Reinforcing the EU banking sector: a catalyst for the growth of Europe

Europe faces unprecedented challenges. Strengthening competitiveness, accelerating the green and digital transitions, enhancing security and defence capabilities, and fostering innovation all require substantial investment.

In this context, the role of banks in financing Europe’s future has become central to the policy debate. European policymakers increasingly recognise that achieving the EU’s strategic objectives will depend not only on mobilising capital, but also on ensuring that banks have the capacity, incentives and regulatory environment needed to support economic growth.

The ABBL has actively contributed to this debate by advocating for a more effective and proportionate regulatory framework that preserves financial stability while enabling banks to fulfil their essential role in financing households, businesses and public priorities.

ABBL’s contribution to the debate

40 Proposals for Smarter Regulation

In 2024, the ABBL published 40 Proposals for Smarter Regulation, a comprehensive set of recommendations aimed at simplifying the European regulatory framework and reducing unnecessary administrative burdens on financial institutions.

The proposals seek to improve the efficiency and coherence of the regulatory environment while maintaining high standards of financial stability and consumer protection. They reflect the conviction that a more proportionate and streamlined framework would free up resources that banks could redirect to financing the real economy and supporting Europe’s strategic ambitions.

Response to the European Commission Consultation on Banking Competitiveness

Building on this work, the ABBL contributed to the European Commission’s consultation on the competitiveness of the EU banking sector.

In its response, the ABBL emphasised the need to strengthen the capacity of European banks to support economic growth and investment while preserving a resilient financial system. The Association highlighted the cumulative impact of regulatory complexity, reporting obligations and supervisory requirements on banks’ ability to compete globally and finance the European economy.

1.  Tackling regulatory complexity and disproportionate burden

The EU framework is highly complex and layered, with multiple levels of rules (Level 1, 2, 3), overlapping reporting requirements and frequent changes creating legal uncertainty. This results in high compliance costs, reduced efficiency and less capacity to finance the economy.

Furthermore, this regulatory burden affects small banks proportionally deeper than large institutions. This “one-size-fits-all” approach risks forcing consolidation, reducing diversity in the banking sector and ultimately weakening financing for SMEs and local economies.

The EU should:

• Simplify and rationalise the prudential framework eliminating redundant buffers and design a coherent capital requirement framework.
• Improve consistency between reporting obligations and promote an Integrated Reporting System in which data attributes are defined once and reused by all relevant authorities. This requires creating a common data dictionary for prudential, statistical, and resolution reporting and mandating the alignment of related regulations to remove existing contradictions (overlap between financial and risk reports, overlap in incident reporting between DORA and PSD2).
• Generalise impact assessment measures to improve Levels 2 and 3 regulations
• Support the Commission’s proposal for a dedicated regime for small and non-complex institutions, wish should be meaningful and usable in practice, based on risk, not only on size.

2.  Reducing market fragmentation

Despite the Single Market, banks operate in a fragmented environment, with divergent national rules, different tax systems, AML/KYC requirements, insolvency regimes, consumer protection rules and supervisory practices. This limits cross-border banking, economies of scale, risk sharing, and expansion across the EU. SMEs are particularly affected, facing more limited financing options due to regulatory complexity.

The EU should:

• Prioritise harmonisation over new rulemaking and limit national gold-plating, specifically in the area of investor protection.
• Ensure a free circulation of capital and liquidity within the EU, notably accelerating the implementation of the SIU in the local framework. In this regard, the local embedding of the Saving Investment Accounts solutions will be key.
• Remove true operational barriers, not just adding new frameworks or diverting attention from core issues with further centralised supervision.
• Facilitate cross-border M&A operations, with simpler approval process and reduced frictions.

3.  Ensure level-playing field between EU banks and non-EU players and non-bank players

EU banks face strong competition from non-EU players, particularly US banks, which benefit from deeper capital markets, greater scale and more flexible regulatory environments. At the same time, regulatory asymmetries in the EU negatively affect competitiveness.

Competition is also increasing from FinTechs, BigTechs and non-bank financial intermediaries. These actors often operate under lighter or different regulatory frameworks, creating an uneven playing field.

EU rules on internal governance and remuneration place EU banks at a competitive disadvantage relative to non-EU peers and other non-banking financial entities. Their cumulative prescriptiveness, granularity and frequent revisions create structural complexity, heavy administrative burdens, and slower decision-making. This reduces agility, increases structural costs and limits EU banks’ ability to innovate, attract talent and expand internationally.

The EU should:

• Unlock significantly lending capacity, stabilising output floor arrangements, and removing CET1 software deduction
• Further upgrade framework for securitisation
• Scale governance and remuneration requirements (i.e., revise bonus cap, simplify definition of Material Risk Takers, assess appropriateness of deferral periods)
• Strengthen equivalence and reciprocity with non-EU jurisdictions to ensure a consistent application of international standards and avoid competitive distortions.
• Extend activity-based regulation to non-bank players by applying “same activity, same risk, same rules” across the financial ecosystem.

4.  Encourage digitalisation initiatives

Digitalisation represents a major opportunity to strengthen the competitiveness, efficiency and resilience of the European banking sector. Financial institutions are making significant investments in IT modernisation, artificial intelligence, cybersecurity and emerging technologies such as DLT and quantum computing, while continuing to ensure the stability of existing systems.

At the same time, the current regulatory environment can create operational complexity, with overlapping requirements and fragmented frameworks that may limit the full potential of these investments. Addressing these challenges offers an opportunity to better support innovation and improve efficiency.

It is critical to continue developing a coherent and interoperable digital framework across Europe, combining simplification, legal certainty and proportionality, while maintaining high standards of resilience, security and consumer protection.

The EU should:

• Accelerate harmonisation and interoperable digital infrastructures across the EU. Promote convergence in supervision and support the development of common EU infrastructures (e.g., instant payments, digital identity), while ensuring interoperability with emerging technologies such as DLT-based systems.
• Support innovation in post-trade and settlement by encouraging the adoption of Distributed Ledger Technology (DLT) and tokenisation of assets to improve market efficiency and cost-effectiveness.
• Prioritise the harmonization of settlement cycles and payment interfaces (including wholesale central bank digital currency) to eliminate “post-trade silos” and reduce cross-border frictions, while ensuring legal certainty and operational resilience through a proportionate regulatory framework.
• Avoid the layering of duplicative ICT and operational resilience requirements under DORA that hinder the scaling of digital services.
• Ensure legal certainty for AI and digital innovation by harmonising the AI Act and GDPR, particularly regarding automated decision-making, transparency, and explainability requirements. This should be supported by a technology-neutral supervisory approach that utilizes regulatory sandboxes for testing and prioritises investment in skills and change management to successfully navigate the human and operational sides of digital transformation.

Quantifying the challenges and opportunities: the EBF–Oliver Wyman report

The debate has now been enriched by a new independent study commissioned by the European Banking Federation and prepared by Oliver Wyman: Bridging the Gap: Financing Europe’s Future.

The report starts from a fundamental question: how can Europe finance its future investment needs?

According to the study, Europe’s additional annual investment needs now amount to approximately €1.4 trillion, significantly above previous estimates. At the same time, many of these investments are long-term, capital-intensive and higher-risk in nature, requiring a financial system capable of mobilising capital across the full risk and maturity spectrum.

The study concludes that banks remain central to bridging this investment gap. However, successive layers of regulation, growing supervisory burdens and persistent market fragmentation have constrained banks’ capacity and incentives to support the investments that are critical to Europe’s future growth.

Among its key recommendations, the report calls for:

• strengthening banks’ financing capacity;
• unlocking a fully functioning savings and investment continuum;
• fostering scale, innovation and integration within the European financial sector;
• achieving a better balance between resilience, capital requirements and growth objectives.