The Future of European Banking Between Competitiveness and Deregulation
With deregulation back on the global agenda, Europe’s banking sector faces a renewed debate on competitiveness, integration, and the balance between stability and profitability. A commentary by Isabella Brancaccio, Brunella Bruno, and Elena Carletti
The competitiveness of Europe’s banking system is once again under the spotlight. Compared with their American peers, European banks have long recorded lower profitability and market valuations. Some observers attribute this gap to stricter regulation, while others highlight structural factors such as market fragmentation, limited scale, and the bank-based nature of Europe’s financial system.
The distinction between the two explanations is key for policymaking: if the gap stems primarily from regulatory burdens, the remedy would be to ease them; if it reflects structural inefficiencies, the solution lies in deeper integration and market development.
In reality, both elements interact through the way regulation influences banks’ competition and, ultimately, banks’ competitiveness, an interaction that remains complex and only partially understood.
Competition versus competitiveness
Competition and competitiveness are distinct yet related economic concepts. Competition measures the intensity of rivalry among firms; competitiveness reflects the ability of a firm, a sector, or a country - relative to its peers - to perform efficiently, innovate, and generate sustainable returns over time.
In banking, the relationship between competition and competitiveness appears to be non-linear: moderate competition promotes efficiency and innovation, but excessive rivalry can compress margins and, in turn, threaten the resilience of the banking sector.1
Structural features of Europe’s banking market
The gap in profitability between European and U.S. banks seems to be driven primarily by structural, more than regulatory, differences.2
U.S. banks operate in a more diversified, market-based system: loans account for 40-45% of assets, compared to about 60% in Europe. Non-interest income, particularly from investment banking, trading, and securitisation, makes up a larger share of U.S. banks’ revenues.
In contrast, European banks operate in more fragmented and domestically oriented markets where cross-border lending, deposits and mergers remain rather limited.
Consistent with these structural differences, price-to-book ratios have long diverged: until very recently, major European banks traded well below parity, while large U.S. banks were steadily above 1. Since late 2022, European banks have benefited from high monetary policy rates and have recovered, with several banks trading at levels above 1.
Regulation and competitiveness: the academic debate
Following the global financial crisis, Europe implemented stricter capital and liquidity standards that strengthened banks’ resilience. However, there is no empirical evidence that higher prudential requirements have systematically eroded banks’ long-term profitability or competitiveness.3
At the same time, there is evidence that regulatory complexity and fragmentation can influence banks’ behaviour and competitive position. Academic studies document how banks active across multiple jurisdictions may reallocate activities toward countries with less stringent oversight, a phenomenon known as regulatory arbitrage.4 This reflects not excessive regulation per se, but rather uneven implementation and limited global coordination.
Similarly, empirical research offers mixed findings on the nexus between the stringency of capital regulation and banks’ cost of capital. According to classical corporate finance theory, in a frictionless world the composition of a bank’s funding sources should not affect its overall cost of capital.5 In reality, however, market frictions, taxes, and information asymmetries can weaken this neutrality.
Taken together, the evidence suggests a measured trade-off: robust regulation enhances stability, market trust, and sustainable profits, though it can temporarily affect competitiveness and credit provision. Therefore, the real policy question is not about the level of regulation, but about its design and global coherence: how to ensure that rules remain efficient, proportionate, and consistent across jurisdictions?
Simplification vs. deregulation: the European authorities’ way
As mentioned, financial stability and competitiveness are not mutually exclusive. A well-capitalised, stable banking sector underpins market confidence and supports sustainable growth.
It follows that a promising way forward does not lie in deregulation, but rather in regulatory refinement – for example, by simplifying reporting, improving cross-border consistency, and ensuring proportionality across institutions of different sizes and business models.
Yet this view is not universally shared. In March 2026, the Federal Reserve advanced proposals that would effectively reduce aggregate capital requirements for the largest U.S. banks. In January 2026, the U.K. moved in a similar direction by delaying the implementation of some new Basel rules.
By contrast, European authorities have deliberately distinguished their approach, insisting on “simplification without deregulation”. Moreover, in February 2026 the European Commission also launched a formal consultation on the competitiveness of the EU banking sector, signalling its awareness of the link between regulation and competitiveness.
Integration as a tool to unlock competitiveness
Finally, even in a world that faces renewed pressures towards deregulation like today’s one, the most significant obstacle to competitiveness in Europe seems to remain market fragmentation.
Differences in taxation and insolvency regimes hinder cross-border activity and limit economies of scale. Cross-border banking groups also face operational challenges due to impediments to capital and liquidity mobility across borders.
Against this backdrop, the European Commission’s March 2025 Savings and Investment Union (SIU) strategy provides renewed momentum for completing the banking union and advancing the capital markets union.
While the SIU is sometimes perceived as a shift away from banks and towards capital markets, this interpretation is misleading: the ECB has been explicit on the complementarity between banks and capital markets.6 In a more integrated financial system, banks will be able to better diversify their risks, use their balance sheets more efficiently and take advantage of additional intermediation channels.
Ultimately, a fully integrated European financial system will be critical to meeting Europe’s financial needs and strengthening its strategic autonomy in light of new geopolitical dynamics, the climate transition, and major technological changes.
1 For academic references on this issue, see, for example: Allen and Gale (2004); Martínez-Miera and Repullo (2010); Beck, De Jonghe and Schepens (2013); and Carlson, Correia and Luck (2022).
2 Di Vito, Fuentes and Leite (2023).
3 Behn and Reghezza (2025) analyze the role of bank regulation and competitiveness. Their findings challenge the argument that high capital requirements erode euro area banks’ competitiveness.
4 E.g., Houston, Lin and Ma (2012); Beck, Silva-Buston and Wagner (2025).
IEP@BU 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.
