Andrea Orcel has struck again in his expansion drive, leaving the German banking sector abuzz. It would not be surprising if the Italian bank with the red logo were to increase its position in the yellow logo Frankfurt-based credit institution, the second largest German commercial bank after Deutsche Bank, from 21% to a blocking minority of 25% via the capital markets in the near future and then reach the participation threshold of 30%. A mandatory takeover bid would then be required.

In his home country, the investment banker Orcel is respectfully referred to as „il Blitz“ (Corriere della Sera) for his latest coup in Germania. Such allusions to the Wehrmacht's Blitzkrieg at the beginning of the Second World War may be considered distasteful in Germany. In Italy, however, they are an expression of a heightened sense of self-esteem towards a country – as in the case of France – where a permanent feeling of inferiority creeps around the bel paese (the beautiful country).

Should Orcel achieve his goal, he would be the top manager in the Italian financial sector, showing the Germans how Banking Union can be achieved in practice – according to the rules of a southern country.

Since the takeover of HypoVereinsbank (HVB) 19 years ago, Germany has been Unicredit's most important foreign pillar. With Commerzbank in its hands, the Milan-based bank would significantly expand its position in the EU's largest economy. In terms of total assets, the expanded Unicredit Group would be on a par with Deutsche Bank, with 1.4 trillion euros. HVB and Commerzbank would complement each other in corporate and retail banking. HVB is mainly active in southern Germany, while Commerzbank has a nationwide presence. Orcel's strategy seems coherent.

With this step, he would achieve a goal that Unicredit has been pursuing for a long time. The Lombards have had their sights set on the institution from the metropolis on the River Main for years. However, the financial market crisis, its own (long since overcome) existential crisis, and the low interest rate phase, prevented it from making a move earlier. It was not the time for sectoral consolidation via mergers and acquisitions. In addition, the nationally dominated banking markets in Italy and France were largely sealed off.

Unicredit and HVB used this difficult time to become more efficient via cost-cutting programmes. The banking group made headlines for years with staff and branch cutbacks. Unicredit and its Munich subsidiary tackled the problems much earlier than many of its competitors in Germany. The fruits of this restructuring have been evident since the turnaround in interest rates. Unicredit has regained the trust of the market.

Unicredit is superior to Commerzbank in all respects. This is shown by key financial data from both banks. Orcel therefore has trump cards to convince institutional investors of the planned acquisition. Possible systemic risks in relation to Banking Union are of secondary importance to these stakeholders. This is because, in the event of the new banking entity failing under ECB supervision, the taxpayer would have to step in again in extreme cases, in this case both the Italian and the German taxpayer. There is no question that an enlarged Unicredit conglomerate would be systemically relevant, for example providing loans to SMEs in core Europe. More than ever Unicredit would be „too big to fail“.

This systemic cluster risk is of great significance. A larger Unicredit Group as a major creditor of the Italian central government would de facto cement a transfer and liability community, which is particularly feared in Germany, Austria and the Benelux countries, via Banking Union. Italy's banks hold large amounts of government bonds from their highly indebted country. In the past, they have repeatedly stepped in to buy up government bonds.

And as if to confirm possible political pressure on the banks, Italy's banking association Abi announced that it would „examine possible measures that could provide the state budget with more liquidity“, but which „must not impair“ the competitiveness of banks operating in Italy. Rome wants to demand a „voluntary contribution“ from banks and insurance companies „that can afford it“ to finance tax cuts.

The country's financial institutions have reduced their exposure to Italian bonds from 27.8% in April 2020 to less than 22%. This also applies to Unicredit. It now holds „only“ 39 billion euros or 30% of its total portfolio of government securities in Italian bonds. Italian government bonds offer attractive interest rates. This is why Commerzbank, for example, holds 7.7 billion euros, or 16% of its portfolio, and Deutsche Bank holds 10.3 billion euros (18.5%) in Italian government bonds – with significantly longer maturities than Unicredit.

However, Italy's low sovereign credit ratings colour Unicredit's own rating. The rating from Standard & Poor's (S&P) and Fitch is only „BBB“, from Moody's „Baa1“, both with a stable outlook. For comparison: S&P rates Commerzbank at „A“ (stable) and Moody's at „A2“, which is significantly more positive. In the event of a takeover, Commerzbank's rating would therefore deteriorate.

For Stefano Caselli, Dean of the Milan SDA Bocconi School of Management, however, there is no cause for concern for Germany. „If Commerzbank is taken over, clear rules can be laid down. There are many models with a good balance between the countries,“ he argues.

Eckhard Wurzel, a long-standing OECD economist who teaches economics at the University of Konstanz, believes that consolidation in the banking system is fundamentally the right thing to do. But he also sees risks: If Unicredit gets into a crisis, „spillover effects“ cannot be ruled out. The owner bank could divert resources at the expense of its subsidiaries in order to improve its own position. Market participants' confidence in the subsidiaries could also suffer, which would make their financing more difficult. In his view, „there are many factors that banking supervisors need to take into account in mergers. This is where the bank's government bond portfolio comes into play. Under current law, government bonds from the eurozone do not have to be backed by risk-absorbing capital, unlike all other financial assets of a bank.“

Wurzel warns: „If banks were to get into difficulties, negative feedback loops could arise between the government bonds on the asset side of the bank balance sheet and the bank's financial obligations. This can be an enormous crisis amplifier, as the 2009 financial crisis showed.“ Wurzel considers it a „grotesque failure on the part of governments in the eurozone not to have eliminated this systemic error of privileging government bonds in bank balance sheets, against their better judgement.“

Governments like banks to buy their bonds. „That is a core problem," says Wurzel. "As these bonds do not need to be backed by equity, it is relatively easy for banks to buy government bonds.“

The many aspects that need to be looked at make it clear that Orcel, if successful, would take the structure of Banking Union to a new dimension.