European Commission weighs bank deregulation to boost lenders' competitiveness

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EU bank deregulation review

Highlights

European Commission draft proposes scrapping parts of Pillar 2 leverage ratio, cutting extra capital buffers, and reducing reporting for banks to boost sector competitiveness.
A new European Deposit and Insurance Scheme in the draft could unlock cross-border mergers, addressing long-standing fragmentation and supporting consolidation among EU lenders.
The Commission's competitiveness report due Friday may introduce regulatory reforms for 2027, aiming to enable pan-European banking groups to better challenge U.S. rivals.

Planned rule changes for European banks

As reported by CNBC, the European Commission is considering a major deregulation push that includes scrapping parts of Pillar 2 leverage ratio requirements, cutting extra capital buffers and reducing reporting obligations for lenders. A draft version also contains further detail on a common European Deposit and Insurance Scheme, a step that could help unlock cross-border banking mergers across the region.

The changes would mark a significant shift in the EU's approach to bank oversight. Brussels is seeking to improve the competitiveness of European lenders, which continue to trail U.S. investment banks in trading, investment banking and capital markets, while the Commission's banking competitiveness report is set to lay out sector reforms for 2027.

The debate comes as major U.S. banks post a strong second-quarter earnings season, with JPMorgan Chase, Bank of America, Citigroup, Wells Fargo and Goldman Sachs all beating expectations on trading revenues and stronger dealmaking. European lenders including Santander, UniCredit, UBS and Deutsche Bank are due to report later this month, putting added focus on whether policy easing can lift confidence and returns in the sector.

Competition and consolidation pressures build

Jakub Lichwa, a member of the multi-sector bond portfolio management team at TwentyFour Asset Management, says European authorities are trying to avoid leaving the sector at a disadvantage as regulators in the U.S. and UK also move to relax some banking rules. He says lower capital requirements could help banks deliver stronger returns on equity and make European bank shares more attractive, even if looser rules alone do not guarantee operational improvements.

Andrew Stimpson, head of European banks research at KBW, says European leaders increasingly see the continent's weaknesses in defense, AI infrastructure and energy infrastructure, all of which require large amounts of capital. In his view, Friday's report matters not only because it is expected to discuss deregulation, but also because it could adjust laws and rules to make cross-border consolidation more likely.

That prospect is important in a market long viewed as too fragmented to produce lenders with enough scale to compete globally. If the Commission follows through, the overhaul could free up balance sheets and strengthen the case for building pan-European banking groups capable of challenging Wall Street more effectively.

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