EU banks: Commission outlines reforms to overcome fragmentation

Among other things, with today’s communication the Commission ‘bury’ the Edisproposed in 2015 and never approved, to resurrect it immediately afterwards, transforming it from a European “scheme” for the “insurance” of deposits, for which the then Minister of Economy Pier Carlo Padoan fought in vain for a long time, into a common “mechanism” for the “protection” of deposits.

The Banking Union, the project to create a true single credit market, was proposed in June 2012, but ran aground in the Banking Council. divisions of the member statesreluctant to lose the hold they maintain on credit institutions, large buyers of government bonds.

In the meantime, the banking sector in the rest of the world has not stood still: at the end of 2007, before the financial crisis that erupted in 2008 with the bankruptcy of Lehman Brothers, Deutsche Bank capitalized at 65 billion dollars, while Morgan Stanley had a market capitalization of 56 billion dollars. Today the former capitalizes around 60 billion dollars, while the US investment bank is worth just under 360 billion dollars, six times as much as the German bank.

Today, after a public consultation and exchanges with Member States, stakeholders and supervisors, the Commission announces that it has identified three main “challenges” that limit the ability of the banking sector to effectively support the EU economy (without big banks, it is difficult to have big businesses).

First of all, for the Commission the sector remains “too fragmented” along national lines, although exceptions exist, which prevents EU banks from expanding and competing globally in key market segments, as well as finding cross-border efficiencies.

Secondly, the way in which international banking standards, the Basel III standards, are transposed into the EU regulatory framework “does not always reflect the specific characteristics of the EU banking landscape”. For the Commission, the regulatory framework must work better “for both large and for small banks”.

Third, some parts of the EU regulatory framework, including the interaction between microprudential, macroprudential and resolution rules, as well as reporting obligations, are “too complex and burdensome” and should be “simplified”.

According to the Commission, addressing these three challenges is “essential” to build a competitive banking sector, capable of supporting the EU economy. Increasing competitiveness, according to the EU executive, requires a “cultural change” in the banking sector, towards “responsible and measured” risk-taking. Simplifying the regulatory framework, integrating the Single Market and completing the Banking Union, observes the EU executive, would help EU citizens and businesses to access products and better services at more competitive prices.

The communication identifies measures focused on three objectives. Primo: Remove barriers to cross-border banking and promote market integration. The Communication outlines the path to reduce prudential and non-prudential barriers to cross-border activity, so that EU banks can reach the scale needed to compete globally.

Among other things, the EU executive would need measures to enable cross-border banking groups to use capital and liquidity more efficiently across the EU, which would allow them to redirect excess funds to areas where they can be more productive, without compromising their ability to finance local economies and without undermining the financial stability of the Single Market.

Second: the Commission, eleven years later, buries Edis, the European deposit insurance scheme, scuttled by the opposition of the Nordics (primarily Germany), and resurrects it, under other guises. The Commission will “seek to increase trust in the financial system and among supervisors” by proposing a “simpler and more effective” common deposit protection mechanism in the Banking Union. The mechanism would replace the 2015 proposal and would be based on existing central and national safety nets, which are now “fully funded” (in Italy there is the Fitd, Interbank Deposit Protection Fund).

Closer monitoring of EU anti-money laundering and consumer protection regulatory frameworks and their implementation at national level is also proposed, which would make it easier for banks to offer cross-border services.

The EU, underlines the Commission, remains committed to applying international standards, while reflecting the specificity of the European banking sector. To preserve an international level playing field and support EU banks in global competition, the Commission proposes to re-evaluate how the EU implements some international standards, which “in some cases”, it acknowledges, could “limit” the lending capacity of EU banks, as the Italian Banking Association has supported since 2011well before the Basel III standards began to take effect.

It is not excluded, then, of review some prudential rules and corporate governance to better reflect the specificities of EU banks.

Finally, according to the EU executive the regulatory framework for banks should be simplified. For the Commission, which has the legislative initiative at EU level, it is necessary to “reduce unnecessary complexity” and make the requirements more predictable and transparent for both banks and authorities.

In particular, we look at the simplification of the capital structure and further harmonization of banks’ macroprudential buffers; the standardization and simplification of bank resolution requirements and processes, as well as the adaptation of criteria and thresholds for small and non-complex institutions and the adaptation of requirements.

The process will still be long: the Commission has requested the opinion of interested parties and invites participants to submit observations or comments “in the coming months”. In the first quarter of 2027, it will then propose a package of measures to modify the banking regulatory framework and follow up on the communication. In parallel, it calls on Member States, supervisors and the banking sector to “continue their efforts to improve the competitiveness of banks”.

According to S&P Global, today among the top ten global banks by total assets there are only two EU banksboth French: Bnp Paribas, seventh, and Crédit Agricole, ninth. The first four are Chinese; two US giants follow. Spanish Santander is thirteenth; Germany’s top bank, Deutsche Bank, is 24th. The first Italian bank, Intesa SanPaolo, is 35th; Unicredit is 40th (the ranking dates back to the end of April).