Brussels Seeks To Boost the EU Banking Sector's Competitiveness

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A 20 euro note.

The European Union is likely to advance banking reforms in 2027 that reduce internal barriers to cross-border banking, boosting its financial competitiveness by freeing up funds tied up in savings, but will stop short of significantly greater fiscal and financial risk sharing. On July 17, the European Commission published a proposal to reform the EU banking sector to enhance its competitiveness. This is part of its broader efforts to establish a Savings and Investment Union, itself aimed at promoting the efficient allocation of capital to help address Europe's large and increasing financing needs. The proposal would reduce internal barriers that prevent EU banks from expanding in other EU countries and growing the scale needed to compete globally. Once transformed into a legislative package, EU member states, and then the European Parliament, would need to approve the measures before the reforms could become law. The proposal seeks to promote cross-border bank mergers, ending the historic fragmentation of the EU banking sector along national lines. It would do this by limiting EU governments' ability to intervene in mergers between banks operating in different EU countries, possibly by threatening to impose penalties on governments that seek to block them. Second, the proposal seeks to streamline capital and liquidity requirements for EU banks, allowing cross-border banking groups to meet them more at the parent level and reducing or removing requirements for their subsidiaries in specific national jurisdictions. This would allow integrated Pan-European banking groups to manage liquidity centrally and allocate capital and lending more efficiently and cost-effectively. Third, instead of creating an EU-wide common deposit insurance scheme, the commission proposal aims to pursue a new plan to simplify and streamline national deposit rules.

Initially introduced in March 2025 as the Capital Markets Union, the Savings and Investments Union, or SIU, is anchored by four primary pillars: retail savings mobilization; European banking sector integration; expansion of capital markets financing; and a more centralized, efficient financial supervision framework. The proposed banking sector reforms are specifically linked to the second and fourth of these pillars.

The proposed banking sector reform is part of the EU's attempt to establish a Pan-EU banking market, lower the cost of capital and compete at scale in the face of competition from large U.S. banks. Banking and capital markets reform need to go hand in hand if Europe is to gain greater stature and reduce its reliance on and capital markets financing, and indirectly, U.S. banks. Spurred by the Letta (April 2024) and Draghi (September 2024) competitiveness reports, the July 17 proposal is part of the SIU, which is meant to mobilize European savings to lower the cost of investment and make savings intermediation, e.g., transforming bank deposits into loans, more efficient in view of large spending and investment needs related to defense, the energy transition and capital-intensive technology investment. Under the second Trump administration, U.S. banking regulators have focused on deregulation, capital relief and supervisory recalibration by simplifying and lowering capital requirements, among other things. This is bolstering U.S. financial institutions' competitiveness and profitability vis-a-vis European banks. U.S. banks have also been much more profitable than their European counterparts due to their ability to exploit economies of scale in their U.S. home market and, especially, the significantly larger U.S. capital markets. By comparison, European banks operate in the more fragmented EU banking market, making it more difficult to realize similar economies of scale. Because the European financial system is primarily bank-based rather than capital market-based, banking sector reform is critical to improving the efficiency of financial intermediation. These reforms are necessary to mobilize deposits more efficiently, ensuring they are allocated across the EU economy in a way that best promotes economic growth, rather than leaving savings stranded within national borders by cumbersome regulatory barriers. The reform also seeks to close the large EU investment gap with the United States and China, which have pulled ahead in areas such as artificial intelligence. The dominance and size of U.S. banks also diminish European banks' ability to support large capital market deals.

Europe represents seven (including two based in the United Kingdom) of the top 20 global financial institutions. Even so, none of the top five global banks by market capitalization — which reflects core profitability — is European. For example, JPMorgan, the largest bank globally, has a market capitalization of more than $900 billion; by contrast, the largest EU-headquartered bank, BBVA, has a market capitalization of just $140 billion. In fact, JPMorgan's market capitalization alone exceeds the combined total of the 10 largest EU banks.

Despite persistent national differences over banking integration, EU governments will likely reach a compromise that advances the commission's core banking reform agenda in 2027. In the coming months, the European Commission will discuss its reform plans with EU member states. The final legislative package will broadly reflect the commission's proposals, although some elements will prove more contentious than others. Reform of national deposit insurance schemes is likely to generate the most resistance because it raises concerns about the redistribution of fiscal and financial risks. Creditor countries such as Germany, the Netherlands and Austria will likely remain cautious about greater risk sharing, while financial centers such as Ireland and Luxembourg may resist measures that reduce their competitive advantages. By contrast, countries with large internationally active banks, including France and Germany, have stronger incentives to support lower capital and liquidity requirements to enhance their banks' global competitiveness. That said, Germany — along with Italy and Spain and most other member states — has also traditionally opposed cross-border bank takeovers to preserve national control over major financial institutions. Nevertheless, the strategic imperative to mobilize European savings and strengthen the competitiveness of EU banks makes a compromise likely. Governments probably will accept tighter limits on their ability to block cross-border mergers, support more flexible capital and liquidity requirements, and agree to greater harmonization of national deposit insurance rules while stopping short of extensive fiscal risk sharing. This means meaningful progress on the reforms is likely in 2027, particularly in cross-border banking integration and prudential requirements. If approved, the new law would support further consolidation of the EU banking sector and improve banks' capacity to expand lending over the following years. If a right-wing populist government emerges in France after the election due in April and May, progress could slow — especially on cross-border mergers — though such a government would be even less likely to oppose capital requirement reforms that benefit large French banks.

In March, the six largest EU governments agreed to support proposals to centralize financial supervision within the European Union. Notably, Berlin backed the initiative despite its historical opposition to increased centralization of banking supervision.
EU governments frequently oppose mergers, including cross-border banking mergers, preventing European banks from gaining greater scale. The German government, for example, has opposed attempts by Italian bank UniCredit to take over Commerzbank, Germany's largest bank, since September 2024. Governments also often intervene in domestic M&A activities. This prevents consolidation, though it can also help prevent undue market concentration, issues that arose in the failed BBVA-Sabadell merger in Spain in 2024-25. Madrid opposed the merger due to market concentration concerns, while political leaders in Catalonia, where Sabadell is headquartered, opposed it due to concerns about the postmerger continuation of lending to local small- and medium-sized enterprises. The acquisition ultimately fell through after Sabadell's board and shareholders rejected BBVA's offer over valuation concerns.
Removing or reducing separate national-level liquidity requirements could release 230 billion euros of liquid assets currently required to be held at the national level to support subsidiaries, trapping capital behind national boundaries and preventing a more efficient allocation of lending across the EU economy.