The European Central Bank (ECB) has in recent years favoured consolidation across the EU’s banking sector, which gives an indication as to how the supranational banking authority would view a possible acquisition by APS Bank plc of HSBC Bank Malta, and whether it would eventually rubber-stamp the deal.

News that APS Bank and HSCB Group are in talks over the acquisition of HSBC Malta, broken by WhosWho.mt, generated considerable column inches across all media, with many financial analysts and market commentators chiming on with their opinions on everything from the effect on the business landscape and the consumer to the ability of APS Bank to actually complete the transaction.

One key consideration brought up in several pieces is whether the ECB, as the regulator overseeing significant banks – as both APS and HSBC are to Malta – would even allow the deal to go ahead.

The presumed reason for refusal would be that the consolidation of APS and HSBC Malta into one entity would reduce competition in the local market.

However, an analysis of ECB policy documents, statements by its key people, and recent behaviour would seemingly indicate that it is supportive of mergers and acquisitions, as long as it feels that they yield a net benefit to Europe’s banking sector.

In particular, the ECB has been vocal about its desire to create “European champions” – truly pan-European institutions that could compete with foreign rivals on equal footing.

The evidence from a recent example of intra-country consolidation seems to confirm the ECB’s thinking. When, in May 2024, Spain’s second-largest bank, BBVA, launched a hostile takeover bid for the fourth-largest, Banco Sabadell, BBVA Executive Chairman Carlos Torres Vila told El País that he was “confident” about securing ECB approval.

“In the first exchanges with the supervisors there was no obstacle from their point of view; they even have a favorable opinion about consolidation,” he said. “The ECB likes consolidation and would love to see cross-border consolidation.”

Only recently, in July 2024, ECB Vice-President Luis de Guindos added that national mergers can pave the way for cross-border deals.

Why is the European Central Bank supportive of bank mergers?

Bank mergers may enhance financial stability, improve efficiency, and strengthen banks' ability to handle economic shocks. The ECB thus views consolidation in the banking sector as a way to create stronger institutions, particularly in the context of a fragmented European banking market where cross-border mergers could help build larger and more competitive banks.

In a landmark document issued in earlier 2021, which signalled a notable shift towards a friendlier approach to mergers and acquisitions in the banking sector, the ECB said that “when well designed and executed, business combinations can contribute to the overall financial soundness of the banking system without weakening the diversity of different business models.”

It added: “They can be a means of addressing longstanding issues in the European banking sector, such as low profitability and overcapacity,” although it acknowledged that “a reorganisation entails execution risks and, in some cases, could pose challenges related to resolvability, which also need to be considered.”

In essence, then, the ECB is in principle in favour of enhanced market consolidation in the banking sector, while carefully evaluating merger proposals to ensure they align with broader financial stability objectives.

In fact, it emphasises that mergers should be driven by sound business rationale, such as improving profitability and operational efficiency, rather than just short-term gains. It also stresses the need for robust due diligence, risk management, and maintaining competition in the market.

This supportive stance has evolved over time, and comes in response to a number of distinct factors that became more important over the last decade.

For example, the prevailing discourse during and following the Great Recession revolved around financial institutions that were “too big to fail”, with the financial crisis causing a dependence on extensive public support to shore up private businesses that were so entrenched in a country’s financial system that their collapse would have had ruinous consequences for the nation’s economy.

However, while the ECB remains mindful of the risks of creating banks that are "too big to fail," it has focused on ensuring that the right frameworks are in place to deal with any risks associated with large institutions. Through mechanisms like the Single Supervisory Mechanism (SSM) and the Single Resolution Board (SRB), the ECB believes it can manage these risks more effectively.

Focus has not turned to the other end, with Europe’s banking sector characterised by a multitude of small-ish banks competing in saturated markets.

Speaking at the University of Bologna back in 2021, Edouard Fernandez-Bollo, a member of the Supervisory Board of the ECB until August 2024, told listeners that “broadly speaking, the European banking sector still has too many banks with heavy cost structures competing for the same customers.”

The ECB Supervisory Board is the organ that specifically oversees mergers and acquisitions, lending his words considerable weight.

He continued: “Sustainable consolidation projects have the potential to create economies of scale across the European banking sector. This would help banks become more cost-efficient and better able to invest in large-scale digitalisation, and spark the transformation of their business models while also opening the door to diversifying their products and therefore their revenue sources.”

The ECB has however made it clear that despite its on-principle support for mergers and acquisition, “there is no ‘one size fits all’ approach when it comes to banking sector consolidation.”

It has instead opted for a case-by-case approach based on proportionality, tailored to the specificities of each transaction – including any potential deal between APS Bank and HSBC Malta.