What are the necessary steps towards a more competitive banking sector in Europe?

Despite the progress towards creating a single banking market in the last decade, cross-border competition in banking services remains very limited for several reasons. Differing consumer protection and insolvency rules pose challenges to cross-border institutions, as does the non-transferability of deposit guarantee contributions. But the most significant issue is posed by the complex capital requirements.

This issue not only limits cross-border competition in banking services. It also holds back the development of a more competitive and secure EU. Finance is crucial for addressing Europe’s security, defence, energy and technology challenges. But without deeper pockets – both public and private – to fund large-scale projects, the EU risks falling further behind other regions. To keep pace with the United States and China, Europe must simplify the regulatory maze that hampers cross-border banking consolidation. We need economies of scale. 

Today we see that decisions affecting banks’ capital and business planning are published abruptly and inconsistently, without full analysis of overlaps with other capital requirements. 

Each member state’s unique approach to capital requirements adds uncertainty for banks contemplating cross-border business models. Furthermore, there is currently no authority in charge of assessing whether the aggregate capital requirements for a banking group are proportionate to its overall risk profile. 

This regulatory patchwork creates uncertainty for banks. For an institution like Nordea, operating in four markets in a branch setup, this means having to deal with 37 separate measures, decided by six different authorities.

The EU should thus prioritise a reform to boost cross-border banking and make it central to the Commission’s 2026 banking sector competitiveness review. Here are some suggestions for what should be prioritised:

– First, we need simplification. The goal should be a streamlined framework with a clear distinction between structural and cyclical buffers. EU-specific additions such as the systemic risk buffer should be removed altogether due to rigidity and a risk of overlaps with other measures.

– Second, we need more centralisation. Macroprudential policy, like most prudential rules, should be set at the EU level. If not, EU-level coordination must be strengthened to ensure consistent decisions and common methodologies across member states.

- Third, we must eliminate the overlapping elements of the current framework. Macroprudential measures should only address risks that supervisor’s measures cannot cover and that aren’t already handled by other member states. 

- Finally, we need clearer guidelines on choosing macroprudential measures. Capital measures often fail to address risks in lending practices. Instead, borrower-based measures should be the first choice to cover risks related to business practices and cycles, rather than relying on capital buffers.

Europe’s tangled banking rules are throttling its financial sector and wider economy. The choice is clear: we maintain the status quo and fall behind, or we make the necessary macroprudential reforms and unlock the continent’s true economic potential.

This article is a shortened version of an article published in the Eurofi Magazine – read the article in full.