REUTERS SUMMIT-EU watchdog urges "overbanking" solution to start local

(For other news from Reuters Financial Regulation Summit, click on http://www.reuters.com/summit/FINANCIALREGULATION17)

* EU watchdog to remove hurdles to cross-border deals

* BoE (Shenzhen: 000725.SZ - news) 's Woods says low banking profitability still a concern

By Huw Jones, Andrew MacAskill and Anjuli Davies

LONDON, Sept 27 (Reuters) - "Overbanking" in Europe should first be tackled at the local level, making it easier to reap cost savings and pave the way for cross-border tie-ups, the European Union's banking watchdog said.

Andrea Enria, chair of the European Banking Authority (EBA), said there had been too much segmentation and national retrenchment since the financial crisis that started a decade ago, which forced governments to bail out lenders.

"I think that it should be explicitly a policy objective to reverse this trend in the months and years to come," Enria told the Reuters Financial Regulation Summit.

Regulators like the European Central Bank have long spoken about the European Union being "overbanked", and the need for consolidation to try to bolster profitability.

"I think that in a setting where you need to reduce excess capacity, it could be reasonable that the first phase of consolidation occurs between banks that have overlapping distribution networks, because that is where it is possible to realise cost savings and increase efficiency," Enria said.

His comments were in response to questions about media reports that Italy's UniCredit (EUREX: DE000A163206.EX - news) might be interested in merging with Germany's state-backed Commerzbank (Xetra: CBK100 - news) , reports which UniCredit has dismissed.

"Maybe it is natural that during a first phase consolidation it occurs more at the national or regional level, but indeed this should eventually lead to a greater move towards cross border consolidation," Enria said.

The two consolidation phases are not necessarily separate as there have already been cross-border reconfigurations, such as Nordea shifting its head office from Sweden to Finland, Enria said.

There have already been attempts since about 2009 to slim down the sector. European Union banks closed 9,100 branches and cut 50,000 staff in 2016, the European Banking Federation, an industry body, said this month.

After years of intensive rulemaking to put banks on a stronger footing, Enria said there should now be an emphasis on making supervision more consistent, and removing hurdles to the integration of banking markets within the EU.

But rules pushed through immediately after the financial crisis reflect the shape of the EU market before the arrival in 2014 of banking union with its single supervisor, the ECB in Frankfurt. This has led to national regulators implementing rules in different ways, Enria said.

But consolidation is ultimately a matter for the banks themselves.

"Of course, if someone tells me that what we do is an impediment to cross-border business, well then I would say we should get our act together and try to remove those impediments," Enria said.

EBA said in its first quarter 2017 snapshot of the banking sector that profitability has cautiously improved, but remains below long-term sustainable levels.

Sam Woods, Deputy Governor at the Bank of England, also expressed two concerns about banks continuing to deliver returns that are below their cost of capital, even if the banks are still meeting their capital requirements in full.

First (Other OTC: FSTC - news) , the banks may find it difficult to raise more capital. "So that is a important contingency action, which we want all firms to have," Woods told the Summit.

"The second is, of course, that it may create an incentive to take on excessive risks. So I would be more happy when we get back to a place where banks are earning a return of equity somewhere closer to their cost of equity," Woods added.

Follow Reuters Summits on Twitter (Swiss: TWTR-USD.SW - news) @Reuters_Summits

(For more summit stories, see) (Reporting by Huw Jones. Editing by Jane Merriman)