Brussels Rethinks the Rules Holding Back Europe’s Banks
The Commission’s new banking proposals link competitiveness to deeper market integration. A commentary by Lorenzo Bini Smaghi
Two years after the publication of the 2024 Letta and Draghi reports on the competitiveness of the European economy, the European Commission has now published its Communication on the Competitiveness of the Banking Sector and the Single Market in Banking, a policy document akin to a white paper. (Finance)
The first reaction might be: better late than never.
A definitive assessment will nevertheless have to wait until the Commission unveils the measures it plans to propose in the first quarter of 2027. It will then remain to be seen whether member states accept those measures and agree to remove the remaining obstacles to the creation of a genuinely integrated European financial market. (Finance)
The Commission’s document nevertheless contains several important changes.
The first is its explicit acknowledgement that the EU banking system has developed a competitiveness problem. This may sound like an obvious conclusion, yet the evidence has long been denied, particularly by the European Central Bank.
On several occasions, including during the consultation organised by the Commission before drafting its Communication, representatives of the Single Supervisory Mechanism argued that “competitiveness is not a problem for the European banking system, but rather for individual banks”.
The document also rejects the rather unconventional proposition that “the competitiveness of the banking system should not be measured by profitability or stock-market valuations”.
Beyond recognising that the European banking system has lost competitiveness, particularly relative to its US counterpart, the Commission identifies regulation itself as one of the main causes of the problem, since it has allowed the market to remain fragmented.
This means that European regulation, especially the rules adopted under the Basel framework, should no longer be treated as untouchable.
It can, and must, be reassessed from a new perspective, taking European experience and interests into account. This is a proposition that Frankfurt has so far rejected.
One example of outdated and distortive regulation is the macroprudential framework, which has allowed national authorities to impose different capital buffers from one country to another, using criteria that are not merely different but often inconsistent.
Another is the set of rules that allows national supervisory authorities to ring-fence liquidity and capital within national borders, rather than allowing them to flow freely across the banking union.
The third important change in the Commission’s document is its recognition of the close and complementary relationship between the competitiveness of the financial system and that of the real economy.
Market fragmentation does not merely weaken the banking system. It also constrains European economic growth. Without an integrated banking market, households and companies have less access to credit, making the European economy less competitive.
Finally, the Commission highlights how government intervention, often in breach of European rules, has contributed to greater market fragmentation, particularly over the past two years.
Governments have obstructed the expansion of banks, even though greater scale is necessary if European institutions are to compete with large US financial groups, which already dominate strategic segments of Europe’s financial markets.
These interventions have not, in any case, benefited the institutions they were intended to protect. It is no coincidence that the European banks currently facing unsolicited takeover bids are precisely those in which the state has remained a shareholder, perhaps for too long.
Overall, the European Commission’s Communication deserves credit for making clear that the European economy cannot be competitive unless each of its sectors is competitive, including finance.
It is not enough for the banking system to be stable and well capitalised. Unless it is also efficient and competitive, it cannot support Europe’s economic development.
In pursuing the overriding objective of financial stability, European regulators and supervisors can no longer ignore the consequences of their actions for the competitiveness of the European banking system.
Regulators in other countries, notably the United Kingdom, already take competitiveness into account. There is no reason why the same principle should not apply in the European Union.
A previous version of this article was published in the Italian daily Il Foglio
IEP Bocconi does not express opinions of its own. The opinions expressed in this publication are those of the authors. Any errors or omissions are the responsibility of the authors.
