The establishment of a Single Supervisory Mechanism (SSM) for the euro zone banking sector could lead to a restructuring of the industry via a series of mergers and acquisitions, according to Vitor Constancio, vice-president of the European Central Bank.

Speaking at a banking conference in Dublin organised by the Institute of International and European Affairs, Mr Constancio said M&A activity had been “weak” in the euro zone since the financial crisis began. Between 2008 and 2012, the overall value of deals fell by three-quarters “to just €10 billion, with cross-border deals the most affected”.

“Nevertheless, the weak profitability and excess capacity of the European banking sector suggests that efficiency gains could be achieved,” he added.

Mr Constancio said a single resolution mechanism for Europe would create “more possibilities” to use consolidation as a resolution strategy.

"We see this in the US where, of the approximately 500 banks that the FDIC [Federal Deposit Insurance Corp] has taken into receivership since 2008, around 450 were resolved through 'purchase and assumption' transactions – that is selling banks to other banks."

Mr Constancio noted that the number of credit institutions in the euro zone has fallen in net terms by 9 per cent or about 600 entities since 2008. Total assets have declined by 12 per cent. “The second-largest reduction in the value of assets was recorded here in Ireland.”

He said there were a number of “frictions” to closer bank market integration, including different legal systems, corporate governance structures and taxation regimes.

“Further integration is needed in these areas if we are to gravitate towards a true single market in capital in the euro area.”

Mr Constancio said asset-backed securitisations could “be one way to stimulate credit to SMEs as banks would feel more confident that they could shift risks to non-bank investors”.

He said compliance costs for cross-border banks should be reduced by the development of the EU single rule book and the SSM by reducing duplication in regulatory functions.