling has noted that the Bank, in its capacity as a supervisor, is neutral when it comes to bank mergers. “We may monitor such processes, but we certainly do not initiate them,” he announced at the Bundesbank’s 2019 banking symposium in Frankfurt am Main. What does matter for supervisors is that the business model is sound and sustainable.

Mr Wuermeling reported that while mergers are increasing in number, with Germany alone registering a drop in the number of credit institutions from nearly 4,500 in 1991 to around 1,800 today, mergers are not the only avenue available for consolidating the banking sector. Further efficiency gains can be tapped by centralising individual elements of the value-added chain within institutions, in groups of institutions, by forging cooperations or outsourcing operations to third parties. Mr Wuermeling highlighted new technologies as one way in which banks can unlock fresh potential: “Innovative forms of collaboration among standalone institutions are often more worthwhile than mergers between traditional institutions.”

Institutions in good shape despite low rates

Mr Wuermeling is convinced that fierce competition in Germany’s banking sector and slim margins will still be an issue five years from now. That is why bank business models also need to function when interest rates are low, he told the bank representatives in attendance. “Judging by your 2018 balance sheets, I can see that many of you, though not all, have been diligently doing your homework,” he observed, adding that not every institution has sound earnings potential, and this needs to be improved. Altogether, though, Mr Wuermeling sees no reason to speak ill of Germany’s banking market: “The institutions are robust, their portfolios are solid, and they are well capitalised.”

End of Basel marathon in sight

Turning his attention to the regulatory process, Mr Wuermeling said that Europe’s banks are on the finishing straight. The European banking package looks set to be signed off before the elections to the European Parliament, and implementation of Basel III is about to be finalised. “So the end of the ‘Basel marathon’ is within our sights,” he said. The next move, he explained, is to implement all the global agreements without exception. He noted that the foundations have also been laid for the subject of proportionality – that is, the matter of easing overly severe operational burdens for small, non-complex institutions. In future, small institutions will be granted exemptions in areas where the administrative effort is disproportionate to the supervisory gains.

Interconnected European financial market

Bundesbank’s 2019 banking symposium ©Frank Rumpenhorst
Mr Wuermeling also used his speech to discuss the structure of the European financial centre in the post-Brexit era. There needs to be a European strategy to deepen and modernise the internal market for financial services, he said, and in a reference to the UK’s forthcoming withdrawal from the European Union, observed that “our objective should be an interconnected European financial market”. But at the same time, national, regional and local specialisation should also be possible. Mr Wuermeling went as far as to predict that, five years from now, London will no longer perform the role it plays today for the EU as a financial centre. “The transition won’t be easy – but as a financial market we’re better prepared than other sectors,” he observed.

Eva Wimmer from the Federal Ministry of Finance, who also spoke at the Bundesbank’s banking symposium, takes a similar view: “We are prepared for a hard Brexit”. The chief problem she sees at the moment is that no one knows how long the spell of uncertainty will last. However, Brexit could also present an opportunity for Frankfurt, in its role as a financial centre, she explained.