EU’s Banks Need a Borderless Rulebook
The Commission has put competitiveness and fragmentation at the heart of its new strategy. Now it must curb national barriers and rebuild financial ties with the UK. A commentary by Ignazio Angeloni
In what may be the sharpest turn in EU banking policy since the launch of sector supervision by the European Central Bank in 2014, Brussels recently issued a paper setting priorities for future banking laws. Two features are novel and welcome.
The first is that the competitiveness of the EU banking sector occupies centre stage.
To promote European goals in a fractured and less co-operative global stage — the argument goes — EU banks must be able to compete with global banks, mainly from the US, which at the moment outperform them in most lines of business, notably investment banking.
This signal in the strategy is an overdue turnaround of a decades-old tradition in which making banks safe was seen as either the only goal or the key to everything else.
Equally important, the new strategy identifies fragmentation as a key source of weakness. The EU lacks genuine continental lenders; banking champions are large in their own countries but are small globally.
Cross-border business is discouraged by EU regulation and national politicians who see local banks as sources of influence and promoters of national goals. While this is a well-known fact, seeing it printed in an official EU document is a novelty.
That said, announcing a new strategy does not guarantee meaningful change. Implementation is key. The immediate challenge for the EU is to design and approve a legal framework enacting the strategy. This is where high hopes are often shipwrecked.
The need to garner support from a majority of member states typically ignites horse-trading. As a result, proposals can lose force and become unrecognisable.
Political negotiation is unavoidable, but the EU Commission should be clear upfront on the red lines and on one above all others: banks with the ambition and the force to operate across national frontiers must face a “country-blind” regulatory framework, subject exclusively to EU laws and authorities, independent of national rules.
Constraints currently forcing cross-border groups to obey prudential requirements in every country they operate in, rather than only in the market where the head office is, should be removed.
The Commission seems inclined to give this power to the ECB, enabling it to grant regulatory waivers. This would be a mistake.
ECB supervision deliberates by simple majority in a board composed of 21 national and six European appointees. Coalitions in support of national demands, explicitly or implicitly trading favours, are easily formed.
The “country-blind” notion, established in principle, would have trouble being enacted in practice. For this to be avoided, directly applicable EU law must unambiguously state that banks operating across frontiers — at least the major ones — must be regulated at European level only.
Another pitfall in an otherwise commendable strategy is in limiting the notion of banking integration to continental Europe alone. Fragmented or integrated as it may be, the EU banking sector lies twenty miles away by sea from one of the main banking and financial centres of the world.
Strikingly, the EU Commission communication never mentions the UK. But furthering EU banking integration while leaving the UK out of the picture makes no sense. The EU prevails in the formation of savings while the UK dominates in managing them; a natural complementarity which the post-Brexit experience, far from weakening, seems to have strengthened.
From 2016 to the end of 2024 trade in financial services across the channel has increased by over 50 per cent in both directions. EU and UK interests in promoting reciprocal financial integration clearly converge.
While reforming its own legislation is an EU priority, a parallel process must bring the two financial sectors closer to each other, facilitating exchanges by eliminating regulatory barriers.
Re-establishing supervisory equivalence between the respective regulators, filling the gap created in recent years, is a first step.
Exchanges of professional staff and mobility of capital should be facilitated. Over time, a comprehensive agreement covering all aspects of trade in financial services must be the objective.
Under the pragmatic guidance of the Commissioner for financial services Maria Luis Albuquerque, the EU has made a notable step in recognising the realities and challenges of its banking sector. The task is neither finished nor free from obstacles. But with the goal clearer, the chances of progress are favourable.
The opportunity should not be missed.
A previus version of this article was published by the Financial Times
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.
