EU banking fragmentation limits lenders' ability to fund bloc priorities, EBA says

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EU banking fragmentation limits lenders

Highlights

European Banking Authority Chair François-Louis Michaud warns EU banking market fragmentation hampers banks' ability to support critical digital, environmental, and defence transitions.
Differences in tax, insolvency, and consumer-protection regimes raise costs for standardised products, reducing cross-border lending and growing reliance on non-bank financial institutions.
EBA aims to cut unnecessary red tape and simplify rules, including capital requirements, to bolster European banks' competitiveness against well-capitalised U.S. rivals.

Barriers to cross-border banking scale

As reported by Reuters, European Banking Authority Chair François-Louis Michaud says the bloc's banking market is still too fragmented for lenders to fully support major economic and strategic transformations.

In an interview on Wednesday, Michaud says Europe needs funding for digital, environmental, demographic, economic-security and defence transitions, calling that need existential for the region's future. He says mergers are not the only answer, and that stronger cross-border lending and deeper financial integration are also needed.

He adds that differences in tax, insolvency and consumer-protection regimes continue to raise the cost of offering standardised products across the EU, making it harder for banks to achieve economies of scale. As a result, wholesale banking by European financial institutions has declined over time, while a larger share of funding comes from non-bank financial institutions, private-credit firms and players from outside the bloc.

Rule simplification and competitive pressure

Michaud says the EBA is seeking to cut unnecessary red tape so banks and supervisors can focus more on significant risks instead of devoting excessive time and money to compliance alone.

With Basel banking reforms now implemented and U.S. regulators moving to ease requirements for some banks, he says momentum is building to simplify European rules, including capital requirements, while preserving resilience. He adds that stronger European banks are also needed to compete with U.S. rivals, noting that many American lenders have substantial capital for expansion and are moving beyond traditional business lines into new markets.

Our earlier article covered the growing divide among EU member states over how to define “Made in Europe” in the planned Industrial Accelerator Act, with major implications for subsidies, procurement, and support for sectors like EVs, batteries, and semiconductors. We noted that the debate reflects a broader push to boost Europe’s industrial capacity and reduce strategic dependencies, but also highlights how internal fragmentation can slow decision-making and weaken the bloc’s ability to act at scale.

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