European Commission on banking competitiveness, EU; measures package due Q1 2027

European Commission on banking competitiveness, EU; measures package due Q1 2027

The July 2026 Commission communication on banking competitiveness - Overall analysis

BRIEFING

Economic Governance and EMU Scrutiny Unit (EGOV) Authors: Ronny MAZZOCCHI and Kai Gereon SPITZER Directorate-General for Economy, Transformation and Industry

PE 784.059 – September 2026 EN The July 2026 Commission communication on banking competitiveness Overall analysis This briefing analyses the Commission’s communication on the competitiveness of the banking sector of 17 July 2026, distilling the action to which the Commission committed from it and giving our interpretation of each of those announced actions. This briefing is part of a set of four briefings that cover: (1) an overall analysis (this paper) (2) macroprudential issues (3) microprudential issues (4) crisis management and resolution issues The first briefing provides the overall analysis while it draws on the three separate more detailed briefings that analyse specific aspects of the communication.

1. Overview The Commission’s communication diagnoses a competitiveness problem for European banks in a narrow sense, namely the ability of European banks to compete with international banks and non-banks, in terms of scale and business environment, including the regulatory framework. It also embraces a broader notion of competitiveness, which might be better called capability in our view: the ability of banks to provide credit and capital market services to the European economy, which may however also be hampered by a lack of scale and shortcomings in the business environment, including regulation. At the outset of the communication, the Commission emphasises the progress so far with the Banking Union, and the resilience that the banking sector has presented in the face of numerous supervisory stress tests and real-world challenges. It argues however out that the sector remains fragmented and that “challenges related to the regulatory framework” need to be “addressed to allow deeper involvement of banks in addressing the significant investment needs which the Draghi report identified”. As evidence of

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2 PE 784.059 fragmentation, the Commission points out that ca. 56% of EU banks’ total exposures reside withing their own Member State, while cross-border exposures outside the EU account for 22% and exposures within the EU for 21%. In other words, EU banks are biased towards their home market and not more integrated with the rest of the EU than they are with the rest of the world. The Commission suggests that the fragmentation of the EU market may be behind a “chronic lack of scale”: it reports that the cumulative market share of the 5 largest US banks in their home market is 45%, while the 5 largest EU banks reach only 31% of EU banking. In turn, the Commission links this lack of scale with a lack of ability to compete in corporate and investment banking, to the detriment of EU capital markets and the wider economy; it points out that even in the Europe, Middle East and Africa region, EU banks have a lower corporate and investment banking market share (29%) than US banks (40%). It is interesting to observe that the evidence presented by the Commission focuses on evidence relating to the disadvantages of fragmentation. By contrast, the Commission does not present evidence that points to bank regulation weighing down lending and economic growth, even though some of its announced measures seem to target alleviating regulatory burden unrelated to fragmentation. As to political context, the Commission refers to – in this order – the European Council conclusions of December 2025 and March 2026, and to the Parliament’s annual report on the Banking Union. It recognises what it refers to as the legislators’ “ambition to reform the banking framework and strengthen the competitiveness of EU banks”. Moreover, it encourages all stakeholders to be “ambitious in implementing necessary reforms” and invites feedback on the communication while it prepares the concrete measures. The communication announces a range of actions, to be tabled as a package in the first quarter of 2027.The purpose of this briefing is to filter these announced actions from the communication. Trying to shed light on what is behind the often vague formulations, the briefing interprets each of the announced actions and provides interpretation and background information in each case. We have built this briefing around small excerpts from the communication without reproducing the entire text. We would frame the communication’s announced actions as falling into two major categories: on the one hand, announced actions that specifically seek to facilitate cross-border banking, and on the other hand, announced actions which more generally aim at burden reduction for the EU banking sector. Our key takeaways from these two categories are: As to facilitating cross border banking, or fostering integration of the banking sector, the Commission tries to create the preconditions for lifting current regulatory requirements on cross-border banking groups’ subsidiaries in other Member States. As a possible outcome, their treatment would be brought closer to that of branch networks. To this end, the Commission considers new requirements on the individual group that ensure liquidity and capital of the group are available equally to all subsidiaries of the group and also changes to the institutional framework that ensure crisis management of cross-border groups does not leave host countries at a disadvantage. Although the communication largely addresses the right issues, we think the Commission has a formidable piece of work in front of it: first, arrangements for transferring liquidity and capital in groups have to be specified and their effectiveness confirmed by legal expertise to ensure sufficient confidence, so that the preconditions for lifting subsidiaries’ requirements will actually be useable in practice. Second, the Commission – in our view, rightly – focusses on the problem that host countries need to be assured that the group resolution authority will stick to an intention to resolve the group with its subsidiaries when the group fails. In this context, the Commission focusses particularly on deposit guarantees. Namely, the Commission announces a replacement for the 2015 EDIS proposal. In our understanding, the Commission does not intend to propose a different guarantee scheme at European level. Instead, it announces legislative proposals to find alternative ways to insulate national deposit guarantee schemes from failures of cross border banks, and it looks for alternative ways for liquidity support for national schemes.

The July 2026 Commission communication on banking competitiveness - Overall analysis

PE 784.059 3 However, while the cost of deviating from resolution for host countries’ deposit guarantee schemes are an important consideration, we feel that the Commission may have to look beyond to costs for host economies more broadly in order to develop a proposal that convinces Member States, and in particular those predominantly in the position of host. Not least, the Commission has to deliver a tractable impact assessment of these announced changes, and how they impact capital ratios and lending to the economy in host Member States in particular. Benefits need to be clear to convince stakeholders, and host Member States in particular, of the benefits. Otherwise, there is a risk that the proposals will be seen as lopsided, benefitting some Member States while depriving others of prudential safeguards. As to more general burden reduction for the banking sector, our impression is that the flagship announcements chiefly benefit larger, more sophisticated banks. For one, the intended changes target, in addition to market risk, the impact of certain requirements under the standardised approach for credit risk, but it seems to us that the framing is a focus on the indirect impact, through the output floor, on banks that use the advanced approaches. It is also worthwhile noting that such changes would distance the EU’s rules somewhat further from international standards. Similarly, the intended simplifications for a good part benefit banks subject to multiple additional and buffer requirements, not least in cross-border constellations, and subject to the internationally-harmonised loss absorbency capacity requirements. To be sure, the choices may well be justified as they indeed target requirements that affect international competitiveness and may hinder integration in the Single Market. Meanwhile, the Commission also announces expanding the existing specific treatment of small and non- complex banks, however without announcing what concrete proposals it has in mind. Moreover, the communication calls for an overhaul of Level 20F1 and Level 31F2, that can benefit banks across the board and smaller ones in particular. In this context, we note that the Commission seeks to obtain larger powers to intervene on the content of Level 2 technical standards. At this stage a lack of specificity does not allow gauging the implications of what is announced here; a thorough impact assessment needs to consider the impact of the evolving framework and the intended changes on the level playing field for all banks in the Single Market. As a final observation, we find that the communication offers a perspective of bank competitiveness that is overly focussed on prudential and resolution regulation. Meanwhile, we would submit that the competitiveness of the banking sector depends as much on the integration of the markets in which banks compete as it depends on the regulatory framework of the banking sector. Not all problems of Europe’s banks can and should be attributed to regulatory causes. The communication rightly makes reference to problems in the broader business environment of banks – unfortunately however without offering concrete prospects for improvement. Moreover, the extent to which the problems identified by the Commission can be attributed to the regulatory framework, rather than also to misguided business decisions, or broader structural factors, remains open to debate – and bears on the ultimate effectiveness of the announced burden-alleviation measures to give banking and the economy a strong boost. We would not suggest that a communication on banking sector integration can and should map a path to resolve the fragmentation of civil law, company law, insolvency law, tax law and so forth. But to provide political context and to manage expectations what can be achieved – and what cannot – by changes to the regulatory framework, it would have been healthy to recall the state of play and the implications and trade- offs at stake. Furthermore, we also note that even within the area of banking regulatory framework, the communication curiously sidesteps questions that obviously pertain to banking sector competitiveness. We would primarily think of further harmonisation: for instance, the ECB had recommended moving rules that currently sit in directives into directly applicable regulations, completing the single rule book. The

1 As opposed to Level 1 legislation adopted by Parliament and Council: delegated and implementing technical standards drafted by the European Banking Authority and adopted by the Commission 2 Guidelines issued by the European Banking Authority (EBA).

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4 PE 784.059 communication does not discuss the merits of a complex endeavour in that direction but merely suggests in passing without further explanation that “certain” rules might be moved. The briefing follows the structure of the communication and thus considers: fostering integration, implementation of international