Europe banking reform hinges on failure regime, ECB supervision says

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Europe banking reform and failure regime

Highlights

ECB Supervisory Arm states the European Commission's July agenda links cross-border integration and competitiveness to strengthening bank failure management frameworks.
ECB estimates current cross-border liquidity rules trap 230 billion euros of high-quality liquid assets in subsidiaries, limiting efficient capital allocation across the EU.
The upcoming 2027 banking package is positioned as pivotal for harmonizing failure regimes and enabling further single market progress in European banking.

Commission agenda ties integration to crisis tools

As reported by European Central Bank Banking Supervision, citing ECB Supervisory Arm, the European Commission's July communication on banking competitiveness combines measures to support scale, efficiency and cross-border integration with a renewed focus on crisis management. The speech argues that credible arrangements for handling bank failures are not a trade-off for integration, but a condition for a more resilient and competitive banking union.

European banks are described as sound, well capitalised and liquid, having acted as shock absorbers through the pandemic, the energy shock and the market turmoil of March 2023. But the sector still falls short of its potential because markets remain fragmented along national lines, domestic consolidation dominates and cross-border corporate lending in the euro area accounts for only about one-sixth of total lending.

The Commission's programme includes plans to let cross-border groups allocate capital and liquidity more efficiently by revisiting rules that apply both at consolidated and individual entity level. The ECB estimates that these constraints tie up 230 billion euros of high-quality liquid assets in cross-border subsidiaries, limiting the ability of banking groups to move resources across the EU.

The communication also points to measures to improve coordination between microprudential, macroprudential and resolution requirements, and to a possible review and simplification of the deposit insurance framework. Alongside that, the Commission is pursuing broader simplification of capital, reporting and regulatory layers built up since the financial crisis.

Failure framework seen as barrier to single market

The speech says a genuine single market in banking must pass tests of entry, operation and exit. While the single licence, passporting system, Single Rulebook and Single Supervisory Mechanism have largely addressed market access and common supervision, the treatment of bank failure remains only partly unified.

Resolution powers have moved to the European level through the Single Resolution Mechanism, but creditor hierarchy still remains national. That split, the speech says, helps explain why local capital, local liquidity and pre-positioning remain entrenched, with fragmentation in normal operations reflecting fragmentation in how failures would be managed.

That issue is especially important for cross-border waivers on capital and liquidity requirements. National authorities are being asked to accept a promise that group resources will be transferred when needed, but that promise loses credibility if enforcement is uncertain or if a subsidiary's claim would be weakened in resolution or insolvency.

If group support fails, the burden can fall back on national insolvency systems, national deposit guarantee schemes and domestic political authorities. The speech concludes that trust in how banks fail is what allows greater freedom in how banks operate, and says the banking package due in the first quarter of 2027 will be central to whether Europe can close that gap.

Our earlier article on the Federal Reserve’s revised bank stress tests covered the political backlash to changes that critics say could make it easier for large U.S. banks to pass annual resilience checks. It noted concerns that looser testing could encourage bigger dividends and buybacks, reopening debate about whether post-2008 safeguards are being weakened and what that means for financial stability.

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