Strengthening banking competitiveness as a driver of growth for Europe

The European Commission’s targeted consultation on the competitiveness of the EU banking sector offers an opportunity to improve bank’s competitiveness, a crucial topic for our association.

European banks are not the weak link in the EU economy. On the contrary, they remain resilient, well capitalised and fully capable of financing households, businesses and the continent’s major transitions. So why is Europe still struggling to compete globally? According to us, the problem lies less in banks themselves than in the environment they operate in. Together with our members we have identified structural bottlenecks hindering European banks’ capacity to support the economy and to compete globally in a complex and unstable international environment. A complex web of regulations, fragmented national rules and heavy reporting requirements is weighing down the sector and limiting its ability to grow.

In order to address this highly extensive Consultation, the ABBL has gathered views and insights from its banking members (prudential and supervision, risk, legal, finance, digital communities mainly) and has, for some parts, relied on the comprehensive work done by the European Banking Federation (EBF), adapting it to the specificities of our local environment in Luxembourg.

Why Europe needs to move fast

2026 will be a decisive year for Europe’s ability to secure sustainable growth. Banks will be central to this effort, financing infrastructure, innovation and defence. Yet their capacity to support the real economy remains constrained by an overly conservative application of regulation.

European banks are falling behind international banking competitors and EU non-banking actors. US institutions benefit from deeper capital markets, greater scale and more flexible regulatory frameworks. European banks, by contrast, must navigate a dense and often inconsistent rulebook that increases costs and reduces agility.

Enhanced competitiveness is essential for Europe’s development and for financing key investments in defence, energy, infrastructure, digital transformation and the transition to a sustainable economy. In this context, legislators and supervisors have a central role to play.

EU Banking Regulation: time to shift toward competitiveness

The solution is not deregulation but smarter regulation. Simplifying rules, reducing duplication and completing the Banking Union could unlock the sector’s full potential.

A strong supervisory framework is beneficial to ensure financial stability in safeguarding the stability of the financial system, but stability should not come at the expense of growth.

Supervisors should further streamline processes and adopt a more risk-based approach, focusing on the most material risks and reducing unnecessary burdens on lower-risk institutions. This would enable banks to better support households, businesses and economic growth.

Regulation must better reflect the realities of the banking sector, considering size, complexity and risk profile, in line with the principle of proportionality. Today, excessive complexity and fragmentation increase compliance costs and divert resources from banks’ core mission. A simpler, more proportionate framework would allow banks to focus on what matters most: financing businesses, supporting investment and driving growth across the European Union.

4 proposals to reinforce European Banks’ capacity for growth and global competitiveness

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.