ECB supervision pushes bank simplification agenda as EU competitiveness debate intensifies

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ECB bank simplification & EU competitiveness

Highlights

ECB Supervisory Arm notes European banks' profitability and improved asset quality but highlights persistent national fragmentation limiting cross-border growth and innovation versus U.S. peers.
European Commission's 17 July Communication identifies fragmented markets, EU-inadequate international standards, and excess regulatory complexity as major obstacles, with a targeted legislative package expected in Q1 2027.
ECB implements simplification by fast-tracking 80% of own funds reduction applications, cutting EU-wide stress test data points by half, and delegating more decisions, aiming to reduce process burdens while maintaining prudential standards.

Fragmentation and policy reform shape competitiveness debate

As reported by ECB Banking Supervision, citing the ECB Supervisory Arm, European banks now show stronger profitability, improved asset quality and returns on equity near the highest levels seen since European banking supervision began, yet supervisors argue that national fragmentation still limits scale, innovation and cross-border growth.

The speech says most bank lending remains domestic, cross-border deposit-holding is minimal and cross-border bank mergers are rarer than before the financial crisis. It also points to weaker performance versus U.S. peers in trading and post-trading activities, where scale and deeper capital markets matter more.

The European Commission on 17 July adopted a Communication on the Competitiveness of the Banking Sector and the Single Market in Banking, aligning with concerns already highlighted in the Draghi report. That communication identifies three linked obstacles, fragmented national markets, international standards that do not fully reflect EU specificities, and excessive regulatory complexity, with a legislative package expected in the first quarter of 2027.

The speech argues that divergent national rules on insolvency, consumer protection, mortgage markets and withholding tax continue to raise costs for banks and other market participants operating across borders. It adds that completing the banking union, including progress on a European deposit insurance scheme, would improve risk diversification and allow capital and liquidity to move more freely within cross-border groups.

ECB cites faster approvals and lighter reporting burden

The ECB says simplification is already moving from design to implementation and is not intended as deregulation. Instead, the approach aims to preserve prudential standards while reducing process burdens and making supervision more proportionate to actual risk.

Among the changes cited are faster capital decisions, with eligible own funds reductions and standardised securitisations now approved in about a week in some cases, compared with several months previously. The ECB also says about 80% of own funds reduction applications qualify for the fast track.

The supervisory arm says it has delegated more straightforward decisions down the organisational hierarchy, cut roughly half the data points required for EU-wide stress tests, streamlined short-term supervisory reporting and shortened on-site inspections and reports. It also says more than 100 supervisory guides have been reviewed, with many outdated texts being discontinued.

Beyond processes, the speech calls for changes to the broader regulatory architecture, including simplifying the EU capital stack, which it says can contain up to nine layers of requirements and buffers. The ECB argues that consolidating macroprudential buffers into a two-tier structure and applying a more risk-based approach to internal model materiality would make capital planning and supervisory work easier without weakening resilience.

The address presents the current measures as a starting point rather than a final step and calls for continued feedback from banks through Joint Supervisory Teams and industry forums. It says the next key test will be whether the Commission’s expected 2027 package turns broad agreement on fragmentation into concrete policy action.

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