* ECB’s De Cos sees Spanish banks’ diversification as an advantage
* Prolonged lower rates could hurt banking transmission
* Could also spur risk-taking, threaten financial stability
* (Adds details on Spanish consolidation)
By Jesús Aguado and Clara-Laeila Laudette
MADRID, Dec 3 (Reuters) - Further consolidation among Spanish banks should be driven by the market and create value for shareholders, European Central Bank policymaker Pablo Hernandez de Cos said on Tuesday.
The comments by De Cos, who also heads the Bank of Spain, came after the European Union’s watchdog said on Friday that EU banks could close branches, merge or leave the market to reverse a “bleak” outlook for profitability.
Since the 2008 financial crisis, the number of Spanish lenders has dropped to 12 from more than 55.
The number of bank branches in Spain has declined by around 40% and the number of employees has shrunk by more than 30%.
“Potential new consolidation processes must be market-led, that is to say, create value for shareholders, while we as supervisors must guarantee that the deals maintain financial stability,” De Cos said at a financial event in Madrid.
In May, Spain’s Liberbank and Unicaja called off merger talks to form the country’s sixth biggest bank after saying they could not reach a deal over the terms of a share swap.
Newspaper Expansion reported last week that shareholders in both lenders were pushing to reactivate merger plans. Both lenders declined to comment.
Along with other European banks, Spanish lenders are struggling to earn money from their traditional lending business amid weakening economic growth and following the European Central Bank’s moves to cut its key deposit rate into negative territory, most recently in September.
On Tuesday, De Cos said that interest rates staying low for longer in the euro zone could hurt banking transmission channels and spur risk-taking, threatening financial stability.
By the end of September, Spanish banks’ return on equity (ROE) - a measure of profitability - stood at 6.2%, down 1.5 percentage points against the first nine months of 2018, while the cost capital hovered around 7%, De Cos said.
The EU’s watchdog on Friday said Spanish lenders’ exposure to emerging markets posed risks, but De Cos said geographical diversification had benefited Spanish banks.
“Perhaps we ought to profoundly rethink, at European and international scales, how we regulate diversification in the banking industry, so as - however complex diversification can be - to better recognise some of its beneficial effects on banking entities’ risk profiles,” De Cos said.
Within the European Union, banks domiciled in Spain and the United Kingdom held nearly 70% of total emerging market exposures, the EU’s watchdog said on Friday, with Spanish banks particularly exposed to Brazil, Mexico and Turkey.
Santander’s results in recent years have shown its Brazilian operations have been a driver of group profit while Mexico has lifted BBVA’s revenues, helping the two banks cope with tough conditions since the financial crisis.
Reporting By Jesús Aguado and Clara-Laeila Laudette; editing by Louise Heavens and Susan Fenton