Industry and policymakers increasingly agree that fragmentation and cumulative regulatory and supervisory complexity constrain European banks’ abilities to operate efficiently and develop critical scale. Europe must improve competitiveness through simpler capital and reporting frameworks and more consistent, risk-based supervision, but without inadvertently weakening resilience in the current high-risk environment. More fundamentally, material progress may be difficult to achieve without simultaneously addressing the longstanding barriers to completing the Banking Union.
Recent policy statements and initiatives, however, demonstrate a clear willingness to move rapidly from diagnosis to implementation. The competitiveness of EU banks is increasingly recognised as critical to financing Europe’s future investment needs and preserving its global economic position. An important step in the EU competitiveness agenda is the European Commission targeted consultation on the competitiveness of the EU banking sector that was launched in early 2026. On 17 July 2026, the Commission published its resulting Communication, which sets out the Commission’s diagnosis and the measures expected in a legislative package in early 2027.
Alongside the Savings and Investments Union and the Draghi and Letta recommendations, the package will be central to determining whether European banks can compete internationally and support the Union’s strategic priorities.
The competitiveness agenda is well established and is expected to be operationalised through the banking package announced for early 2027.
Unlike the US, where capital markets play a larger role, European corporates and SMEs continue to rely heavily on bank financing. Against significant investment needs in AI, digital and energy infrastructure, banks remain central to financing Europe’s growth ambitions. Their ability to support investment across different risk and maturity investment profiles has become a broader competitiveness issue for the EU.
However, for the EU banking sector to remain competitive, it must deploy capital more effectively despite barriers that continue to limit cross-border banking integration, including restrictions on the transferability of capital and liquidity within banking groups and the absence of a fully integrated banking market. The regulatory and supervisory environment must also not be overly restrictive, taking a risk-based approach that focuses on the risks that matter most for financial stability rather than seeking to eliminate risk altogether.
The package proposed by the European Commission tries to answer some of these central issues. It is not a fundamental redesign of the prudential framework. Instead, it provides a holistic review intended to reduce cumulative complexity, improve the usability of the framework and support responsible risk-taking while preserving resilience. It also addresses issues repeatedly raised by market participants, including fragmentation, inefficiencies in cross-border banking and capital framework complexity.
While industry participants and policymakers broadly agree with the Commission’s central diagnosis, they remain divided on the ambition of the proposed changes. The communication stops short of endorsing some of the most structural changes advocated by industry participants.
For example, the Commission proposes a review of the mandate of the European Banking Authority (EBA) and stronger accountability mechanisms. The industry feedback has argued for a broader competitiveness objective to be embedded across regulatory and supervisory authorities, rather than being limited to the EBA. There is, however, no consensus among public authorities on a formal secondary competitiveness mandate. Instead, the Commission favours pursuing competitiveness through simplification, proportionality and a more risk-based supervisory culture.
Similarly, the report focuses on improving supervisory coordination, accountability and transparency, while industry participants have advocated for deeper reforms of supervisory discretion (including stronger review and appeal mechanisms).
The same distinction is visible in the debate on cross-border integration. The Commission seeks to facilitate integration through enhanced supervisory mechanisms, while industry stakeholders have generally favoured more automatic solutions to remove barriers to the movement of capital and liquidity within cross-border groups.
The debate is no longer about identifying the barriers, but about how far Europe is willing to go in removing them, as well as which common safeguards are needed to support that change.
“The Commission’s package can make a real difference if it moves Europe from a highly risk-averse framework towards proportionate regulation and genuinely risk-based supervision. This must, of course, preserve resilience but also give well-managed banks greater scope to deploy capital and liquidity across Europe and compete more effectively with international peers”.
Eric Cloutier Partner and Group Head of Banking Regulations, Forvis Mazars
The Communication operationalises the competitiveness agenda around four key blocs of proposed changes:
1. Capital requirements: review the output floor, capital stack interactions and macroprudential framework, while removing leverage-ratio-related Pillar 2 requirements to improve predictability.
These changes are likely to impact banks’ capital planning and align the EU requirements with the recent implementation of international standards by other jurisdictions
2. Resolution: align MREL more closely with international standards, simplify calibration and permissions, review crisis management and deposit insurance arrangements and ensure stronger arrangements for liquidity in resolution, including credible backstop funding mechanisms for liquidity in resolution.
The Communication does not revive the 2015 EDIS proposal; instead, it proposes a new architecture to overcome the political blockade. This new proposal would align the financing of crisis management and deposit protection measures, while addressing remaining liquidity vulnerabilities in national deposit guarantee schemes.
3. Financing growth and strategic priorities: review the prudential treatment of software assets, specialised lending and trade finance, reassess the treatment of unrated corporates and consider reviewing selected Basel implementation measures and remuneration rules.
These measures may affect the economics of financing infrastructure, defence, technology, trade finance and transition projects, supporting the broader EU strategic priorities.
4. Reporting and proportionality: rationalise regulatory reporting, support greater automation of reporting frameworks, strengthen accountability and market-impact assessments for Level 2 measures and further tailor requirements for smaller and less complex institutions. Additionally, the Communication proposes to review the EBA mandate.
The proposed changes will impact reporting methodologies, compliance costs and data architecture.
A final area of reform is the capital-stack architecture to improve readability and reduce duplication. The Commission proposes to reduce the number of macroprudential buffers and improve their design and calibration. Industry participants had proposed a significantly more ambitious review, including phasing out the SyRB (Systemic Risk Buffer). Industry participants also called for greater buffer usability, including that which would allow banks to use released capital buffers as intended in periods of stress. The Communication recognises that double counting can constrain buffer usability in practice. However, while it proposes to reduce the number of buffers, it does not propose a specific reform.
Taken together, the proposals aim to reduce fragmentation, improve capital deployment and strengthen banks' capacity to finance the Union's competitiveness agenda while preserving resilience.
The competitiveness of the EU banking sector will also depend on its ability to operate at scale across the Single Market. Yet, cross-border subsidiaries generally remain subject to capital and liquidity requirements at both individual-entity and consolidated group level. This leads to regulatory ring-fencing, duplication and absence of integration efficiencies.
The Commission estimates that removing constraints on liquidity held in cross-border subsidiaries could release approximately €230bn of high-quality liquid assets.1 Industry participants go further, citing estimates that more than €475bn of capital and liquidity remains trapped through regulatory ring-fencing.2 Despite different methodologies, both figures illustrate the scale of resources that could be deployed more efficiently across the Union.
Through the Consultation, industry participants argued that automatic cross-border waivers under Articles 7 and 8 of the CRR and automatic intragroup exemptions in the large-exposures framework would strengthen cross-border expansion and consolidation. These articles allow supervisors to waive certain solo capital and liquidity requirements under specific circumstances.
The Commission does not go as far as the automatic waivers proposed by industry participants. Instead, it focuses on allowing cross-border groups to allocate capital and liquidity more efficiently by enabling supervisors to ensure requirements are met at parent level. It also requires parents to provide timely and enforceable support to subsidiaries in both going concern and crisis situations. It also proposes to apply a similar treatment of intragroup exposures at national and European levels.
Ultimately, the effectiveness of these reforms will depend on trust between home and host authorities. The central tension is that supervision and resolution have become increasingly European, while deposit protection and responsibility for some of the consequences of failure remain substantially national. Greater capital and liquidity mobility will therefore only be accepted where Member States are confident that enforceable parental support, resolution arrangements and liquidity backstops provide sufficient safeguards for local financial stability.
The Communication seeks to improve the predictability of group resolution strategies, strengthen liquidity-in-resolution arrangements and replace the 2015 EDIS proposal with a new deposit insurance architecture. The extent to which these measures address longstanding home-host concerns is likely to determine if greater capital and liquidity mobility can be achieved in practice.
The package is intended to improve the competitiveness of the sector, but the benefits are unlikely to be distributed evenly. Banks that already operate at scale across Europe are likely to be the first beneficiaries of any increase in capital and liquidity flexibility. Simultaneously, the package also seeks greater proportionality for smaller and less complex institutions.
These institutions already possess the legal entity structures, client franchises and operating models required to benefit from greater capital and liquidity flexibility. If barriers to capital and liquidity mobility are reduced, these banks may be able to realise efficiencies more quickly than competitors focused primarily on domestic markets.
Existing groups with visibility over capital, liquidity and risk position across Member States may be better positioned to demonstrate the safeguards expected by supervisors and benefit from a more integrated allocation of resources.
However, scale alone will not close gaps in technology, specialist expertise and higher-value product capabilities. Banks capable of combining traditional lending with debt capital markets, trade finance, structured finance and distribution capabilities may be better positioned to support Europe's financing needs at scale, particularly across energy, technology and defence sectors.
As policymakers in the US and UK increasingly focus on competitiveness and strategic investments, the ability of European banks to operate efficiently across the Single Market becomes more important. Competitiveness is increasingly assessed against the ability of EU banks to compete with institutions operating in larger and more integrated markets. A successful package should strengthen the ability of EU banking groups to compete with larger international peers and support the emergence of European banking models.
“The proposed reforms could give European banks greater room to compete, but regulatory flexibility alone will not deliver more effective capital deployment. The real opportunity lies in combining greater cross-border integration with the technology and capabilities needed to compete at scale.”
Gregory Marchat Global Head of Financial Services Advisory, Forvis Mazars Group
Europe has built resilient banks and a strong supervisory framework. The next challenge is whether regulatory reform can make those foundations usable at European scale to unlock growth, and whether European banks can convert greater flexibility into disciplined financing of the investments Europe now needs.
The Communication reflects a meaningful shift in direction, but stops short of several measures sought by industry, particularly around competitiveness mandates, supervisory discretion and the mechanics of cross-border integration.
The ultimate impact of the reforms will depend not only on legislative changes, but also on supervisory judgement, the application of proportionality and the extent to which greater flexibility translates into more efficient capital deployment. Despite any effort by the European Commission to simplify the EU framework at its core, national authorities will also have to engage in reducing gold-platting and minimising differing supervisory interpretation to avoid fragmented application of the same rules.
Competitiveness will also depend on the broader regulatory environment beyond prudential reforms. Europe expects banks both to finance technological transformation and to invest in their own digital capabilities. At the same time, industry stakeholders argue that overlapping digital regulations are increasing operational complexity. This creates a potential tension between technology as a competitiveness objective and digital compliance as an accumulating operating constraint. The Commission is clearly calling for support from supervisors, politicians, banks and regulators to achieve the competitiveness objective, which is a “shared responsibility”.
The European competitiveness agenda also aligns with a broader international debate on regulatory and supervisory modernisation. For example, on 14 October 2026, the Financial Stability Board (FSB) published a consultation report on Regulatory and Supervisory Modernisation Principles, launched at the request of the US G20 Presidency.
The consultation proposes a set of high-level principles to make regulatory and supervisory frameworks more effective, proportionate, and forward-looking while preserving financial stability and resilience. Together, these European and international developments signal a growing focus on ensuring that regulation supports both financial stability and sustainable economic growth.
Ultimately, European banking competitiveness will depend on how the reforms are implemented. This will require a coherent regulatory framework, consistent national implementation and the effective exercise of supervisory judgement. Banks will also need to adapt their business models, capital allocation and risk appetite to support Europe’s strategic priorities.
Keeping your finger on the pulse of regulatory developments in a changing world.
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