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Banking sector competitiveness and the single market
Banking sector competitiveness and the single market
Issam Hallak, Members' Research Service
Summary
On 17 July 2026, the European Commission presented a plan to enhance the banking sector's competitiveness and integration into the single market. The communication notes that three major challenges persist: the sector's fragmentation between Member States, the further consideration of EU specificities needed in the transposition of international regulatory standards, and the fact that the regulatory framework is sometimes excessively complex. The Commission insists that a sound and resilient banking sector is essential to its competitiveness and its ability to support the EU's investment needs. The Commission outlines 34 measures to address these challenges. Notably, it suggests the consolidation of supervisory requirements at the level of cross-border groups and enhancing the proportionality of regulations. The package of proposals is planned for the first quarter of 2027, with the co-legislators projected to reach a final agreement by the end of 2027.
Background
On 17 July 2026, the European Commission issued a communication presenting a plan to foster the EU banking sector's competitiveness and integration into the single market. The plan is part of an overarching strategy to integrate the EU's financial system, known as the savings and investments union (SIU) strategy. This replaces two strategies from the previous mandate, the banking union and the capital markets union. In the same way as the two previous strategies, the SIU's objective is to enhance financial system integration. What is different is that the SIU is now part of the Commission's competitiveness compass roadmap, aimed at restoring EU dynamism and boosting economic growth. It is positioned as the third horizontal enabler of EU competitiveness.
Therefore, the plan for the banking sector has the intertwined objectives of strengthening the EU banking sector and advancing the construction of the single market in the banking sector. However, some proposed amendments also refer to the changing geopolitical landscape, as some third countries are deviating from the coordinated regulatory framework within the Basel Committee.1
The communications' accompanying staff working document highlights the importance of the banking sector in the financial system, which is traditionally high in the EU and remains the primary source of funding for EU corporations, accounting for 46 % of corporate debt financing. Although the share dropped significantly after the 2007-2008 financial crisis (minus 11 percentage points) in favour of non-bank financial institutions, the figure has been relatively stable. Nevertheless, the share varies substantially across Member States, from 12 % in Ireland, to 70 % in Austria.2
Commission's analysis and planned actions
In its assessment of the banking sector, the Commission identifies three areas of concern preventing the integration of the EU's banking sector. The first area is the fragmentation of the banking sector across Member States, meaning it is very much managed on a national level. The Commission sees four reasons for this, particularly the lack of supervisory cross-border groups and the regulatory layers added by national competent authorities (NCAs). Despite the major reforms that took place after the 2007-2008 financial crisis, the Commission argues that supervisory fragmentation is still significant. Related to this, the Commission outlines that mergers and acquisitions, especially across Member States, are hindered by national interventions.
The second area of concern is the implementation of international standards that do not take into account EU specificities. The Commission reiterates its commitment to the Basel standards and the recommendations from the Financial Stability Board, but underlines that in the EU, these standards apply to all banks They do not reflect the diversity of the EU's banking sector, which should be governed by a regulatory framework that provides for all types of firms, including fast-growing digital companies. Moreover, many rules apply irrespective of the business model and size of the bank, creating undue complexity. Large cross-border groups also face varying and high compliance rules decided by Member States – known as gold plating – on top of EU adopted rules which follow internationally agreed standards. This creates additional concerns about the EU's global competitiveness, while conversely, some third-country jurisdictions strongly deviate from these international standards.
Finally, the third area of concern is the excessive regulatory complexity, which is to some extent due to the specific, multilayer framework for financial services. This defines different levels of regulation, with level 1 being subject to the ordinary legislative procedure between the Commission, Council and Parliament, and rules being categorised as level 2 being dealt with via an implementing act. This allows for specific, quick, minor changes to level-2 legislation, but this may add regulatory burden to banks, especially smaller ones. Moreover, implementation involves a large number of entities, resulting in coordination difficulties and inefficiencies.
Overall, the plan sets out 34 measures and actions to address these challenges (see Table 1). An additional four actions will promote collaboration with other EU and Member State entities. The way the Commission intends to proceed is not specified in the communication, but there are several measures that could form the basis of potential legislative initiatives (corresponding to levels 1 and 2 in the framework).
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The communication outlines measures to enhance the efficiency of fund allocation within cross-border groups and to provide group supervisors with the power to ensure that requirements are met at group level.
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It plans to replace the European deposit insurance scheme (EDIS) legislative proposal with a new proposal on deposit insurance.
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Measures detailed in the communication improve the predictability of group resolution strategies.
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Where it identifies breaches of EU laws, the Commission is to use its enforcement toolkit to prevent Member States intervening in mergers and acquisitions.
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The plan includes proposals regarding the minimum capital requirements for all banks, known as the output floor, and transitional arrangements.
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It explores potential areas of action to ensure access to lending for companies relying heavily on non-tangible assets and intellectual property, and the 'immaterial economy', in general.
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It seeks to change the prudential framework for investment firms as regards, for example, governance, remuneration and capital and liquidity requirements.
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Future proposals may remove pillar 2 (operational risks) capital requirements related to the ratio of capital to assets (the leverage ratio).
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The minimum requirement for own funds and eligible liabilities (MREL) is to be aligned with international standards by eliminating unnecessary discrepancies with the total loss absorbing capacity (TLAC) standard. TLAC falls on banks whose failure would cause significant stability risk to the financial system, known as global systemically important institutions (G-SII).
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The Commission sets out stronger coordination mechanisms between supervisory authorities, including enhanced exchange of information.
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It intends to transpose some regulatory rules currently enacted through directives into regulations, for the purpose of clarity, supervisory convergence and reduced administrative burden.
| Area | Sub-area | Number of measures |
|---|---|---|
| Fostering integration with safeguards | Prudential barriers to integration | 4 |
| Appropriate safeguards | 3 | |
| Non-prudential barriers to integration | 4 | |
| Implementing international standards while considering EU specificities and ensuring proportionality | Taking account of EU specificities | 6 |
| Ensuring proportionality | 3 | |
| Simplifying the regulatory framework | Microprudential rules | 2 |
| Resolution rules | 3 | |
| Macroprudential rules | 1 | |
| Interaction among resolution, microprudential and macroprudential rules | 3 | |
| Streamlining reporting and disclosure requirements | 5 | |
| Total number of measures | 34 |
Data source: Communication from the European Commission, Author's compilation.
A short background on micro- and macro-prudential capital requirements
Capital held by banks absorbs any losses on their assets and works as a protection for deposits and other financiers. International regulatory standards – defined by the Basel Committee and the Financial Stability Board – have introduced two categories of capital requirements rules. One of these categories concerns the capital that is required for an individual bank based on the risk level of its specific assets, known as microprudential (capital requirements at bank level). On the other hand, there are capital requirements that can be required for all banks or some categories of banks, regardless of the risk assessment of bank-level assets, known as macroprudential capital requirements. There are several macroprudential capital buffers. These include the buffer for systemically important institutions as well as the countercyclical capital buffer (aimed at building resilience to cyclical systemic risks). Some macropudential buffers are decided by national supervisory authorities, and the European Banking Authority (EBA) reports and issues an opinion on all macroprudential buffers required by Member States' national supervisory authorities.
Positions of EU institutions
European Council and joint position of the Council, European Parliament and the Commission
On 24 April 2026, the Council, European Parliament and European Commission agreed on the 'One Europe, One Market roadmap', to be implemented by the end of 2027 at the latest. The roadmap was launched at the European Council's 19 March 2026 meeting, where it called for urgent implementation of the roadmap and committed to regularly reviewing its progress. In addition, the European Council underlined that it is pressing to achieve the single market and make it simpler for people and businesses, a responsibility that is shared between Member States and EU institutions. The European Council's position is that 'a fundamental precondition for sustainable growth is a true savings and investments union (SIU) with a fully integrated and efficient capital market, that effectively channels savings into productive investments. This is key to providing businesses, including those in strategic sectors, with the equity capital they need to innovate and grow, and to create quality jobs in the EU.' For this purpose, the European Council called on the Commission to propose targeted amendments to the prudential framework in order to enhance the capacity of the banking sector to finance the EU economy – while safeguarding financial stability – and with a view to maintaining a global level playing field. In this regard, it welcomed the Commission's intention to present a report on the competitiveness of the banking sector.
European Parliament
In April 2026, the European Parliament adopted its 2025 annual report on the banking union. It acknowledged the substantial progress in the last decade in this area but called for the swift completion of the 'banking union' (which the Commission now refers to as the 'single market in banking'). For this, the report urges that legislative progress on the EDIS, to which Parliament is strongly committed,3 must continue, and more measures need to be adopted to deepen market integration and facilitate the 'efficient flow of capital and liquidity within banking groups'. Parliament recommended that the Commission propose concrete measures to 'enhance the competitiveness of EU banks while preserving their essential role in financing the investments needed to achieve the EU's green and digital transitions'.
Parliament also encourages the Commission to 'consider taking measures' to enhance households' and small and medium enterprises' (SMEs') access to finance. It stresses the important role played by banks in general to support SMEs and local ecosystems, while acknowledging that smaller banks also play a role in providing financial services to households and SMEs. The report acknowledges the context in which the number of bank branch closures is increasing, affecting vulnerable and peripheral communities; in the context of the recent reform of the crisis management and deposit insurance framework (CMDI), 'Parliament emphasised the need for flexibility for smaller and medium-sized banks'.
Regarding banking sector stability, Parliament reiterates that banks' credit risk exposure should be monitored and sufficient capital and liquidity be maintained. It emphasises that sufficient own capital to protect against losses – known as the minimum requirement for own funds and eligible liabilities (MREL) – is essential for a credible resolution framework and for providing authorities with the flexibility to apply appropriate resolution strategies during a crisis.
European Central Bank
In its opinion published on 16 April 2026 in response to the Commission's targeted consultation, the European Central Bank (ECB) insists that the euro area should be an effective single jurisdiction where capital and liquidity move freely within banking groups. For this purpose, synchronised progress on key components is essential, including concrete steps towards a single deposit insurance scheme.
It acknowledges that there are barriers to cross-border banking integration and scale, and these must be removed. The ECB believes that resilient banks underpin sustainable growth and competitiveness, and undue complexity should be removed without weakening banks' resilience. The ECB also provides suggestions for simplification.
The ECB argues that capital requirements of banks in the euro area are comparable to those in other jurisdictions and in line with international standards. It claims that banks have been able to maintain lending, even during recent periods of acute stress, and capital requirements have not hampered banks' efficiency or lending capacity.
Overall, it calls for concrete changes to EU banking rules. In particular, the ECB endorses banking rules being shifted from EU directives to regulations, further proportionality for small banks, streamlined reporting, and taking a holistic view of the overall level of banks' capital.
European Banking Authority
In its opinion of 17 April 2026, the European Banking Authority (EBA) acknowledges the resilience of the EU banking system, but underlines the importance of completing the single market for financial services. The diversity of the EU banking sector contributes to stable funding structures and resilience. However, key macro-financial risks remain in relation to geopolitical fragmentation, trade disruptions and market volatility. Therefore, abrupt repricing could affect funding conditions and asset valuations. Banks also present vulnerabilities due to their risk exposure to non-banking financial institutions and the challenges linked to digital sustainability and demographic changes. The digital transition is already deeply transforming the banking sector, via increasing competition and the incorporation of artificial intelligence, cloud computing and big data analytics. These changes also bear potential risks.
However, although banking rules developed in the last 15 years have certainly fostered integration of the EU banking sector, they are also complex and setting out directly applicable regulations would support convergence. Therefore, according to the EBA, after years of working on harmonisation, it is now possible to focus on supervisory convergence, which requires verifying that rules are applied consistently and that existing legislation is reviewed.
Stakeholders' positions
In its response to the Commission's consultation of 19 April 2026, the European Banking Federation (EBF)4 argues that the biggest obstacle to lending capacity is the inefficient use of bank capital, due to the overlapping requirements of supervisory authorities at EU and national levels. According to the EBF, so-called gold plating by national supervisory authorities adds up to 66 % on top of the Basel standards' minimum capital requirements. The EBF advocates that legislators should reform or withdraw the unnecessary parts of the 'massive and complex' regulation, especially gold plating. Addressing fragmentation that creates barriers to the circulation of liquidity and capital is also essential. The Olivier Wyman report commissioned by the EBF and published on 9 June 2026 recommends rationalising and recalibrating capital add-ons. It also recommends embedding durable growth and competitiveness in regulatory and supervisory objectives, modernising the legislative framework, enhancing securitisation to free-up lending capacity, and reviewing constraining prudential rules.
On 17 July 2026, the EBF welcomed the Commission's report as an accurate assessment of the challenges, and called on the Commission to propose an ambitious package. However, it declares that ' Europe cannot wait for slow implementation timelines'. Instead, the EBF emphasises that decisive short-term measures must be implemented alongside structural reforms. Current rules limit banks' ability to finance the real economy and the ability of EU banks to finance strategic sectors is declining. The EBF states that higher capital requirements have resulted in higher borrowing costs that bear no relationship to actual risks. It echoes the belief that the issue is the cumulative effect of European and national requirements, fragmentation and duplication.
In April 2026, Finance Watch 5 proposed a package of reforms to simplify the complex regulatory framework while preserving resilience. These include phasing out the regulatory use of banks' internal models, rebalancing leverage and risk-based requirements, simplifying the capital stack and macroprudential framework, and creating a genuinely simpler regime for small banks. Finance Watch believes that the Commission's report arrives at the right conclusion: market fragmentation is an obstacle to the sector's efficiency. Nonetheless, its assessment is that the Commission's responses to this challenge are underdeveloped and its proposed measures would make the European banking system less resilient and less able to finance the economy in the future. It considers that sharing the risk of bank failure in Europe would be a major solution to bank industry fragmentation, as countries hosting foreign-owned bank subsidiaries fear exposure to losses if a bank fails in their territory.It suggests that credible deposit insurance and resolution safeguards, alongside simplification of the rulebook, need to be implemented. In addition, Finance Watch stresses that capital requirements should not be reduced as it would affect the lending capacity of banks in the long-term.
Outlook
The Commission's communication proposes a plan of action for the EU banking sector's integration and competitiveness, containing concrete measures. The deadline for stakeholders to provide feedback on this plan was 17 September 2026. The Commission will summarise the feedback received and present it to the European Parliament and the Council. A package of associated measures is planned in the first quarter of 2027. The One Europe, One Market roadmap's list of priority deliverables points to an aim for a final agreement between the co-legislators by the end of 2027.
Further references
- European Banking Authority, Report on the efficiency of the regulatory and supervisory framework, BA/REP/2025/26, 2025.
- European Commission, Competitiveness of the banking sector and the single market in banking, staff working document SWD(2026)0615, July 2026.
- Hallak, I., Savings and investment union: Overview and state of play, EPRS, European Parliament, 2025.
- Hallak, I., Banking union: Overview and state of play, EPRS, European Parliament, 2024.
- Hallak, I., European Deposit Insurance Scheme, EPRS, European Parliament, 2024.
- Mazzocchi, R., Spitzer, K.G., The July 2026 Commission communication on banking competitiveness – Overall analysis, Economic governance and EMU scrutiny unit, European Parliament, 2026.
- Mazzocchi, R., Spitzer, K.G., The July 2026 Commission communication on banking competitiveness – Microprudential issues, Economic governance and EMU scrutiny unit, European Parliament, 2026.
- Mazzocchi, R., Spitzer, K.G., The July 2026 Commission communication on banking competitiveness – Macroprudential issues, Economic governance and EMU scrutiny unit, European Parliament, 2026.
- Mazzocchi R., Spitzer, K.G., The July 2026 Commission communication on banking competitiveness – Crisis management and resolution issues, Economic governance and EMU scrutiny unit, European Parliament, 2026.
Endnotes
Classification
Policy areas: Economics and Monetary Issues
Regions: European Union
Committees: Economic and Monetary Affairs (ECON)
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