The logic is that the move will help jump-start a lagging economy.
The regulator is in charge of covering the largest eurozone banks, and it has only made the softening of its stance on mergers known privately thus far, according to bankers, supervisors and analysts, although some officials have talked about the problem in public recently.
This is in sharp contrast to the regulator's previously-held position, which was strongly against such mergers.
The loosening of the regulator's stances comes as the banking sector in Europe is seeing a slowdown. According to The Wall Street Journal, low interest rates among the country’s fragmented banks are wearing away at the banks’ margins on loans.
By merging, the banks will possibly be able to compete with larger U.S. competitors, experts think. European returns on equity sits around 6 percent, which is only about half of U.S. counterparts’ returns. Jérôme Legras, head of research at Axiom Alternative Investments, theorized that the ECB has realized that it needs help to correct the negative rates it is seeing.
Because of disagreements over board makeup, executive leadership and shareholder structure, it’s traditionally been difficult for European banks to forge alliances and merge. A merger between German lenders Deutsche Bank AG and Commerzbank AG broke down in recent years over the cost and difficulty of pulling off the merger.
And bankers have expressed skepticism over whether the ECB will really be flexible enough to make things palatable for all parties in a merger. One official said that the ECB's tendency toward being risk averse may stop any drastic changes from moving forward.
The change of attitude toward mergers could help more smaller banks become open to the idea. Germany has more than 1,500 banks, Italy has 500, France has 400 and Spain has 200.