The regulatory approach to bank mergers in the U.S. is expected to become increasingly favourable to dealmaking — narrowing the recent divergence between the U.S. and European banking sectors — and facilitating further consolidation, says Fitch Ratings.
In a report published Tuesday, the rating agency said that while European banking regulators have taken a more permissive approach to bank mergers and acquisitions (M&A) in recent years, U.S. authorities have been more restrictive.
“[U.S. regulators] are highly focused on consumer protection and anti-monopolistic practices, and recent guidance from the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation includes tougher requirements for larger mergers,” the report said.
Conversely, the European Central Bank (ECB) and other regulatory authorities in Europe have recently been more receptive to bank M&A.
“The ECB recently confirmed that banks with credible integration plans will not be penalized with higher capital requirements,” Fitch said.
The ECB also issued guidance that allows so-called “badwill” — when the fair value of an acquired bank’s net assets exceeds the acquisition price — to be counted as regulatory capital.
“This could provide a capital boost for acquiring banks,” Fitch said.
Despite the more favourable regulatory environment, there are other significant challenges to bank mergers in Europe, the rating agency noted.
“Smaller institutions, which are less diversified and often have outdated IT platforms, face considerable pressure to merge, but local political opposition may pose significant barriers to consolidation,” the report said. “Nevertheless, potential strategic benefits, enhanced efficiency and strong capital levels may make M&A attractive for European banks in 2025.”
Against this backdrop, Fitch said it expects “a mix of bolt-on deals and larger mergers, reflecting different strategic approaches.”
“Merging legal entities within a group and in-market consolidation are likely to be key trends. We also expect further acquisitions of insurers or asset managers,” the rating agency added.
At the same time, U.S. regulatory guidance, which poses tougher hurdles for deals between larger banks “may be rolled back” under president-elect Donald Trump’s incoming administration, Fitch said.
This sort of policy shift, coupled with personnel changes at the regulators themselves, “could lead to a much more conducive environment for U.S. bank M&A,” it noted.