In response to the financial crisis, the EU embarked on a wide-ranging reform of the prudential framework for banks aimed at increasing the resilience of the EU banking sector. One of the main elements of the reform consisted in implementing international standards agreed by the Basel Committee for Banking Supervision, specifically the so-called “Basel III reform”. Thanks to this reform, the EU banking sector entered the COVID-19 crisis on a resilient footing. However, while the overall level of capital in EU banks is now satisfactory on average, some of the problems that were identified in the wake of financial crisis have not yet been addressed. In particular, two main problems remain. First, the default methods that banks use to calculate their capital requirements (so-called “standardised approaches”) do not capture sufficiently well the risks that banks are exposed to (i.e. they are not sufficiently risk sensitive), leading to inadequate (either too high or too low) capital requirements. This, in turn, may negatively affect banks’ activities. Second, the sophisticated methods that mostly large banks are allowed to use (so-called “internal model approaches”) produce very different capital requirements for similar or even identical risks. This makes it difficult to compare capital ratios across banks and undermines the trust in those ratios and hence in the banks using internal models. Furthermore, for certain types of assets, there are not enough data of sufficiently good quality to allow for a reliable and robust modelling of capital requirements. Banks using internal models for those assets may therefore have insufficient capital to cover for the associated risks. Beyond the need to address those deficiencies by completing the post-crisis reform agreed at international level, the transition to a more sustainable economy entails risks for banks that they will need to properly manage to ensure financial stability. The Sustainable Finance Strategy highlighted the need to include a better integration of climate and environmental risks into the EU prudential framework. The present legal requirements alone are insufficient to provide incentives for a systematic and consistent management of environmental, social and governance (ESG) risks by banks. Another area of focus is the proper enforcement of prudential rules. Supervisors play a crucial role in this respect. Supervisors need to have at their disposal the necessary tools and powers to this effect (e.g. powers to authorise banks and their activities, check the suitability of their management, or sanction them in case they break the rules). While the EU legislation ensures a minimum level of harmonisation, the supervisory toolkit and procedures vary greatly across Member States. This fragmented regulatory landscape in the definition of certain powers and tools available to supervisors and their application across Member States undermines the level playing field in the Single Market and raises doubts about the sound and prudent management of EU banks and their supervision. This problem is particularly acute in the context of the Banking Union. Differences across 19 different legal systems prevent the Single Supervisory Mechanism from performing its supervisory functions effectively and efficiently. Moreover, cross-border banking groups have to deal with a number of different procedures for the same prudential issue, unduly increasing their administrative costs. Market discipline is another important tool. In order for investors to exercise their role of monitoring the behaviour of banks, they need to access the necessary information. The current difficulties related to the access to prudential information deprive market participants from the information they need about banks’ prudential situations. This ultimately reduces the effectiveness of the prudential framework for banks and potentially raises doubt about the resilience of the banking sector, especially in periods of stress.