The Legal Implications of the Prudential Supervisory Assessment of Bank Mergers and Acquisitions under EU Law

Abstract

In September 2004, the Scheveningen ECOFIN Council invited the European Commission to identify the various obstacles to cross-border consolidation in the EU financial sector, including obstacles resulting from the application of prudential rules by supervisory authorities. Although this consolidation has increased in recent years, the number of cross-border mergers and acquisitions in the banking sector continues to lag behind other (non-financial) sectors. Moreover, the difficulties experienced by EU banks in attempting to acquire stakes in financial undertakings in other EU Member States (e.g. in Italy in 2005 or in Poland in 2006) have highlighted the need to ensure a high level of transparency and legal certainty in the rules applied by supervisory authorities when assessing proposed increases in and acquisitions of qualifying holdings, and the need for the Commission to closely monitor the application of these rules. This has led to the adoption of Directive 2007/44/EC of the European Parliament and of the Council of 5 September 2007 ('the Qualifying Holdings Directive') which introduces harmonised procedural rules and evaluation criteria for the prudential assessment of acquisitions and increases of holdings in the financial sector. These new EU rules must be implemented by 21 March 2009. This paper provides an overview of the main characteristics of the new rules applicable at Community level to acquisitions and increases of holdings in the financial sector, with a particular focus on the amendments introduced to the Banking Directive (2006/48/EC).

Before looking at the new EU legal framework for qualifying holdings, this paper puts these rules into perspective against the European Court of Justice's application of the Treaty principles on the free movement of capital and freedom of establishment, and their consequences for cross-border banking consolidation in the EU. This paper provides an analysis of the exceptions to these Treaty freedoms, especially the prudential carve-outs, the impact of these principles on third country investors and authorities, and an assessment of the lessons to be drawn from the infringement proceedings initiated by the Commission in recent years in the banking sector. Lastly, this paper studies the relationship between the prudential rules and the competition law rules in cases of cross-border banking mergers.