European Commission Unveils Reform Agenda For EU Bank Competitiveness

INTRODUCTION AND CONTEXT

Overview and key proposals

The European Commission (EC) has published a report on the Competitiveness of the Banking Sector and the Single Market in Banking (the Report), setting out a high-level agenda to address fragmentation within the EU banking market, simplify regulation, and enhance the international competitiveness of EU banks. The Report fires the starting gun for reform and will be followed by a detailed package of proposed legislative changes in Q1 2027. It marks the beginning of a long process which will involve detailed negotiations and may yet expand to include issues not currently dealt with in the Report.

Proposed actions that may be welcomed by industry include:

• Favourable reforms for EU banking groups, including lower capital requirements for EU subsidiaries, beneficial treatment of intra-group exposures and a lighter group resolution regime.
• Clear proposals on revisions to capital requirements under the Basel III implementation, including for loans to unrated corporates, real-estate loans, loans to IP-heavy companies and “strategic” investments. Smaller banks that do not operate cross-border could also be excluded in line with the implementation of Basel III in other jurisdictions.
• Revisions to Pillar 2 requirements and guidance, including the removal of Pillar 2 capital requirements related to the leverage ratio.
• Harmonization and simplification of macro-prudential buffers, as well as simplified reporting and measures to reduce national goldplating.
• Lighter remuneration requirements for material risk takers.

That said, the Report remains vague and in general identifies issues that should be tackled rather than setting out proposals to resolve them. The timetable is unambitious and calls have been made for legislative drafts to be produced earlier than Q1 2027. Issues have been omitted which could usefully have been dealt with, including the question of international fragmentation in the banking market and the new third-country branch requirement under the sixth Capital Requirements Directive (Directive (EU) 2014/1619) (CRD VI).

Context

The Report represents a holistic review of the EU banking sector and ties in with EU priorities including the internal market, the Banking Union and broader EU competitiveness reforms. The competitiveness drive should be read in the context of the Savings and Investments Union (SIU) strategy (which emerged from the EU Competitiveness Compass and the Draghi report), the Single Market Strategy, and the One Europe, One Market roadmap. The Report sits alongside the EC’s 2025 proposals to revitalize the EU securitization framework and the Market Integration and Supervision Package (MISP), which shares the objective of unlocking economies of scale for EU financial services. 

In the Report, the EC notes that EU banks are resilient but the single market in banking remains fragmented along national lines. The Banking Union remains incomplete, with no resolution regime for mid-sized banks and no recent progress on the much-debated European Deposit Insurance Scheme (EDIS). The EC’s proposals are grouped around the following key objectives: (i) fostering market integration with appropriate safeguards; (ii) implementing international standards while taking account of EU specificities and ensuring proportionality; (iii) simplifying the regulatory framework; and (iv) making competitiveness a shared responsibility.

FOSTERING MARKET INTEGRATION

Prudential barriers to integration

The need to comply with capital and liquidity requirements at both consolidated and individual entity level, can make allocation of resources across groups inefficient and potentially affect performance and resilience. Exceptions to the requirements are largely limited to same-Member-State situations. The European Central Bank (ECB) estimates that removing liquidity constraints in subsidiaries would release around EUR230 billion of high-quality liquid assets. The proposals include the following:

• Group-wide supervisors will have powers to ensure capital and liquidity requirements are met at the parent entity level for cross-border groups, and to require the parent to move resources to subsidiaries.
• Similar regulatory treatment of intragroup exposures will be applied at both domestic and EU levels—eliminating the current asymmetry which can exist where crossborder groups must comply with varying requirements depending on the location of their group entities. Measures will be proposed to address excessive concentration of sovereign exposures and encourage the diversification of sovereign bond portfolios by banks.
• There will be continued use of the enforcement toolkit where Union law is breached, notably on mergers and acquisitions.

The M&A enforcement point in part reflects a desire to manage political interference in cross-border bank deals, coupled with a need to tackle the decrease in EU bank M&A activity observed in the Staff Working Document. The length of M&A authorization processes has already attracted criticism from industry, and the EU’s new notification and approvals regime for M&A transactions under the Capital Requirements Directive VI (Directive (EU) 2024/1619 (CRD VI)) adds another layer of complexity. There is, however, no mention in the Report or Staff Working Document of proposals to streamline the M&A approvals process.

Safeguards

The EC acknowledges that market integration must be accompanied by credible safeguards. Concerns remain that EU-based subsidiaries of cross-border banking groups could face capital and liquidity shortages in times of crisis, leaving national deposit guarantee schemes to absorb failures if there is insufficient parent support. The EC plans to:

Introduce a new EDIS proposal, replacing that of 2015, which would simplify the deposit insurance framework to better align responsibilities for, and the financing of, crisis management and deposit insurance (CMDI) within the existing Banking Union framework, at both central and national levels.

Improve the predictability of group resolution strategies and support the more integrated allocation of funds within cross-border groups in stress. Continue supporting public sector backstop mechanisms for liquidity in resolution, in line with international standards.

The announcement of a new EDIS proposal is significant, although at this stage there is no detail on what that will look like. The deposit insurance framework was only recently amended as part of the CMDI reforms which came into force in April 2026 (with application from 2028). Any reforms will require delicate political compromise between integration ambitions and national sovereignty concerns.

Non-prudential barriers

The Report also considers non-prudential barriers that hinder cross-border banking activity, including:

• Consumer protection—the EC will review national consumer protection rules with a view to facilitating cross-border activity while maintaining adequate protection.
• Digitization—the EC will focus on ensuring the regulatory framework is agile enough to support innovation, while preserving cyber-resilience.

On the consumer protection side, there is inherent tension between full harmonization and national discretion, particularly given the higher risk of harm for retail investors. Supporting cross-border activity in the retail space would, however, align with the stated aim of the EU’s separate Retail Investment Strategy to improve how the EU financial system channels savings into productive investments.

EU IMPLEMENTATION OF INTERNATIONAL STANDARDS

Adapting international standards to the EU market

The EC reaffirms its commitment to international standards, including those of the Basel Committee on Banking Supervision (Basel Committee), while acknowledging the need to account for EU specificities and developments in other jurisdictions. It also notes the need to remain internationally competitive as a destination for highly skilled professionals in the banking sector, with potential adjustments to remuneration rules under scrutiny as something that could foster EU competitiveness

Areas of focus include:

• Output floor—the EC will “make clear proposals” regarding the output floor and its transitional arrangements on unrated corporates and mortgage lending, as well as its interaction with other parts of the framework, including measures aimed at balancing resilience with the financing of the economy.
• Market risk (FRTB): having delayed the application of the FRTB to January 1, 2027, and adopted a delegated act which mitigates its effects until end-2029, the EC plans to adopt “a long-term EU approach” taking account of level-playing-field considerations. Lending to intellectual property (IP)-intensive companies: the EC will explore ways to support access to lending for these companies, taking account of the EU’s Startup and Scaleup Strategy.
• Remuneration: the EC will investigate adjustments to the effectiveness of current remuneration rules for material risk-takers with a view to reducing unnecessary complexity, preventing distortions in competition for specialized talent and adapting the framework to systemic risks.

The EU implemented the majority of the final Basel III standards (sometimes colloquially referred to as Basel IV) via the EU Capital Requirements Regulation III (Regulation (EU) 2024/1623) (CRR III) and CRD VI. The output floor is being phased in gradually, but recent developments in the US have raised questions around competitiveness.

The ECB has separately pushed back on industry requests to consider lowering bank capital requirements. The EC’s measures will therefore likely seek to tread a fine line between international competitiveness and maintaining robust prudential standards.

Although no specific issues were mentioned in relation to remuneration, the bonus cap has long been a bone of contention, with the EU a notable outlier internationally. In 2023, the UK scrapped its bonus cap and last year reduced the deferral periods for variable remuneration to four years, down from seven for certain senior management functions (SMFs) and five for other (non-SMF) material risk takers. The US has never had an equivalent cap.

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