UniCredit-Commerz merger could spawn sixth-largest EU G-Sib

Analysis of banks’ risk indicators suggest combined entity could have larger systemic footprint than ING and BPCE, returning Italian bank into too-big-to-fail club

A merger between UniCredit and Commerzbank could create a lender with a larger systemic risk footprint than ING Bank or Groupe BPCE, Risk Quantum analysis suggests.

Based on a simple sum of the global systemically important bank (G-Sib) risk indicators for the two lenders at the end of 2023, a combined entity would comfortably rank as the sixth-largest G-Sib in the European Union, likely attracting a 1% surcharge to its Common Equity Tier 1 (CET1) capital buffer, as UniCredit did until last year.

UniCredit’s recent disclosure of a 9% stake in Commerzbank has ignited speculation, with reports suggesting the Italian bank is eyeing to increase its stake to 30%, potentially leading to a full takeover.

In terms of balance sheet size alone, the combined group would have had €1.48 trillion ($1.65 trillion) in exposures at end-2023, ranking above Deutsche Bank but below Groupe BPCE.

 

While this, in itself, would not necessarily trigger a G-Sib designation, the bank’s systemic risk score would be further elevated by other risk indicators. For instance, the merged entity would have only trailed BNP Paribas and Deutsche Bank in terms of debt and equity issuances and trading of non-debt instruments among the seven current EU G-Sibs.

Analysis of the European Banking Authority’s end-2023 data, which mirrors the global methodology for G-Sib identification, shows that the merged bank would have achieved a systemic risk score higher than ING Bank and Groupe BPCE and lower than Santander.

All three banks are currently saddled with a 1% G-Sib surcharge, making it highly likely that a UniCredit-Commerzbank conglomerate would be subject to the same buffer.

UniCredit was removed from the G-Sib club last year after its score in the global assessment fell below the designation threshold for the first time.

What is it?

Global systemically important banks are designated by the Financial Stability Board (FSB) using the Basel Committee on Banking Supervision’s (BCBS) assessment methodology, which measures systemic risk. Each bank is assessed across 14 indicators grouped into five categories: size, interconnectedness, complexity, cross-jurisdictional activity and substitutability.

The score for each bank is calculated by dividing the bank’s indicator values, expressed in euros, by the aggregate amount for that indicator across all banks in the G-Sib sample. This sample comprises the 75 largest global banks by leverage exposure, banks already designated as G-Sibs the previous year and any other bank added by national supervisors. The result is multiplied by 10,000 before being averaged across the five categories, with the substitutability score capped at 500bp.

G-Sibs are divided into five buckets based on their scores, with additional capital surcharges ranging from 1% and 3.5% of their risk-weighted assets, depending on the bucket.

G-Sibs are also required to maintain sufficient bail-in-able debt and capital to meet total loss-absorbing capacity standards and implement group-wide resolution plans in case of failure.

Since the BCBS has not yet released the denominators for calculating the end-2023 G-Sib scores, this article uses data from the 33 EU banks required to report relevant indicators. While these provisional scores cannot predict the final G-Sib bucket allocation – which will be disclosed in November by the FSB – they provide a comparative measure of the systemic footprints of each bank.

Why it matters

UniCredit only recently shed its G-Sib status, meaning its systemic risk score remains inches away from the designation threshold. On the surface, a significant acquisition could likely push the combined entity back over the line again.

In practice, there are several ways a merged bank’s systemic footprint could be less than the sum of its parts. As major players in highly interconnected markets, UniCredit and Commerzbank may have substantial overlapping exposures, such as leverage exposures, over-the-counter derivatives, intra-financial system assets and liabilities, and cross-jurisdictional activity. The presence of mirror positions could result in offsetting effects, reducing the combined systemic risk.

Moreover, any merger would most likely involve disposals to assuage regulatory or political concerns – with UniCredit’s Russia franchise being an obvious candidate – further shrinking the systemic shadow cast by a combined bank.

Whether the new lender would sit above or below the designation threshold could also turn out to be irrelevant for its capital requirements. UniCredit and Commerzbank are currently subject to other systemically important institution (O-SII) buffers of 1.5% and 1.25%, respectively. The O-SII buffer for the combined bank – whether set by Italian or German regulators – would likely fall between these two levels. And, under EU rules, the higher of the O-SII and G-Sib buffer is the binding one, meaning the bank’s ultimate designation may turn out to be perfunctory.

Explore our data

Readers of Risk Quantum now have access to some of the datasets that sit behind our stories – not just the segment of data that is the focus for the story, but the full time series, for the full population of covered firms. Readers can choose the institutions they want to look at, the metrics they are interested in, and download the data in CSV format to run their own comparisons and build their own charts. Risk and capital managers told us it would be helpful for internal reporting and benchmarking, but we figured many of our readers might get something out of it.

Currently, the available data covers more than 120 banks and over 450 metrics, but we’ll be adding more throughout the year. The Risk Quantum database can be accessed here. The full list of data points currently available can be found at this page. The full range of banks covered can be viewed here.

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