The European Commission is preparing to shift EU banking policy in a bid to make the sector more competitive, according to a leaked draft of its forthcoming banking report seen by en.philenews.
The proposals reflect a broader debate in Brussels over whether Europe’s regulatory framework, introduced largely after the 2008 global financial crisis, is an obstacle for banks that need to finance growth and investment.
Among the measures under consideration are signals to review the mandate of the European Banking Authority (EBA), the bloc’s banking watchdog, so that it would take into account the competitiveness of European banks alongside its existing supervisory responsibilities.
The idea has long been supported by parts of the banking industry and several member states, which argue that EU rules have become more burdensome than those faced by competitors in other major financial centres.
Banking supervisors, including the European Central Bank (ECB), have opposed such a change, warning that giving regulators an explicit competitiveness objective could create tension with their primary responsibility of maintaining financial stability. They argue that lessons from the 2008 financial crisis show the importance of ensuring that banks remain resilient, even when economic conditions are difficult.
The draft also proposes easing some capital requirements for banks, including changes to the leverage ratio framework. The leverage ratio, introduced after the financial crisis, requires banks to hold a minimum level of capital against the size of their overall balance sheet, regardless of the riskiness of individual assets. The Commission argues that some requirements have become overlapping and unnecessarily complex, while banks say they constrain their ability to lend and compete internationally.
Why are European banks less competitive than US banks?
The Commission’s proposals form part of a broader effort to strengthen Europe’s financial sector at a time when policymakers are increasingly concerned that the bloc is falling behind the United States in financing growth and innovation. European banks have long argued that they face a more complex combination of capital rules, reporting obligations and supervisory requirements than many international competitors, limiting their capacity to support investment.
Brussels increasingly shares the view that simplifying parts of the regulatory framework could help unlock financing for the EU’s industrial, digital and defence priorities without removing the safeguards introduced after the financial crisis. The draft therefore proposes not only changes to capital requirements, but also a review of reporting obligations and other regulatory burdens.
However, many experts argue that prudential regulation not the problem. Europe’s banking market remains fragmented along national lines despite years of efforts to build a genuine Banking Union. Banks operating across borders still face restrictions on moving capital and liquidity between subsidiaries, while differences in insolvency rules, consumer protection and supervisory practices continue to limit integration.
“EU banks struggle to compete with US peers partly because they do not operate in a comparable single market. A bank at group level cannot simply move liquidity to a subsidiary, or offer the same product across borders, without running into national capital, liquidity, insolvency, consumer-protection and supervisory barriers,” Max Kretschmer of Finance Watch told en.philenews.
“The reason is mostly trust. Host countries of bank subsidiaries still fear being left exposed if a subsidiary fails, through their national authorities, deposit guarantee schemes or budgets. If the liability remains national, the instinct to manage the risk nationally is understandable. But that also keeps the market fragmented,” he added.
Capital requirements and deposit insurance
The Commission’s review of capital rules is expected to be one of the most significant elements of the banking package. The draft proposes removing an additional capital requirement linked to the leverage ratio and reducing the number of other capital buffers that banks must maintain, while improving how those buffers are designed and calibrated.
The move would bring the EU closer to recent regulatory adjustments in the United States and the United Kingdom, where authorities have also sought to ease some leverage constraints on banks. Supporters argue that European banks are carrying excessive regulatory costs compared with global competitors, while critics warn that reducing capital cushions could weaken the resilience of the financial system. Recent analysis from The BIS shows that large banks in Europe have equivalent capital Requirements as their US peers.
The report also revives efforts to reform the EU’s deposit insurance framework, replacing the Commission’s stalled 2015 proposal with a new model combining national and EU-level elements. Rather than introducing full mutualisation of the costs of bank failures, the revised approach would focus on ensuring that national deposit guarantee schemes have access to sufficient liquidity during a crisis.
The issue is closely linked to the broader Banking Union debate, which looks to answer the question of how far Europe should go in sharing responsibility for its banks. The absence of a common European deposit insurance system has made national authorities reluctant to allow banks to operate more freely across borders, as governments remain concerned that they could ultimately be responsible for problems originating in another member state.
Why is the debate so contentious?
The debate reflects a wider shift in European economic policymaking. After the global financial crisis, regulators focused on making banks safer by requiring them to hold larger capital cushions and strengthening supervision. Today, policymakers face a different challenge: finding enough private financing to support economic growth, competitiveness and strategic investment.
With Europe seeking to finance the green transition, digital transformation and increased defence spending, the Commission argues that banks need to be able to play a stronger role in supporting the real economy. The challenge will be overcoming political blocks on market fragmentation.
Why is this happening now?
The timing of the Commission’s review reflects a broader change in Europe’s economic priorities. Concerns that the EU is falling behind the United States in innovation, productivity and access to capital have increased pressure on policymakers to improve the functioning of European financial markets.
The banking reforms are part of a wider push to deepen European capital markets and make it easier for money to move across borders. Recent debates around the EU’s competitiveness agenda, including the recommendations of former ECB President Mario Draghi’s report on Europe’s economic future, have highlighted the need for greater private investment to finance strategic sectors.
Supporters of reducing capital levels argue that less money for safeguards means more money for investment. Critics, however, caution that competitiveness is not achieved through a weaker prudential regime, and that market fragmentation is what undermines EU banks’ ability to drive scale and efficiencies.
“The Commission diagnoses fragmentation as the problem but looks set to increase the risk before it has built the trust needed to overcome that fragmentation. That will not give EU banks a US-style market. It could leave Europe with the same fragmented market, but weaker safeguards,” said Kretschmer.
“Simplify the rulebook where it is unnecessarily complex, complete the Banking Union, build credible deposit insurance and resolution safeguards, but do not reduce capital levels. Supervision must retain a single prudential objective in order deliver on their mandate. do not muddle market incentives with resilience objectives,” he added.
Taken together, the proposals point to a significant recalibration of EU banking policy: one that seeks to make European banks more competitive but may sacrifice stability measures built since the financial crisis. Whether the Commission can strike that balance will become clearer when the final report is published on Friday.
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