Cross-border mergers in Europe would help diversify banks - ECB's de Cos

MADRID (Reuters) - European monetary policymaker Pablo Hernandez de Cos on Monday called for cross-border banking consolidation in Europe to strengthen the European banking union and increase lenders' geographical diversification.

European banks are under growing pressure to join forces to deal with rising bad debts and record-low interest rates as they battle the fallout from the novel coronavirus pandemic.

"European transnational operations would be particularly positive and would also foster a potential bigger client base to share the burden of technological investments," De Cos said at a financial event.

He added however that their immediate contribution to cost-cutting would likely be minimal.

De Cos, who is also Spain's central bank governor, said there was more scope for consolidation both in Spain and other European countries to reduce excess capacity and improve banks' battered profitability.

Against the backdrop of the COVID-19 crisis, De Cos said banks' non-performing loan ratios were expected to "increase significantly" over the coming quarters, even in a more benign scenario.

For now, bad loans have been contained among European banks thanks to mitigating measures from regulators and state-backed credit loans from governments.

De Cos, who sits on the ECB's governing council, said banks should remain prudent regarding their dividend policy whatever the future decision from the European Central Bank on shareholders' remuneration.

The ECB is expected to revisit in December its recommendation for euro zone banks not to pay dividends, and may move to a more flexible case-by-case approach.

(Reporting by Jesús Aguado and Emma Pinedo; Editing by Inti Landauro and Jan Harvey)