COMMISSION STAFF WORKING DOCUMENT Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK, THE EUROPEAN ECONOMIC AND SOCIAL COMMITEE AND THE COMMITTEE OF THE REGIONS Competitiveness of the Banking Sector and the Single Market in Banking
Date: 2026-07-17
Institutions: Directorate-General for Financial Stability, Financial Services and Capital Markets Union, European Commission
Subjects: EU banking union, banking policy, banking supervision, banking system, capital market, competitiveness, financial stability, financial supervision, investment, single market

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 17.7.2026  SWD(2026) 615 final  COMMISSION STAFF WORKING DOCUMENT Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK, THE EUROPEAN ECONOMIC AND SOCIAL COMMITEE AND THE COMMITTEE OF THE REGIONS  Competitiveness of the Banking Sector and the Single Market in Banking {COM(2026) 615 final}  
 
 
TABLE OF CONTENTS 

1. 

INTRODUCTION ......................................................................................................................... 2 

2.  ECONOMIC ANALYSIS OF THE BANKING SECTOR ....................................................... 3 

2.1. 

The role of banks in the EU economy ................................................................................ 3 

2.1.1.  Lending: EU banks’ core financing function ................................................................ 3 

2.1.2.  Productivity and bank lending ....................................................................................... 9 

2.1.3.  Banks as market intermediaries .................................................................................. 11 

2.2. 

Resilience, profitability and market valuations .............................................................. 13 

2.2.1.  Capital has increased and asset quality has strengthened ......................................... 14 

2.2.2.  Profitability has recovered and remains sustained .................................................... 17 

2.2.3.  Market perception and valuations ............................................................................... 24 

3.  REMAINING CHALLENGES .................................................................................................. 28 

3.1. 

Fragmentation of the single market in banking – Main issues ...................................... 28 

3.1.1.  Evidence of a fragmented banking sector ................................................................... 28 

3.1.2.  Fragmentation has resulted in a chronic lack of scale ............................................... 31 

3.1.3.  Opportunities and limits to market integration ......................................................... 36 

3.1.4.  Barriers to market integration ..................................................................................... 37 

3.1.5.  Cross-border allocation of funds: efficiency and resilience ....................................... 42 

3.1.6.  Safety nets and resolution strategies ............................................................................ 43 

3.1.7.  Liquidity in resolution .................................................................................................. 46 

3.2. 

Implementation of international standards in the EU – Main issues............................ 47 

3.2.1.  Output floor ................................................................................................................... 48 

3.2.2.  Credit risk ...................................................................................................................... 50 

3.2.3.  Market risk and FRTB application ............................................................................. 51 

3.3. 

Undue complexity of the framework – Main issues ........................................................ 52 

3.3.1. 

Institutional set-up ........................................................................................................ 52 

3.3.2.  Micro-prudential requirements ................................................................................... 57 

3.3.3.  Crisis management ........................................................................................................ 62 

3.3.4.  Macroprudential ........................................................................................................... 64 

3.3.5.  Transversal issues related to capital stack .................................................................. 66 

3.3.6.  Proportionality .............................................................................................................. 68 

3.3.7.  Other issues .................................................................................................................... 69 

3.3.8.  Prudential framework for investment firms (IFR/IFD) ............................................ 74 

1 

 
 
 
 
 
 
 
1. 

INTRODUCTION 

The  Communication  of  the  European  Commission  on  the  Savings  and  Investments  Union 
(SIU)1 announced in March 2025 that the Commission would publish a report assessing the 
overall  situation  of  the  banking  system  in  the  single  market,  including  an  evaluation  of  the 
banking sector’s competitiveness. 

Banks  are  important  to  the  EU  economy,  financing  and  supporting  businesses—especially 
small and medium enterprises—and strengthening capital markets. The contribution of banks 
to the EU economy ranges from that of smaller banks supporting local businesses to that of 
larger,  internationally  active  banks  able  to  operate  across  the  Union  and  beyond.  While 
progress has been made over the past 15 years with regard to resilience and financial stability, 
undue complexity and inefficiencies in the structure and implementation of the bank regulatory 
framework remain, with direct consequences on banks’ ability to operate in a more competitive 
way. Fostering  competitiveness  of the banking  sector  thus implies  addressing  the persisting 
fragmentation  of  the  single  market  in  banking,  reviewing  the  way  the  implementation  of 
international standards takes into account EU specificities, and tackling the undue complexity 
of the bank regulatory framework. Stepping up the competitiveness of EU banks is vital for the 
SIU and for a competitive EU economy.  

This Staff Working Document complements the Communication on the competitiveness of the 
banking sector and the single market in banking. It provides evidence to support the economic 
analysis of the EU banking sector as well as an overview of the complexities and inefficiencies 
of the bank regulatory framework. It is based on extensive research and builds on contributions 
from  a  wide  range  of  stakeholders,  including  the  European  Banking  Authority  (EBA),  the 
European Central Bank (ECB) and the Single Resolution Board (SRB), on their experience of 
the banking activities and the regulatory framework. This includes in particular the feedback 
gathered  during  thematic  workshops  organised  by  the  Commission  in  September2  and 
November 20253, an implementation dialogue with bank representatives in December 20254, 
the responses to the targeted consultation conducted by the Commission between 11 February 
to  19  April  20265  and  specific  outreach  activities  and  meetings  with  Member  States’ 
representatives,  financial  institutions,  business  organisations  and  representatives  from  civil 
society. 

1 
2 

3 
4 
5 

European Commission, Savings and Investments Union Strategy, 2025. 
European  Commission,  Single  market  in  banking  workshop:  The  economics  of  banking  in  the  single 
market, 2025. 
European Commission, Reality check on the complexity of the EU banking regulatory framework, 2025. 
European Commission, Implementation dialogue on banking integration and competitiveness, 2025. 
European Commission, Targeted consultation on the competitiveness of the EU banking sector, 2026. 

2 

 
 
 
 
 
 
2. 

ECONOMIC ANALYSIS OF THE BANKING SECTOR 

The EU banking sector has evolved significantly over the past 15 years, adapting to events and 
responding to the crises that characterised those years, from the global financial crisis (GFC) 
to the euro area sovereign debt crisis and Brexit, and more recently COVID-19, the Russia’s 
war of aggression against Ukraine and the war in the Middle East. The sector also benefited 
from periods of economic growth and has increased its profitability since 2022.  

The GFC highlighted that risks to the financial systems  do not stop  at national  borders and 
financial stability could only be preserved through a common European response: this shaped 
today’s prudential and supervisory architecture and focused EU action in setting a resilient and 
robust framework. The subsequent crises tested the resilience of the EU banking sector (and of 
the financial EU architecture as a whole), demonstrating its strengthened capacity to act as a 
shock absorber rather than an amplifier. Despite these gains, EU banks continue to trade at low 
valuations relative to past performances and global peers, reflecting persistent concerns over 
structural profitability and fragmented markets. This highlights the remaining challenges to the 
competitiveness of the EU banking sector. 

2.1.  The role of banks in the EU economy 

The  EU  operates  a  predominantly  bank-based  financial  system,  in  which  the  banking 
sector plays a pivotal role in sustaining economic activity. Banks serve as the primary engine 
of credit creation, investment financing, and monetary policy transmission. These functions are 
underpinned by the diversity of the banks’ business models and services. This pivotal role is 
enabled by the structure of banks’ balance sheet, which has historically rested on deposits as 
the primary and most stable source of funding. Among such deposits, retail deposits provide 
banks with a resilient and competitive funding base. They are usually less sensitive to market 
volatility than wholesale financing, reflecting customer inertia and switching costs inherent to 
retail  banking.  This  relative  rigidity,  while  moderating  the  speed  of  monetary  policy  pass-
through,  reinforces  the  stability  of  deposit  funding  across  interest  rate  cycles,  making  such 
deposits the cornerstone of the EU’s predominantly bank-based financial system. The ECB's 
Economic Bulletin analysis6 confirms this conclusion, acknowledging the impact of national 
banking markets’ structure and remaining differences in the EU deposit insurance frameworks. 

2.1.1.  Lending: EU banks’ core financing function 

EU banks are the primary source of financing to the real economy. As of June 2025, the 
aggregated assets of EU/EEA banks reached EUR 29 trillion equivalent to roughly 80% of EU 
GDP, with loans and advances accounting for 63% of total assets (EUR 20.3 trillion). Error! 
Reference source not found.Figure 1 underscores the criticality of bank financing for the EU 
economy. This aggregate figure hides however substantial variation across different types of 
borrowers.  As  of  December  2025,  66%  of  the  outstanding  loans  and  advances  of  EU/EEA 

6 

Money and credit dynamics in the euro area and a comparison with the United States. Economic Bulletin, 
Box 
https://www.ecb.europa.eu/press/economic-
Bank. 
bulletin/focus/2024/html/ecb.ebbox202406_07~925b6bd4c3.en.html   

European 

7/2024. 

Central 

3 

 
 
 
 
 
banks were extended to households and corporates7. Households accounted for EUR 7 trillion 
(35% of total loans and advances) while corporates represented EUR 6.3 trillion (31% of total 
loans and advances).  

Figure 1: EU/EEA Banks' asset composition.  

Source: EBA Rish Dashboard (Q4 2025), FISMA calculations 

Households lending remains one of the most structurally important functions of EU/EEA 
banks, primarily through mortgages, consumer credits, and personal loans. Competition 
in this segment stays robust, driven by a broad network of significant and less significant banks 
across the EU, as well as enhanced digital channels widening accessibility and streamlining 
loan origination.  

The  primary  source  of  corporate  funding  has  consistently  been  provided  by  banks, 
accounting for 46% of corporate debt financing in the EU8. This figure has been broadly 
stable for the past year but decreased significantly (11% gap) since the GFC as banks were 
forced  to  deleverage  in  order  to  comply  with  stricter  prudential  requirements.  There  are 
considerable  differences  between  EU  Member  States  in  terms  of  share  of  bank  loans  in 
consolidated corporate debt (12% in Ireland up to 70% in Austria). In parallel, credit provisions 
by NBFI have increased over the past years, notably via private credit. According to ECB’s 
estimates, the share of non-banks in the provision of credit to corporates grew from circa 15% 
at the time of the GFC to circa 30% in 2021. 

7 
8 

EBA risk dashboard – Q4 2025 (link) 
European Financial Stability and Integration Review, 2026: European Financial Stability and Integration 
Review 2026 (link) 

4 

 
 
 
 
 
 
Figure 2: Share of bank loans in total (consolidated) NFC debt 

Capital  market  instruments  (listed  shares,  corporate  bonds)  remain  structurally 
underdeveloped,  especially  compared  to  the  UK  and  the  US.  Debt  securities  and  listed 
shares make up only 3% and 14% of corporate debt in the EU, whereas respectively account 
for 7% and 31% in the UK and 6% and 38% in the US. The ECB's Occasional Paper on the 
Capital Markets Union notes that while progress has been made over the past decade, European 
capital  markets  remain  fragmented  along  national  lines,  reducing  their  capacity  to  allocate 
capital  efficiently  across  borders.9 This  structural  gap  reinforces  the  continued  centrality  of 
banks in financing the European economy. The Savings and Investments Union strategy aims 
at developing scale and depth of the EU capital markets, thus bringing diversification to EU 
funding markets.  

9 

Capital Markets Union: a deep dive. Occasional Paper No. 369. European Central Bank (link)  

5 

 
 
 
 
Figure 3: Composition of NFC liabilities in the EU 

Banks  play  a  particularly  critical  role  for  SMEs10,  providing  EUR  2.6  trillion  in 
outstanding loans (40% of banks’ total corporate lending, as per Figure 1) . SMEs are, on 
average, highly reliant on banks due to their limited access to capital markets, making 
them vulnerable to any tightening of credit lending, related to underwriting standards or other 
factors. In contrast, micro-firms tend to rely more on non-bank financing, as alternative sources 
of funding (such as own equity or other sources which are better suited to funding higher-risk 
projects that fall outside banks’ risk appetite).  

Corporates’ reliance on bank lending differs markedly across sectors. Banks remain the 
dominant  source  of  external  financing  for  asset-heavy  industries,  such  as  real  estate, 
construction,  and  wholesale  trade,  where  tangible  collateral  and  established  credit  histories 
facilitate credit assessment. Commercial real estate lending historically shows the highest bank 
credit penetration (approx. 25% of total assets of the sector), reflecting the importance of bank 
debt  for  this  sector  made  possible  by  a  tangible  and  relatively  liquid  pool  of  collateral. 
Conversely,  sectors  with  higher  productivity  potential,  such  as  manufacturing,  ICT  and 
productivity-enhancing technology firms fund only a small fraction of their assets through bank 
lending (circa 4%), relying instead on a more diversified financing mix. For the latter group of 
sectors, the lack of tangible collateral, coupled with the opacity of early-stage cash-flows often 
push  financing  needs  beyond  banks’  risk  appetite.  This  aligns  with  the  conclusions  of  the 
Letta11  and  Draghi12  reports,  highlighting  the  limitations  of  bank-based  financing  for  some 

10 

11 
12 

SMEs represent over 99% of EU businesses and account for roughly two-third of employment in the 
EU.  
Enrico Letta, Much more than a market, April 2024 
Mario Draghi, The future of European competitiveness, September 2025 

6 

 
 
 
 
sectors despite their high productivity and innovation potential, requiring deeper EU capital 
markets.  

Figure 4: Source of funding per corporate sector; 2023 

Source: BvD Electronic Publishing GmbH – a Moody’s Analytics company, ECB (AnaCredit, 
QSA,  MNA),  European  Commission  (KLEMS)  and  ECB  calculations,  reflected  in  the 
Eurosystem's response to the EU Commission's targeted consultation on the competitiveness 
of the EU banking sector. 
Note:  Bank  credit  includes  credit  lines,  loans,  trade  receivables  and  overdrafts  reported  in 
AnaCredit. A firm is defined as having access to bank lending if it has at least one outstanding 
credit exposure in AnaCredit or Orbis. 

Bank lending behaviour is inherently procyclical: credit expands during upswings and 
contracts during downturns. When these swings are driven by supply-side factors, they may 
amplify  rather  than  dampen  the  underlying  economic  cycle.  However,  if  banks  are  well 
capitalised and profitable, procyclicality of credit supply can be mitigated.  

7 

 
 
 
 
 
Figure 5: Loan demand and credit-to-GDP gap 

Source: The transmission of monetary policy: financial conditions and credit dynamics. Speech 
by Philip Lane, ECB Executive Board Member 

During the tightening cycle of 2022–2023, banks’ lending growth weakened sharply, in 
line with the intended transmission of monetary policy. As highlighted in Figure 5 (left had 
side panel), the net demand for loans from both corporates and households collapsed through 
2022-2023, due to higher rates discouraging borrowing for both counterparties, while banks 
tightened  their  own  credit  standards.  The  tight  monetary  policy  slowed  loan  demand  and 
therefore pushed credit below GDP (right hand side panel), which was instead recovering from 
the sharp COVID-19 induced downturn. This gap was not fully offset by non-bank financing, 
via public or private markets, as banks maintained their central role of credit intermediation in 
the EU. The credit-to-GDP gap remained wide in 2024, and only slowly started to narrow, as 
loan  demand  from  corporates  and  households  was  recovering.  On  one  hand,  this  this  trend 
shows how banks are a key component of monetary policy transmission, on the other hand it 
highlights  the  need  to  further  develop  capital  markets  to  serve  as  an  additional  source  of 
financing and mitigate the credit supply difference. 

Looking closely at credit demand and supply, the ECB’s Survey on the Access to Finance 
of  Enterprises  (SAFE)13  points  to  a  credit  market  that  is  normalisation  rather  than 
structurally impaired. The survey evidences an easing of the financing constraints since the 
post-pandemic tightening cycle: loans’ rejection rates, which spiked sharply across corporates, 
consumers, and mortgage lending in 2022-2023 as rates rose, have since drifted back toward 

13 

For further reference (link) 

8 

 
 
 
 
 
pre-crisis levels, with only a slight uptick in consumer credit rejections over the past year. At 
corporate level, actual loan refusals remain rare, with only 1% of firms having a loan request 
rejected in 2025 (down from 3% in 2024) and overall obstacles to obtaining a bank loan (incl. 
rejections, declined offers, and partial approvals) fell to 7% from 15% over the same period. 
This improvement however coincides with a longer-run decline in loan demand itself. The 
share of EU  corporates  applying from  bank credit has fallen from  34% to 24%  since 2014, 
suggesting corporates are relying less on bank finance rather than being squeezed out of it. For 
firms  that  did  not  apply  for  bank  loans,  the  most  frequently  cited  reason  was  that  they 
considered their internal funds to be sufficient to support their business plans. Crucially, these 
constraints  are  heterogeneous  among  Member  States  and  remain  systematically  higher  for 
SMEs than for large firms, indicating that credit subduedness is concentrated among specific 
borrower segments and jurisdictions rather than reflecting a broad-based supply crunch. 

Figure 6 - Bank loan applications 

Source: EBA/ECB data. 

2.1.2.  Productivity and bank lending 

Total factor productivity (TFP) growth in the European Union, a key variable related to 
long  term  economic  growth  and  development,  has  slowed  down  since  200014  and  has 
lagged significantly behind that of the United States over recent decades. This productivity 
gap, which compounds over time into a substantial competitiveness disadvantage, has multiple 

14 

“Mid-Tech Europe? A Sectoral Account on Total Factor Productivity Growth from the Latest Vintage 
of the EU-KLEMs Database” (link). 

9 

 
 
 
 
 
 
drivers, but  the role of  finance  and  capital  allocation is  recognised as  a  contributing factor. 
Evidence cited in the ECB’s Financial Stability Review special feature on firm productivity 
underscores  the  non-linear  relationship  between  bank  lending  and  aggregate  TFP15:  while 
efficient  capital  allocation  can  boost  productivity,  distortions  in  lending  practices,  such  as 
support for low-productivity incumbents or sectorial biases, may instead hinder it.  

Figure 7 - Cumulative TFP growth: Euro Area vs. US 

Source: ECB Financial Stability Review, November 2024 

The terms and composition of bank lending contribute to shaping the productive capacity 
of the economy. A key insight from the ECB’s working paper is that high-performing banks 
are not only more resilient but also more effective intermediators.16 The paper shows, using 
granular data from the euro area credit register and the pandemic shock, that banks with higher 
"edge" (that is, performance relative to a market-based benchmark) originate more credit, direct 
it towards more productive firms, and support to a greater extent firms’ investment. 

Conversely,  the  literature  on  credit  misallocation  points  to  a  significant  risk:  banks, 
especially  during  stress  periods,  often  support  non-viable  firms  instead  of  allowing 
resources  to  be  reallocated.  For  instance,  while  public  guarantees  during  the  COVID-19 
pandemic  were  vital  for  sustaining  viable  firms  through  temporary  liquidity  shocks,  they 
inadvertently supported less productive businesses, depressing aggregate TFP. More broadly, 
the  “zombie  lending”  witnessed  in  Japan  and  Europe  after  crises  periods  like  the  Global 
Financial  Crisis  underscores  how  misallocation  can  severely  drag  down  long-term 
competitiveness. 

15 

16 

Low firm productivity: the role of finance and the implications for financial stability. Financial Stability 
Review, Special Feature, November 2024. European Central Bank (link) 
Determinants  of  bank  performance:  evidence  from  replicating  portfolios.  Working  Paper  No.  2937. 
European Central Bank (link) 

10 

 
 
 
 
The capacity of a financial sector to support innovation is another critical dimension of 
the productivity-finance nexus, and banks are, by nature, not best placed to finance early-
stage or innovation-intensive firms whose assets are predominantly intangible and whose 
cash  flows  are  uncertain.  This  is  because  banks,  and  creditors  more  generally,  are  only 
interested in their credit being repaid and do not participate to the profits of a company and 
therefore may lack incentives and skills to screen for particularly innovative and productive 
ventures. The incentives to screen for innovative and productive firms and invest in those are 
greater for equity investors, which take part to the ownership of a company and to the profits 
it may generate. In other words, equity investors, differently from bank investors, participate 
to the upside risk of a company and have a different risk/reward profile than banks. Banks also 
normally opt for investments into tangible assets, which can be collateralised to help mitigate 
credit  risk.  Given  innovative  firms’  uncertain  and  often  intangible  and  uncertain  valuation 
aspect, for instance linked to intellectual property rights, these loans cannot be collateralised in 
a way that grants a more favourable capital treatment, and are hence less interesting for banks. 
Spotting  opportunities  with  early-stage  firms  requires  specific  skills  that  are  less  present  in 
banks and more in equity investors (e.g. venture capital firms). These structural limitations of 
bank-based  intermediation  argue  for  a  more  diversified  financial  ecosystem,  with  a  greater 
share of equity and venture capital investors, a conclusion that points directly to the rationale 
of the Savings and Investments Union strategy.  

While banks are the primary source of external financing for the majority of European 
firms, and particularly for SMEs, the efficiency of capital allocation (i.e. the degree to 
which credit flows to firms with the highest marginal productivity of capital) may not be 
the (main) objective of bank lending. At the sectoral level, the composition of bank lending 
portfolios  across  the  euro  area  reveals  significant  concentration  in  real  estate.  A  substantial 
share  of  bank  credit  in  most  European  countries  is  directed  to  the  real  estate  sector,  both 
residential  mortgage  lending  and  commercial  property  financing.  While  such  lending  is 
economically important, it is equally important that bank credit in collateral-backed real estate 
is complemented by the financing of innovative, fast-growing firms, which should also rely on 
other  sources  like  equity  investors.  Furthermore,  a  large  real  estate  banking  portfolio  may 
impact housing availability.  

2.1.3.  Banks as market intermediaries 

Beyond  their  traditional  role  as  deposit-taker  and  lenders,  some  banks  serve  as 
intermediaries in financial markets. In this capacity, they operate as underwriters, arrangers, 
dealers,  custodians  and  risk  managers,  thereby  enabling  investment  flows  across  the  EU 
economy.  This  intermediary  role  is  heavily  concentrated  around  the  seven  euro-area  global 
systemically important banks (G-SIBs) and other large EU banks.  

Repo  markets17  are  one  of  the  key  channels  through  which  banks’  intermediation 
operates,  given  the  scale  of  these  markets.  Repo  intermediation  activity  has  more  than 

17 

Repo markets are where financial institutions borrow and lend securities (typically government bonds) 
as collateral in exchange for short-term cash, with an agreement to reverse the transaction at a set future 
date. 

11 

 
 
 
 
doubled  since  2021,  driven  by  increased  demand  from  non-euro  area  non-bank  financial 
entities (NBFI). Repo intermediation in US dollar warrants particular attention in this context, 
considering the demand from non-euro area investment funds (mainly hedge funds) for short-
term liquidity denominated in USD. This activity is highly concentrated within five euro area 
G-SIBs  accounting  for  circa  80%  of  banks'  total  reverse  repo  claims  on  NBFI  entities18. 
Furthermore, these G-SIBs are also the principal repo counterparties for those NBFI entities on 
the liability side, making them simultaneously the largest lenders to, and borrowers from, the 
NBFI sector. This two-way exposure creates a structural interdependency as any stress event 
triggering outflows would simultaneously erode both the asset positions and the funding base 
of institutions at the core of the intermediation chain.  

The  G-SIB’s  intermediation  role  has  grown  markedly  relative  to  domestic  activity, 
reflecting the sizeable international footprint of some euro area G-SIBs. Sustaining this 
intermediation role requires euro area G-SIBs to raise significant USD funding, with currently 
approximately  17%  of  funding  denominated  in  US  dollars.  This  funding  is  sourced 
predominantly  from  wholesale  markets,  making  the  G-SIBs’  intermediation  capacity 
structurally  contingent  on  continued  access  to  these  markets.19  Since  the  monetary  policy 
tightening cycle began in 2022, total outstanding amounts of euro area banks’ US dollar repos20 
have almost doubled, reaching EUR 1.6 trillion in November 2024, whereas euro-denominated 
repo volumes have remained broadly unchanged over the same period. Euro area banks are net 
US  dollar borrowers in  the repo market,  with  volumes of repos exceeding reverse  repos by 
around EUR 250 billion, and they channel these dollars predominantly toward non-euro area 
non-banks. Beyond repos, euro area banks have also expanded sharply as net providers of FX 
swaps to euro area non-banks: net positions vis-à-vis euro area non-banks have tripled over 
five years, with net positions to investment funds increasing up to fivefold and to pension funds 
up to threefold since 2018. Unlike US banks (from which euro area G-SIBs are net buyers of 
US  dollars)  euro  area  banks  thus  serve  as  the  structural  intermediary  redistributing  dollar 
liquidity toward the European NBFI sector. 

This concentration of dollar intermediation in a few G-SIBs creates mutually reinforcing 
vulnerabilities21. On the liability side, the short-term nature of the funding on which these G-
SIBs rely, approx. 60%  of deposits  and  repos with  NBFI  entities, renders them structurally 
exposed to outflows. On the asset side, around 26% of total identifiable exposures to NBFI 
entities involve firms using leveraged strategies, with any deterioration in market conditions 
risking  triggering  simultaneous  deleveraging  by  the  counterparties  providing  that  funding. 
These balance sheet risks are compounded by two structural features of the markets in which 
the  intermediation  takes  place.  First,  both  the  repo  and  FX  swap  markets  are  highly 
concentrated, with the top four euro area dealers now accounting for about 60% of the FX swap 

18 

19 

20 
21 

ECB Financial Stability Review, November 2025, Special Feature: "Systemic risks in linkages between 
banks  and  the  non-bank  financial  sector"  -  https://www.ecb.europa.eu/press/financial-stability-
publications/fsr/special/html/ecb.fsrart202511_02~e2f82a64bf.en.html.  
Euro area banks’ role in market-based intermediation. Financial Stability Review, Special Feature, May 
2025. European Central Bank. 
Financial Stability Review, November 2024. 
ECB and ESRB issue joint report analysing financial stability risks from linkages between banks and the 
NBFI sector (link). 

12 

 
 
 
market,  up from  50% five years ago. The failure or  retrenchment  of even one G-SIB could 
impair the proper functioning of USD intermediation of the European financial system. Second, 
the off-balance sheet nature of the FX swap exposures limits the assessment of associated risks, 
especially  concentration  risk.  Should  these  G-SIBs  curtail  their  activity  under  stress,  their 
counterparties could face difficulties funding or hedging dollar-denominated investments and 
may need to  sell such assets,  transmitting  bank-level  stress  directly into broader  asset price 
dislocations. These dislocations could be further amplified by the structural dependency of EU 
GSIBs on USD funding mechanism (including FX swap lines and USD money markets). This 
dependency weights on EU banks’ competitiveness as the cost of maintaining USD liquidity 
buffers disadvantages EU banks compared to US peers. 

Next to servicing NBFIs, banks play a crucial role in the capital markets by channelling 
retail savings into diverse investment products, such as UCITS funds, ETFs, and pension 
schemes under applicable regulatory requirements. The top five EU-headquartered assets 
managers by assets under management are bank-affiliated, underscoring the impact of banks 
in the savings-to-investment pipeline.  

As underwriters and lead arrangers, banks function as a gateway for corporates seeking 
capital markets access. Their influence is particularly pronounced in the publicly listed equity 
(EUR  87  billion  in  equity  issuance,  including  IPO  and  secondary  offerings  in  2025),  bond 
issuance (EUR 436 billion in  corporate bond issuance in  2025 and EUR 3.2  trillion  in  new 
sovereign debt issuance in 2025), and in mergers and acquisitions (EUR 348 billion in deal 
value in 2025). There are signs of increasing competition on several areas of the market from 
non-bank financial institutions: however, comprehensive data and research on these aspects is 
not readily available. 

As market makers, banks are indispensable, ensuring liquidity, price discovery and risk 
management across a range of financial instruments. The EU relies structurally more on its 
banking sector for market making compared to the US, rendering the operational capacity of 
EU banks’ trading desks systemically important.  

As  post-trade  service  providers,  banks  operate  crucial  services  subsequent  to  the 
execution  of  trades,  facilitating  capital  movement.  Acting  as  settlement  agents,  clearing 
members, custodians and collateral managers, banks facilitate the seamless transfer of assets 
for EU counterparties.  

2.2.  Resilience, profitability and market valuations 

The analysis of the  banking  sector’s  competitiveness  must  rely  on  its  overall resilience  and 
sustainability in generating profits. Only banks that are stable and sound can be competitive 
and can—in turn—contribute to the competitiveness of the broader economy. The profitability 
and competitiveness of a bank is key to ensure its long-term viability and stability, as profits 
are the first source of capital for banks. 

13 

 
 
 
The EU banking sector is resilient, as shown by a series of indicators and as evidenced by 
the latest EU wide stress tests22. Liquidity ratios are overall stable and satisfactorily above 
minimum requirements, with LCR and NSFR standing at 163% and 127%, respectively, as of 
Q4  202523.  The  results  of  the  2025  EU-wide  stress  test  show  that  European  banks  remain 
resilient under an adverse scenario which combines increasing geopolitical and trade tensions, 
a severe EU and global recession and rising inflation – a very relevant scenario in the current 
geopolitical context. The CET1 ratio of participating banks stood at 15.8% on average at the 
beginning of the exercise, the highest starting point of all previous EBA stress test exercises. 
Despite the sizeable losses induced by the stress scenario, the average CET1 ratio at the end of 
the scenario was 12.1%. All 64 banks in the stress test sample remained above minimum capital 
requirements except one that breached the leverage requirements, while 17 banks faced limits 
in  their  dividends’  distribution  –  hitting  “the  MDA  trigger”24.  The  results  of  the  stress  test 
underpinning  the resilience of EU banks to  the adverse stress  scenario can be explained by 
three  key  factors:  the  solid  capital  position,  the  strong  ability  to  generate  income  and 
profitability, and the good asset quality. 

The banking turmoil of spring 2023 in the United States and Switzerland was a real-life 
stress test that proved the resilience of the EU banking sector in a moment of heightened 
market  tensions.  In  Spring  2023,  Silicon  Valley  Bank  and  three  other  US  banks  failed  in 
succession25.  These  events  created  tensions  in  financial  markets  that  went  beyond  the  US 
banking sector. Credit Suisse also experienced a fatal loss of market confidence that brought 
its collapse and government sponsored acquisition by UBS26. Notwithstanding the heightened 
tensions  in  financial  markets,  following  this  series  of  bank  failures  is  a  complex  macro-
financial  environment,  the  EU  banking  sector  proved  resilient  as  no  EU  bank  entered  into 
difficulties. EU public authorities had monitored any arising issues and communicated at key 
junctures of the banking turmoil27. 

2.2.1.  Capital increase and asset quality strengthening 

Today, EU banks are stable and well capitalised: their capital ratios are at all-time highs 
and  have  almost  doubled  compared  to  2009  and  increased  by  30%  compared  to  2014 

22 

23 
24 

25 

26 

27 

The EU wide stress test sample comprised 64 banks, covering 75% of total banking assets in the EU and 
Norway. 75% of EU. 
EBA Risk Dashboard – Q4 2025 (link).  
The  maximum  distributable  amount  (MDA)  represents  the  maximum  limit  to  the  distributions  (e.g. 
dividends, buybacks and bonuses) that a bank can make once it falls below its overall capital requirements 
(OCR). The OCR is the sum of the total SREP capital requirement (TSCR), notably the sum of bank’s 
Pillar 1 and Pillar 2 requirements and the combined buffer requirement (CBR), which includes the capital 
conservation buffer, the countercyclical capital buffer, the global systemically important institutions (G-
SII) buffer if applicable, the O-SII buffer if applicable and the systemic risk buffer if applicable. The 
MDA  is  part  of  the  capital  conservation  plan  that  a  bank  falling  below  its  OCR  must  submit  to  its 
supervisor, detailing, among others, a timeframe and set of measures to increase the capital ratios. 
In March 2023, at the time of failure, SVB was the 16th largest bank in the US with around USD 200 
billion in assets, while the other two banks, Signature Bank and Silvergate, were at the time USD 110 
billion and USD 15 billion in asset. They were followed in May 2023 by First Republic Bank (USD 229 
billion at the time of failure) that was eventually resolved by the FDIC and then acquired by JP Morgan 
Credit Suisse was one of 30 Global Systemically Important Banks (G-SIB) and had a size of CHF 531 
billion as of end 2022. 
For instance, the ECB Banking Supervision, SRB and EBA statement on the announcement on 19 March 
2023 by Swiss authorities (here) or the SSM’s introductory statement at the Hearing of the Committee 
on Economic and Monetary Affairs of the European Parliament (here). 

14 

 
 
 
levels. In the first years following the GFC, EU banks made efforts to shore up their capital 
ratios by improving capital supply and asset quality. The decade from 2014 to 2025 confirms 
a trend of a remarkable capital build-up from the context of vulnerable post-crisis base to levels 
that guarantee resilience of the sector. Looking at Tier 1 capital ratio, EU banks’ Tier 1 ratio at 
Q4 2025 stood on average at 17%, increased by 400 bps from the 2014 level of 13%, and by 
755 bps from the 2009 level of 10%. The picture is similar when looking at the CET 1 ratio28, 
now at 16,3% and increased by 400 bps and 730 bps from its 2014 and 2009 levels, and at total 
capital  ratio  (which  considers  also  Additional  Tier  1  and  Tier  2  instruments),  which  stands 
today at 20,4% and was 16,2% in 2014 and 13% in 2009.  

The capital increase in EU banks was encouraged by a demanding regulatory framework 
and supervisory conservativeness which led to a continuous build-up over time, coming 
from equity issuances and retained earnings. EU banks’ capital supply, looking both at CET 
1, Tier 1 and total capital, increased from 2010 onwards. The capital buildup is the result of 
supervisory pressures and EU banks’ ability to shore up their solvency profiles coming out of 
the GFC. Analysing the composition  of the capital  build since 2009,  in the first  half of  the 
2010s, capital accumulation was primarily driven by issuance and the injection of fresh capital 
in the system via equity raises and issuance of contingent convertible hybrid instruments29. The 
process  took  time  and  efforts,  constrained  by  chronically  low  profitability  and  investor 
scepticism about European bank valuations.  

The  2010s  decade  also  featured  waves  of  deleveraging  and  derisking  that  contributed 
substantially to the increase in capital ratios, even though at the cost of exits from certain 
activities  and  markets,  including  cutting  cross-border  activities.  Over  the  first  years  of 
crisis, deleveraging had largely been driven by equity increases – as banks located in the euro 
area issued EUR 133 billion in quoted shares from December 2008 to March 2013, while assets 
remained close to 2008 levels30. From May 2012 to 2014, EU banks reduced their consolidated 
balance sheets by over EUR 5 trillion (of which EUR 4,3 trillion of euro area assets), with great 
variation  across  banks.  Around  half  of  this  decline  came  from  a  reduction  in  derivative 
positions,  which  has  made  the  most  significant  contribution  to  balance  sheet  shrinkage  on 
aggregate. The second driving factor was a reduction in loans to the non-financial private sector 
(including  asset  transfers)  specifically  affecting  countries  under  macro  financial  stress31. 
Contextual to the deleveraging, EU banks were faced with a deterioration of asset quality. In 
countries worse hit by the crisis, non-performing loans (NPL) ratios were increasing to all-time 
highs to the peaks of 2013-2014. Following deleveraging and balance sheet derisking efforts, 
in the years between 2014 and 2018 EU banks gradually reduced their stock of NPLs and exited 
lines of business that either were perceived as excessively risky or were not profitable enough 
– hence not generating enough risk-adjusted capital. 

28 

29 

30 
31 

CET 1 was not defined consistently in 2009; hence Tier 1 ratio is used as a reference offering a time 
series as consistent as possible over time. 
To a lesser extent, and the gradual unwinding of legacy capital structures that were non-compliant with 
the fully phased-in Basel III definition of CET 1. 
Financial Stability Review, European Central Bank, May 2013 (p. 57). 
Financial Stability Review, European Central Bank, May 2014 (p. 69). These countries were Greece, 
Italy, Ireland, Portugal, Spain. 

15 

 
 
 
Figure 8 - CET 1 ratio of EU banks, SSM sample (as of 2015) and EU G-SIBs (changing 
composition). CET 1 capital for years before 2013 refers to Tier 1 capital excluding hybrid 
instruments. 

Source: ECB, EBA 

Over the past 10 years, EU banks have improved their asset quality. In 2014, NPLs were 
a macro-financial problem and a drag on the EU banking sector, with the non-performing loans 
amounting to 6,5% of the total loans and advances (the so-called NPL ratio) – see Figure 9. On 
the back of the balance sheet derisking efforts and the improved internal capacity of banks to 
manage impaired assets, the picture is much different today. The NPL ratio remained stable at 
1,8% as of Q4 2025 and the EU banking sector has proven able to weather the COVID crisis, 
the inflation spike and the energy crisis maintaining a high credit quality. Looking at the credit 
risk in banks’ portfolios, the picture looks broadly under control even though Stage 2 loans (i.e. 
underperforming loans according to IFRS 9) have increased over the past 5 years (from 8% to 
9,5%)  and  vulnerabilities  may  arise  from  an  uncertain  macroeconomic  and  geopolitical 
outlook. 

16 

 
 
 
 
 
Figure 9 - Non-performing loans in the EU 

Source: ECB. 
Note:  Non-performing  loans,  domestic  and  (non-EU)  foreign  subsidiaries  and  branches, 
FINREP  reporters  in  EUR  (billion)  and  NPL  ratio,  domestic  and  (non-EU)  foreign 
subsidiaries and branches, FINREP reporters, EU, quarterly data. 

2.2.2.  Profitability improvements 

In addition to being well capitalised and resilient, today’s EU banking sector is profitable 
– yet, financial market valuations are still treating EU banks at a discount compared to 
past performances and to US peers. Since the GFC, the sector has struggled to recover and 
has recorded years of low profitability, linked to both macro-financial and idiosyncratic factors. 
In the years between the GFC and euro area sovereign debt crisis and until 2016, EU banks had 
a return on equity (RoE) 32 between 3% and 4%. In the years between 2017 and 2021, the RoE 
of the EU banking sector was around 6%, with the exception of 2020 where it stood at 0.5% 
due to the increase in loan-loss provisions resulting from the COVID pandemic. All along these 
years, the RoE of EU’s banking sector was below its cost of equity – meaning that EU banks 
were delivering to their investors less than their expected rate of return. Today (as of Q4 2025), 
the RoE of EU banks stands at 10.5%, which is in line with the performance of 2024 and 2023 
(10.5%  and  10.4%,  respectively).  Hence,  EU  banks’  profitability  is  at  record  highs, 
with earnings surpassing pre-2008 financial crisis peaks33. 

32 
33 

Return on Equity is defined as total profit or loss for the year divided by total equity. 
The  same  cannot  be  said  for  US  banks,  even  though  they  are  close  to  those  highs.  In  particular,  the 
average quarterly RoE (FDIC Data) in the pre-crisis period between 2001 and 2006 was 13.5%, while 
recently (in the period 2021-2026) the average quarterly RoE stood at 11.8%. To note, the pre-financial 
crisis was a rather favourable period for banking globally, whereas by contrast the banking turmoil of 
Spring 2023 had a negative effect on bank returns. 

17 

 
 
 
 
 
Figure  10  –  Return  on 
equity  (in  percentage 
points)  of  EU  banks, 
SSM Sis and EU G-SIBs.  

Source: ECB, EBA 

Figure  11  –  Return  on 
equity and cost of equity 
(in percentage points) of 
listed  euro  area  banks. 
The  cost  of  equity  of 
euro  area  banks 
is 
on 
estimated 
Altavilla et al (2021)34. 

based 

Source: ECB 

Interest income dynamics 

The trajectory of net interest income (NII) over the past three years (2022 to 2025) has 
been the dominant driver of the remarkable improvement in EU banks’ profitability. Net 
interest income is a key component of EU banks’ revenue structure as it accounts for 50% to 
60% of the EU banking sector’s total income. As a response to the inflation spike that took off 
at  the  end  2021,  the  ECB  (together  with  other  EU  central  banks)  rapidly  increased  its  key 
interest rates in the attempt to tame inflation. The monetary policy tightening cycle that began 
in 2022 delivered a substantial boost to NII, as lending rates repriced upward faster than deposit 
remuneration, enhancing EU banks’ net interest margin – see Figure 12. Looking in detail, the 

34 

Altavilla, C., Bochmann, P., De Ryck, J., Dumitru, A.-M., Grodzicki, M., Kick, H., Melo Fernandes, 
C., Mosthaf, J., O’Donnell, C. and Palligkinis, S., “Measuring the cost of equity of euro area banks”, 
Occasional Paper Series, No 254, ECB, 2021. 

18 

 
 
 
 
 
 
 
 
 
 
 
enhancement of interest margin can be observed driving the increase in NII since the start of 
2022, as the banking sector was anticipating a monetary policy tightening that started in July 
2022. 

Figure  12 
-  Net 
interest income (NII) 
dynamics. 

Source:  ECB  and 
Supervisory 
Reporting 

EU banks’ net interest margins benefited from a quick pass-through on interest earning 
assets35 and on a favourable outlook to keep their financing expenses under control.  In 
particular, in 2022, the average loan-deposit spread on the front book (i.e. the new loans granted 
by a bank) started increasing, tripling from 1,5% to more than 4% in 2023 – see Figure 13. In 
addition, banks benefitted from favourable financing conditions, keeping under control their 
interest  expenses.  On  financial  markets,  banks’  cost  of  capital  decreased  as  yields  have 
continued to decline and credit spreads compressed to the lowest level since the start of the 
hiking  cycle  (with  the  exception  of  covered  bonds),  particularly  tight  for  the  most  junior 
instruments – see Figure 14. On the deposits side, EU banks have seen inflows of deposits over 
the past 3 years, with the exception of the second half of 2023: the trend extended further a 
relatively cheap financing source, showing on one hand a rather low sensitivity of deposit rates 
to  policy  interest  rates  –  see  Figure  15  –  though,  on  the  other  hand,  a  noticeable  share  of 
depositors shifted from non-remunerated overnight deposits to remunerated term deposits. 

Figure 13 – EU Banks loan-deposit spreads 
on outstanding amounts (in blue) and on new 
business (in yellow); and net interest margin 
(in blue).  

Figure 14 – Secondary bond markets bond 
yields and spreads of euro area banks.  

35 

This is particularly true for banks whose assets are predominantly earning a floating interest rate.  

19 

 
 
 
 
 
 
Source: ECB  

Source: ECB 
Note: left hand chart in percentages; right 
hand chart in basis points 

Figure 15 – Deposits and passthrough rates.  
Panel a) Quarterly deposit flows and annual growth; Panel b) Deposit betas across past 
cycles; Panel c) average deposit rates offered by euro area banks 

Notes.  Panel  a)  January  2022  to  March  2025;  three  month  rolling  flows,  EUR  billions, 
percentages.  
Panel  b)  change  in  rate  on  new  business  divided  by  change  in  the  deposit  facility  rate, 
Deposit  betas  for  the  hiking  cycle  are  calculated  on  the  period  from  January  2022  to 
November 2023 for term and redeemable-at-notice deposits and from January 2022 to May 
2024 for overnight deposits, reflecting the peak of different deposit rates. Easing betas for 
agreed  maturity  (AM)/redeemable-at-notice  (RED)  and  for  overnight  (ON)  deposits 

20 

 
 
 
 
 
 
  
consider the period from November 2023 and May 2024 until September 2025 respectively. 
“Historical range of previous hiking betas” refers to the peak betas reached during previous 
hiking 
in  November  2000,  November  2005  and  September  2011. 
Panel c) January 2022 to September 2025, percentages. 

cycles 

However, as the ECB (together with other EU central banks) began cutting rates from 
mid-2024, the NII tailwind has started to fade. Net interest margins started tightening, with 
EU/EEA banks posting a Net Interest Marin (NIM) of 1,58% in Q3 2025, down from 1,68% a 
year  earlier,  pushing  net  interest  income  to  levels  last  observed  in  late  2023.  Despite  this 
headwind,  overall  profitability  has  held  up  reasonably  well,  supported  by  volume  effects. 
European banks maintained robust return on equity levels averaging close to 10% in the first 
half of 2025, albeit with some cross-country variation. 

Looking back at the previous decade, we observe a picture of chronic NII compression 
that was affecting the long run viability (and market valuations) of the sector. With the 
ECB's deposit facility rate at the zero lower bound or even in negative territory and the yield 
curve  exceptionally  flat,  low  bank  profitability  was  driven  by  three  distinct  factors:  weak 
income generating capacity, a legacy NPL problem and structural inefficiencies. At the time, 
75% of euro area significant institutions were generating a  RoE of below 8%. While banks 
benefited  from  loan  volume  growth  (volume  effect)  and  declining  credit  costs  under  those 
conditions, these positive effects were insufficient to offset the steady erosion of net interest 
margins as assets repriced downward at a faster pace than liabilities.  

Non-interest income dynamics 

The trend on non-interest income, notably net fees and commission income (NFCI) and 
net trading income (NTI), tells a different story from the NII path. Where NII was subject 
to a squeeze in the low interest rate environment, followed by a surge from 2022, non-interest 
income  followed  a  more  complex  trajectory:  a  modest  but  significant  structural  rise  until 
beyond  30%  of  total  income  in  2020  and  2021  as  banks  tried  to  diversify  away  from  rate-
sensitive revenues, followed by a partial displacement effect as NII resurged. 

The evidence after the GFC and until the end of the last decade points to a weakly positive 
correlation between NII growth and NFCI growth for most SSM significant institutions, 
suggesting  some  degree  of  complementarity  between  these  two  income  sources  rather 
than substitution. In view of the pressures on net interest margins due to the prolonged period 
of low yields, many banks have sought to expand NFCI-generating activities to compensate for 
the  slowdown  in  NII.  However,  the  relationship  between  the  two  income  streams  actually 
linked  them  to  cyclical  factors  and  did  not  suggest  a  pure  substitution  effect.  This 
complementarity suggested that both income streams were driven by common macro factors 
such as economic growth and lending volumes, meaning that in a downturn—precisely when 
banks would most need fee income to compensate for NII pressure—fee income would also 
tend  to  fall.  In  addition,  there  is  no  unlimited  pool  of  fees  available  for  all  banks,  and  a 
substantial share of this stream of income is only available for a subset of business models like 
investment and custodian banks. 

In  2021,  as  pandemic  conditions  eased  and  economic  activity  rebounded,  profitability 
improved strongly driven by contracting cost of risk, as well as rising NFCI and NTI. Fee 

21 

 
 
and trading income therefore served as an early-cycle recovery driver before NII had begun to 
benefit from the rising interest rates.  

The onset of rate tightening from mid-2022 brought a sharp compositional reversal. As 
NII  surged  on  the  back  of  repricing,  its  share  of  total  income  rose  sensibly,  mechanically 
compressing the relative contribution of fees. Throughout 2022 and 2023, the share of net fee 
and commission income in total net operating income dropped, not because the absolute level 
of fees was collapsing, but because NII was growing far faster.  

Figure 16: Net operating income drivers and cost efficiency for EA and US G-SIBs 

Source: ECB 

Efficiency and cost-income ratio 

Analysing  today’s  levels  of  profitability,  EU  banks  have  strengthened  their  income 
generation  and  have  become  slightly  more  cost-efficient  over  the  past  10  years.  The 
dynamics of the cost-income ratio (CIR)36, which has decreased from 63% in 2014 to 53,3% 
in  2025,  capture  the  cost  discipline  showed  by  banks  especially  after  COVID,  and  is  also 
reflective of the strong increase in income generation. While the increase in profitability has 
already  been  discussed,  to  ascertain  whether  EU  banks  have  also  increased  their  cost 
effectiveness focus on operating costs as a share of core assets and liabilities. European lenders 
show  a  structural  reduction  in  costs  between  2021  and  2024  that  hints  to  an  increase  in 
operating efficiency.  

Looking  back  at  the  period  until  2020,  the  high  cost-to-income  ratio  (CIR)  was  a 
recurring and prominent problem for the EU banking sector, which ended up becoming 
a  structural  issue.  The  problem  was  fundamentally  one  of  income  (the  denominator) 

36 

Cost-income ratio = Administrative expenses divided by total net operating income. 

22 

 
 
 
 
stagnation  rather  than  costs  (the  numerator)  excess.  Banks  were  attempting  to  reduce 
operational costs through branch network rationalisation and headcount reductions or investing 
in  digital  transformation.  Nonetheless,  cost  savings  from  branch  rationalisation  and  staff 
layoffs were easily offset by the initial restructuring costs or the need to spend more on digital 
platforms changes. Yet, largely due to low income growth, EU banks' CIR on average remained 
above pre-crisis levels – see Figure 17.  

Figure 17 – Cost income ratios of euro area banks 

Source: ECB consolidated banking data 

After years of flat CIR dynamics, the combination of post-pandemic revenue recovery 
and continued cost discipline began to shift the ratio more favourably from 2021 onwards. 
Supported by higher interest rates and low loan loss provisions, euro area banks showed robust 
earnings momentum throughout 2022—this was particularly true for banks in countries where 
variable-rate  lending  predominated.  The  income  denominator  of  the  CIR  was  finally 
expanding, which mechanically improved the ratio even where costs were broadly stable. In 
2022,  bank  operating  profitability  improved  further,  though  the  outlook  had  become  more 
uncertain amid vulnerabilities in non-financial sectors.  

From 2023 onwards, the CIR narrative shifted from a story of persistent failure to one of 
genuine  but  incomplete  improvement.  The  ECB’s  2025  SREP  results  (covering  the  2024 
performance year) provided quantitative evidence of the post-2022 efficiency transformation 
across the EU banking sector – see Figure 18. Looking across business models, the CIR trend 
hinting to operating expenses growing at a slower pace than operating income, demonstrating 
cost discipline, especially for G-SIBs, retail and consumer credit lenders, and universal  and 
investment banks. 

23 

 
 
 
Figure 18 - CIR by business model 

Source: ECB, 2025 SREP results 

Analysing the dynamics of CIR across the period, a structural tension emerges clearly 
and  consistently.  The  CIR  has  improved  dramatically  since  2022,  and  the  tangible 
improvement  is  the  result  of  efforts  from  banks  and  supervisors.  However,  this  positive 
development arguably does not constitute a structural cost cut, and it is instead attributable to 
income  growth  driven  by  the  rate  cycle  —  a  cyclical  rather  than  structural  driver.  This 
distinction  —  between  income-driven  CIR  improvement  and  genuine  structural  efficiency 
gains through cost reduction — is central to look prospectively and steer the discussion under 
the policy, (supervisory) and banking business points of view. The concern is that as the NII 
tailwind  fades,  banks  that  failed  to  use  the  high-profitability  window  to  fundamentally 
restructure their business, consolidate or restructure the cost bases may find the CIR drifting 
back toward the elevated levels that defined the 2014–2021 era. 

2.2.3.  Market perception and valuations 

Market valuations of EU banks have improved compared to the previous decade but still 
trade at a discount compared to the pre-crisis context and to international peers. Prior to 
the GFC, the long run weighted average of EU banks’ price to book ratios was around 2x, with 
US banks already showing a premium at 2.4x37. After the GFC and during the euro sovereign 
crisis, EU banks have traded below parity, meaning investors priced the net assets of EU banks 
at a discount compared to their book value. For more than a decade, the low valuations reflected 

37 

Financial Stability Review, May 2019 – Box 5 Recent developments in banks’ price-to-book ratios and 
their determinants (p. 66). 

24 

 
 
 
 
the many issues that were affecting EU banks’ performances and perceived solidity, as well as 
macro-financial  factors.  Today’s  price-to-book  ratio  of  EU  banks  (considering  a  composite 
index of publicly traded banks) have surpassed the parity, which is a positive outcome, even 
though it is still far from the pre-GFC long run average. In addition, today’s level still implies 
EU  banks  are  traded  at  a  discount:  both  compared  to  US  banks,  even  though  the  gap  has 
somewhat closed compared to the last decade, and compared to their own performance in the 
pre-GFC period. Anecdotally, the order of magnitude of the decline in EU banks’ valuations 
(and the contextual increase of US banks’ ones) over the past 25 years is remarkable: at the 
beginning of the 2000s, the 5 largest EU banks had individually a market capitalisation higher 
than the largest US bank; today, the single largest US bank has a market capitalisation higher 
than the 5 largest EU banks, combined.  

Figure 19 – Price to book ratios of indices of EU banks and US banks. The perceived lack 
of competitiveness of EU banks vs their own pre-crisis performance (PB ratio used to be 
1.8x before the GFC and is now 1.4x), and vs US banks’ valuations at 1.6x. 

Source: Bloomberg, DG FISMA calculations 

Market prices of EU banks can be seen as driven by a mix of variables, notably a bank’s 
profitability and how much of those profits it manages to distribute, its management and 
operational efficiency, and the macroeconomic outlook. According to an ECB analysis38, 
low EU banks’ valuations after the GFC were driven mostly by the weak growth environment 
(until  2013)  and  subsequently  (from  2013  onwards)  by  the  faltering  profitability  profiles. 
Moreover, the study highlighted how asset quality, and management and operational efficiency 

38 

See previous footnote - Financial Stability Review, May 2019 – Box 5 Recent developments in banks’ 
price-to-book ratios and their determinants. 

25 

 
 
 
 
were also explaining the dynamics of market prices. Overall, those factors explained about half 
of the variability of EU’s share price, meaning other factors were also playing a role. 

One key element influencing market valuations  is  related to how much of its profits a 
bank manages to pay out to its investors – in terms of dividends and share buybacks – 
and investors’ future expectations around that. Effectively, the price of an equity depends 
not just on how profitable the company is, but also on the share of profit which is paid out or 
distributed. The ECB’s Financial Stability Review of November 2025 makes the link between 
listed  EU  banks’  share  price  and  their  expected  profitability  and  payouts.  Also,  Resti  at  al. 
(2025)39 point out to the difference between the historical payout ratios between EU and US 
banks as a potential factor explaining EU’s share price underperformance.  

Market  valuations  can  be  influenced  by  investors’  long-term  expectations  over  the 
economy and the sector. Investors may still regard the increase in EU banks’ profitability as 
temporary, and cast doubts on the ability to maintain these performances consistently over time. 
In  other  words,  investor  sentiment  towards  the  sector  takes  time  to  adjust  and  structural 
considerations play a factor. Heider et al (2025)40 interpret the stickiness of market valuations 
of EU banks as linked to the fragmentation of the single market, which does not give EU banks 
a  sufficiently  wide  market  to  guarantee  continuous  growth  and  profitability  over  time.  In 
addition, analysts report that the past decade of low M&A activity, coupled with government 
interventions that hindered recent cases, dissipated investors interest in the sector.  

In  addition  to  these  explanations,  several  studies  tried  to  determine  the  impact  of 
regulation on banks’ valuations. A study by Oliver Wyman (2023)41 analyses the impact of 
regulatory  burden  on  EU  banks  compared  to  US  peers,  concluding  that  the  incremental 
regulatory impact on EU banks amounts to 0.8-1.0 percentage points in RoE and translates into 
a 0.11-0.12 on their price-to-book ratio42. The analysis mostly aims at showcasing how the EU 
regulatory framework puts European banks on an unlevel playing field with US ones43. Other 
analyses contradict the claim of that study44, and actually flip the argument by indicating how 
the  US  framework  would  be  more  stringent  than  the  EU’s  one.  Investors  are  interested  in 
comparative analyses on levels of capital requirements across jurisdictions, but are even more 
so interested looking ahead at changes (decreases or increases) of the regulatory framework 
imposing  those  capital  requirements.  Overall,  the  main  takeaway  from  the  debate  is  that 
regulatory framework can be a factor in influencing a bank’s business choices, and possibly 
that the prudential framework is adapted to the realities of its own banking sector.  

39 

40 

41 

42 

43 

44 

How  have  European  banks  developed  along  different  dimensions  of  international  competitiveness?  – 
Resti et al (2025), p. 17. 
How  have  European  banks  developed  along  different  dimensions  of  international  competitiveness?  – 
Heider et al (2025), p. 22. 
The EU banking regulatory framework and its impact on banks and the economy – Oliver Wyman, EBF 
(2023), p. 50. 
Among the costs considered in the analysis, there were SRF contributions. As SRF reached its target 
levels, these contributions are no longer being made and the estimates may now be on the high side. From 
the SRB’s Annual report, p. 5 (link): “Having reached the target level of 1% of covered deposits end of 
2023  and  being  still  above  the  threshold  in  2024,  the  Single  Resolution  Fund  did  not  raise  any 
contributions in 2024.” 
Recent analyses by Autonomous Research point to a similar takeaway, that the European framework 
ends up being more conservative than the one in the US. 
In  particular,  the  Occasional  paper  (here)  from  the  ECB  “Understanding  the  banking  sector  capital 
framework in the European Union” and a similar analysis from the EBA. 

26 

 
 
 
One  additional  factor  explaining  EU  banks  (and  more  broadly  EU  equities)  valuation 
dynamics is the size of the stock market. In the 2000 the market capitalisation of US domestic 
listed stocks was USD 15 trillion, while the EU’s was USD 5 trillion45. Today, the market cap 
of  US  companies  has  increased  by  5  times  to  USD  75  trillion,  while  EU’s  market  cap  has 
increased by 2.7x to USD 13.6 trillion46. While the dimension of the stock market does not per 
se explain differences in market valuations of single stocks, the orders of magnitude can help 
understand the scale at which the US stock markets have grown and how big of a problem the 
EU has without a completed SIU. This also has a remarkable effect on the CIB activities as it 
prevents EU banks to leverage on a wide EU market as their basis to develop scale and global 
operations. 

45 
46 

Data from the World Bank (link). 
As of end-of the year 2025, see here Equity Primary Markets and Trading Report (AFME). 

27 

 
 
 
 
 
3.   REMAINING CHALLENGES 

3.1.  Fragmentation of the single market in banking – Main issues 

The  fragmentation  of  the  banking  single  market  is  a  strategic  vulnerability  with 
detrimental  effects  on  the  EU  financial  sector  and  the  EU  economy.  A  more  integrated 
financial  market  would  enhance  the  EU's  collective  resilience  to  idiosyncratic  shocks  by 
enabling genuine cross-border risk sharing and portfolio diversification. In a fully integrated 
market, banks could allocate capital across Member States, so that a downturn in one country 
is partially absorbed by income flows from others. Where national segmentation persists, this 
insurance mechanism based on the private financial sector is absent, and the counterbalance of 
idiosyncratic shock relies on the public sector: losses concentrate domestically, amplifying the 
severity of local downturns and increasing the likelihood that single Member States’ financial 
systems come under stress simultaneously rather than acting as buffers for one another. Under 
the  EU  economy’s  perspective,  fragmentation  reduces  competition  and  hinders  access  to 
finance  for  businesses  and  households.  This  means  that  the  cost  and  availability  of  capital 
continue to differ markedly across Member States, reflecting structural barriers, including the 
regulatory ones, rather than genuine differences in creditworthiness or investment risk. 

The  persistence  of  national  fragmentation  imposes  on  EU  banks  significant  structural 
costs  and  prevents  them  from  achieving  economies  of  scale  and  scope.  Cross-border 
banking activity within the EU remains far below what the size of the internal market would 
warrant,  in  part  because  regulatory  and  supervisory  heterogeneity,  national  ring-fencing 
requirements and differences in insolvency frameworks create barriers to entry and to further 
deepen  cross-MS  activities.  Without  the  ability  to  consolidate  operations  and  client 
relationships across borders, European banks are unable to achieve the cost efficiencies that 
larger,  more  geographically  diversified  institutions  realise  through  the  sharing  of  fixed 
infrastructure, technology platforms, compliance functions and risk management capabilities. 
This penalises European banks, weakening their competitive position, eroding their capacity to 
invest in digital transformation, and ultimately reducing the quality and breadth of financial 
services they can offer to European businesses and households. 

3.1.1.  Evidence of a fragmented banking sector 

Data  from  the  EBA  show  that  EU  banks  have  slightly  more  cross-border  exposures 
outside  the  EU  than  in  another  Member  State,  reflecting  the  shortcomings  of  the  EU 
Single Market for banking. As expected, the majority of EU banks’ lending is concentrated 
in the Member State where the bank is established: this represents ca. 56% of EU banks’ total 
exposures. Looking at the cross-border exposures, EU banks have around 22% of exposures 
outside the EU and around 21% of exposures within the EU. While on one hand this can reflect 
the  global  reach  of  some  large  EU  banking  groups  or  their  presence  in  neighbouring  third 
countries, on the other hand the analysis highlights that a bank expansion beyond its Member 
State of incorporation finds similar barriers in other Member States vis-à-vis its expansion to 
third countries.  

Looking  at  the  trend  over  the  years,  integration  of  banking  markets  has  somewhat 
increased, but remains at unsatisfactory levels. Looking broadly at financial integration, the 

28 

 
 
picture  over  the  last  15  years  is  one  of  a  slow-paced  integration  and  some  episodes  of 
retrenchment, where banks withdrew back to their national markets. The ECB response to the 
targeted consultation depicted a context of integration mostly limited to the wholesale banking, 
where 22% of total lending there happens on a cross-border basis. Cross-border lending in the 
euro  area  to  all  sectors  except  the  banking  one  (i.e.  households,  corporates,  NBFIs,  and 
governments) represented 8% of total lending. For the corporate sector specifically, granular 
analysis shows that as of the fourth quarter of 2025 cross-border lending within the euro area 
represented ca. 16% of total corporate lending, of which 8% of indirect form – namely, where 
the subsidiaries of a bank and a borrower are domiciled in the same country, but (at least) one 
of their parents is domiciled in a different member. 

Figure 20 – Cross border lending across the Euro Area 

Source: ECB Response to the targeted consultation 

EU banks  face  significant barriers  that limit  their movement of funds  across  Member 
States. The current fragmentation exemplifies the cost of an absence of a European dimension 
in the banking sector and the economic inefficiencies it generates. Several estimates confirm 
that there is a significant amount of capital and liquidity segregated in EU subsidiaries of EU 
banking  groups.  ECB  Banking  Supervision  estimated  that  the  transferability  of  EUR  230 
billion of high-quality liquid assets within groups across Member States is constrained by the 
application of full liquidity requirements at Member State level. This is a conservative estimate, 
as EUR 150 billion of excess high quality liquid assets are also held within those subsidiaries 
and some of those may not be transferable because of other requirements like large exposure 

29 

 
 
 
limits,  individual  level  requirements,  etc.  In  a  recent  study47,  AFME  estimated  a  similar 
amount, EUR 250 billion of liquidity, to be “trapped” in subsidiaries of EU banking groups. In 
a similar fashion, AFME estimated EUR 225 billion of capital to be constrained within EU 
subsidiaries of EU banking groups48.  

These barriers act like de facto tariffs and do not allow EU banks to reap the benefits of 
being in the  single market.  According to  the ECB,  despite the decrease recorded between 
2005  and  2023,  intra-EU  service  trade  costs,  including  in  the  financial  sector,  are  roughly 
equivalent on average to an ad valorem tariff of around 95% compared to domestic trade. Also, 
a recent IMF report49 recognised that requirements at national level corresponded to internal 
EU tariffs amounting to up to 100% for trade in financial services. 

In a study released in June 2026, the IMF concluded that bank credit in the EU is strongly 
biased towards domestic borrowers50. The IMF estimates that cross-border lending to NFC 
corporates  by  immediate  lenders  represents  on  average  5%  of  all  NFC  lending  in  EU  with 
sizeable variation, ranging from 2% (IT) to 49% (IE). Cross-border lending by parent entity 
via subsidiaries or branches represents on average only around 14% of total NFC loan volume, 
with large variations notably in Central and Eastern European Member States where the share 
of lending via group entities is higher. The analysis by the IMF highlights significant barriers 
to entry in cross-border lending, including policy aspects like bank regulation, financial safety 
nets, but also non-prudential barriers like divergences in national insolvency laws and taxation. 
The IMF estimates that reforms reducing barriers to cross-border banking could raise EU GDP 
by about 2 percent in the long term, with pronounced benefits especially for start-ups. 

The status quo creates hurdles for banks to explore cross-border business within the EU, 
as  witnessed  by  the  trends  in  the  concentration  metrics  and  mergers  and  acquisitions 
dynamics. As AFME reports51, M&A activity has declined compared to the first decade of the 
2000s, dropping from over 100 operations to about 20. In addition, most M&A occurs within 
Member States. The decrease of M&A activity tells a twofold story: first, the EU banking sector 
becomes  less  attractive  for  investors;  second,  cross  border  M&A  activity  becomes  less 
attractive – and this is visible in the decrease of cross border M&A activity. In sum, euro area 
banking  sector  consolidated at national  level  but not  at  EU or euro area level,  not  allowing 
banks to attain the benefits of the single market and economies of scale within it. 

47 
48 

49 
50 

51 

AFME, Banking Union: measuring progress and identifying implementation gaps, September 2025, p.4. 
This estimate does not directly reflect the amount of capital that banks hold at subsidiary level as a result 
of prudential requirements applicable at subsidiary level, and there can be different reasons for which 
banks hold higher capital ratios at subsidiary level, including non-prudential reasons (e.g. tax reasons). 
International Monetary Fund, A Recovery Short of Europe’s Full Potential, October 2024, p.19. 
IMF (June 2026), Deeper and More Integrated Financial Markets to Foster Growth and Resilience in 
Europe. 
AFME,  “Banking  Union:  measuring  progress  and  identifying  implementation  gaps,  ”  –  AFME 
September (2025), p.10. 

30 

 
 
 
Figure 21 - Number of M&A 
banking deals between BU 
banks 

Source: AFME, Dealogic 

Figure 22 - Share of the 5 
largest credit institutions in 
total assets per each member 
state. Interquartile ranges in 
blue and medians are 
calculated across average 
country values. Data for 
each Member State are 
available from 1999 or from 
the year of EU accession.  
(Data 2007-2024)  

Source: ECB Data, FISMA 
Calculations 

3.1.2.  Fragmentation and chronic lack of scale 

Large  banks  in  general  benefit  from  economies  of  scale,  lower  average  costs,  greater 
diversification, and enhanced capacity to invest in technology and risk management that 
allow  them  to  operate  more  efficiently  and  extend  credit  at  finer  margins.  Using  data 
across EU countries, the ECB constructed a composite indicator of banking sector overcapacity 
encompassing sector size, competition, and efficiency and tracking its evolution from the GFC. 
The  findings  show  that  overcapacities  have  generally  declined  since  2008,  driven  by 
deleveraging,  rationalisation  of  branch  networks,  and  technological  substitution.  However, 
significant  cross-country  heterogeneity  persists,  with  some  markets  having  been  slower  at 
consolidating.  As  shown  in  Figure  22,  EU  banks  have  undergone  in  the  past  years  a 
consolidation  within  Member  States  borders.  Such  dynamic  had  the  effect  of  increasing 
concentration  within  each  MS,  but  failed  to  grant  a  single  EU  bank  sufficient  size  to  reap 
economies  of  scale  within  the  Single  Market.  Looking  at  the  five  largest  EU  banks,  and 
comparing with the five largest US banks, one can observe that the cumulative market share of 
the former group is 31%, while that of the latter stands at 45%. Anecdotally, the difference is 
stark when looking at the largest bank in each jurisdiction: in the EU, the market share of the 
largest bank is 8%, while in the US, the market share of the largest bank is twice as much.  

31 

 
 
 
 
 
 
 
 
 
Figure 23 - Comparison of market share of the 5 largest banks in EU and the US 

Source: ECB data, banks individual annual reports, FED data – (as of end 2025) 

The chronic lack of scale of EU banks is limiting their ability to compete in specific market 
activities.  EU  banks  have  long  established  franchises  in  corporate  and  investment  banking 
(CIB)  activities52, but  they have struggled  to  keep stable  market  shares53 not  only  at  global 
level, but also in EU financial markets. In particular, US banks have larger market shares in 
EMEA than the EU G-SIBs (40% vs 29%, respectively). Additionally, specific EU markets 
activities are dominated  by US  players e.g.  fiduciary services, commodity trading,  and to  a 
lesser extent custody services and corporate finance (like M&A)54. League tables across Equity 
Capital Markets, Debt Capital Markets, and M&As confirm the picture of EU banks struggling 
to keep presence, even in the European market. In particular, EU banks are essentially absent 
from Global League Tables for M&A Advisory, rank #6 and #8 in Debt Capital Market and 
#10 in Equity Capital Market. In League Tables for European market, the situation remains 
grim for M&A Advisory and Equity Capital Markets. Only in the area of Debt Capital Markets 
EU banks manage to maintain a relevant market presence, with four banks in the top 10. 

52 

53 

54 

Corporate and Investment Banking can be divided in two sub-business lines defined by asset class and 
type of activity.  

•  First, Global Markets (GM) business offers a broad suite of market-making and brokerage services 
to a global client base of corporations, financial  institutions, government and municipal entities. 
Divided in two products suites: Equities, and Fixed Income and Commodities (FICC). 

•  Second, Investment Banking (IB) business focuses on the advice, origination, structuring, listing 
and distribution for Debt Capital Markets (DCM), Equity Capital Markets  (ECM, offering Initial 
Public Offerings, Follow-on offerings, private placements, etc.) and M&A deals. 

From AFME’s response to the consultation (p. 18): “EU Banks have lost significant market shares in 
investment banking and capital market  activities in Europe over the past 10/20 years. In M&A down 
from 45% to 36% and in ECM, down from 58% to 36% over the past 20 years. In Global equity market, 
down from 35% to 20% over the past 10 years”. 
EBA non-EU dependencies report (link). 

32 

 
 
 
 
 
 
Table 1 - Merger and Acquisition Advisor Ranking – Financial Year 2025 

Europe  
Rank  HQ  Advisor 

Global 

# deals  Rank 

Value 
$bn 
565.1  204 
374 
163 
338.6  123 
269.7  121 
197.3  94 
175.9  146 
166.8  328 

US  Goldman Sachs 
US 
JPMorgan 
US  Morgan Stanley 
US  BofA Securities 
US  Citi 
US  Lazard 
EU  Rothschild & 

Co 

EU  BNP Paribas 

145.6  116 

1 
2 
3 
4 
5 
6 
7 

8 

1 
2 
3 
4 
5 
6 
7 

8 

9 
10 
Source: Dealogic  

CH  UBS 
UK  Barclays 

140.4  103 
139.4  67 

9 
10 

Table 2 - Debt Capital Markets (DCM) Bookrunner Ranking 

HQ  Advisor 

US  Goldman Sachs 
US 
JPMorgan 
US  Morgan Stanley 
BofA Securities 
US 
Citi 
US 
Evercore Inc 
US 
UK  Barclays 

US 

Centerview 
Partners 

US  Wells Fargo 
CH  UBS 

Europe 
Rank  HQ  Bookrunner 

1 
2 
3 
4 
5 
6 
7 

8 
9 
10 

EU 
BNP Paribas 
JPMorgan 
US 
EU  Deutsche Bank 
UK  Barclays 
Citi 
US 
UK  HSBC 
EU 

Credit Agricole 
CIB 
US 
BofA Securities 
US  Morgan Stanley 
EU 

SocGen CIB 
Subtotal 
Total 

Value 
$bn 
197.61 
163.84 
155.84 
146.95 
131.56 
126.88 
126.03 

# 
deals 
833 
645 
598 
725 
508 
507 
520 

505 
400 
400 

124.33 
107.1 
102.26 
1,382.40  3,097 
2,826.10  5,689 

Global 
Rank  HQ 

Bookrunner 

1 
2 
3 
4 
5 
6 
7 

8 
9 
10 

JPMorgan 
US 
Citi 
US 
US 
BofA Securities 
US  Morgan Stanley 
Barclays 
UK 
BNP Paribas 
EU 
Goldman Sachs 
US 

Deutsche Bank 

EU 
US  Wells Fargo 
UK  HSBC 

Subtotal 
Total 

Source: Dealogic 

Table 3 - Equity Capital Markets (ECM) Bookrunner Ranking 

Europe 
Rank  HQ  Bookrunner 

Value 
$bn 

1 
2 
3 
4 

JPMorgan 

US  Goldman Sachs  16.19 
12.67 
US 
US  Morgan Stanley  12.59 
11.99 
EU  BNP Paribas 

Global  
Rank  HQ  Bookrunner 

1 
2 
3 
4 

US 
JPMorgan 
US  Morgan Stanley 
US  Goldman Sachs 
US  BofA Securities 

# 
deals 
65 
51 
49 
79 

33 

 
 
 
 
 
 
 
 
 
 
5 
6 
7 
8 
9 

US  BofA Securities  10.9 
7.17 
US  Citi 
6.38 
CH  UBS 
4.97 
UK  Barclays 
4.35 
EU  Deutsche Bank 

10 

US 

Jefferies LLC 
Subtotal 
Total 

3.57 
90.79 
134.37 

Source: Dealogic 

5 
6 
7 
8 
9 

10 

50 
52 
44 
28 
34 

34 
220 
975 

US  Citi 
CH  UBS 
US 
UK  Barclays 
US  Cantor Fitzgerald & 

Jefferies LLC 

Co 

EU  BNP Paribas 
Subtotal 
Total 

These activities critically depend on size, which allows to withstand the instability of the 
business revenues, diversifying income across CIB activities in bad years and capitalising 
on  excess  demand  in  good  years.  A  diversified  market  presence  across  corporate  and 
investment  banking  can  help  banks  stabilise  the  swings  in  revenues  across  business  lines, 
driven by the instability of macro trends determining the fee pool that banks can earn. Growth 
rates in the Global Markets (GM) and Investment Banking (IB) sectors over the past 10 years 
have ranged from -37% to 27% with particularly pronounced swings during the pandemic. A 
bank of larger size can reap the benefits of diversification, offsetting between different activity 
types—both within GM, but also across GM and IB. Specifically, high volatility levels drive 
market making (to the benefits of GM business) at the expense of IB products, like structured 
deals and financing that tend to be postponed in period of high volatility. Vice versa, relative 
stability  or  anticipation  of  large  shifts  are  conducive  to  (re)financing  demand  and  larger 
undertakings. Furthermore, in this context big players like US banks will be better positioned 
to provide excess supply of CIB services/products when the market rebounds after a bad year55. 

Bigger  banks  are  also  better  positioned  to  maintain  broad  coverage  across  different 
business  lines,  have  better  capacity  to  attract  and  retain  talent.  The  global  reach  and 
capacity to maintain coverage throughout the cycle, coupled with capacity to commit financial 
and human resources, give non-EU banks a competitive advantage, acting as "one stop shops". 
Maintaining  the  broad  presence  comes  with  the  trade-off  of  sustaining  costly  networks  of 
highly specialised bankers to ensure market coverage, and by contrast allows higher revenues 
and attracts bigger and more lucrative deals. At the same time, bigger banks are able to offer 
more  competitive  remuneration  packages  to  its  bankers,  which  are  a  key  component  in 
corporate and investment banking activities. 

In addition, CIB activities require investments in IT infrastructure to remain sustainable 
and gain the edge over the competition, and for some specific activities, like credit trading, 
a substantial initial investment is needed to enter the market56. On one hand, the relatively 
small scale of EU banks does not allow them to mobilise the large resources needed to carry 
out the necessary investments; on the other hand, EU G-SIBs are also investing less in their IT 
infrastructure than their US competitors. In the three years 2019 to 2022, the average annual 
budget for IT investments of the largest US G-SIBs was around 0.5% of total assets, compared 
to less than 0.2% for EU G-SIBs – see also Figure 24. For instance, SSM analysis for 2024 

55 

56 

For example: “Wall Street traders post triple the gains of European rivals” – Financial  Times 2 May 
2026, Simon Foy and Joshua Franklin. 
ECB and AFME. 

34 

 
 
 
 
 
 
 
 
 
 
 
looking at data published by the top four banks in the US and the EU shows that the top four 
US banks’ IT budgets are in absolute terms and relative terms57 higher than the budgets of the 
largest four EU banks.  

Figure 24 - U.S. and euro area G-SIBs annual IT budgets, 2019-2022 

Source: EBA presentation at  Workshop  “Economic of  the Single  Market” (19 September 
2025). ECB and EBA calculations. ECB Occasional Paper “Understanding the profitability 
gap between euro area and US G-SIBs” 

CIB  activities  are  important  not  just  to  the  banks  themselves,  but  also  for  financial 
markets  and  the  economy.  These  activities  can  offer  banks  a  source  of  revenues  that  is 
detached from the interest rate cycle and often provide group-wide services to the bank (like 
hedging  and  asset  liability  management  for  the  bank’s  treasury).  Moreover,  CIB  activities 
expand the product offering to corporate clients, including other financial intermediaries and 
non-financial  corporations.  For  instance,  banks  offer  CIB  services  to  insurance  companies 
hedging risks they are not willing to cover and offer large corporations solutions to hedge e.g. 
interest rate or foreign exchange risks and  may be the channel for those corporations to tap 
capital  market  financing,  e.g.  raising  equity  or  issuing  bonds.  In  this  vein,  a  bank’s  CIB 
activities are deeply intertwined with the depth and breadth of financial markets players and 
vivacity. US banks have global franchises also because they can leverage on well-developed 
US financial markets, whereas the lack of an integrated market for banking deprives EU banks 

57 

Looking at the comparison in relative terms, scaled by each bank’s total asset, the statement remains true 
with one exception, where the EU bank that invests the most has a higher relative budget than the US 
bank that invests the least.  

35 

 
 
 
 
 
 
from solid fundaments from which to develop their CIB activities. Therefore, facilitating CIB 
activities of EU banks also contributes to resilience and EU sovereignty.  

3.1.3.  Opportunities and challenges from market integration 

Market integration is a central part of the policy response set out in the Communication and is 
the element with potential to deliver the biggest improvements to competitiveness. Integration 
can take various forms, including structural consolidation, shared infrastructures and operating 
models or direct provision of cross-border services. The lack of market integration derives from 
a multitude of factors, including the composite nature of banking rules, European and national, 
the result of prudential and non-prudential barriers, or political and economic pressure within 
Member States. 

Benefits of cross-border market integration 

Diversification  makes  banks  more  resilient  to  country-specific  shocks.  The  diversification 
gains  are  greater  the  more  different  the  markets  are58.  Diversification  and  integration  also 
contribute  to  better  risk-sharing,  smoothen  local  shocks59  and  can  also  support  effective 
transmission of monetary policy60. 

Scale effects allow banks to make efficiency gains and support their profitability, in particular 
thanks  to  the  cost  savings  that  derive  from  the  central  management  of  resources  such  as 
liquidity and capital, and potentially from more competitive funding rates on financial markets. 
Scale is also important to keep the pace in the current context of rising technology and cyber 
security.  However,  these  benefits  may  not  always  be  fully  realised  in  practice,  due  to 
organisational complexities for certain business models in large cross-border banks, legal and 
compliance  burden,  different  cultures,  and  other  barriers.  Benefits  may  depend  on  market 
segments and the business models of institutions. 

The presence of foreign banks increases competition with domestic banks. Foreign-controlled 
entities were slightly more profitable than domestic banking groups in most Member States 
until  2021/22  when  profits  started  to  increase  as  a  consequence  of  higher  interest  rates61, 
consistent  with  research  that  found  that  foreign  subsidiaries  are  more  cost-efficient62  than 

58 

59 

60 
61 

62 

Gropp, R.E., Noth, F., and Schüwer, U. (2019), What drives banks’ geographic expansion? The role of 
locally non-diversifiable risk, SAFE Working Paper No. 246. However, the literature is inconclusive on 
the extent to which diversification lowers risks given that diversification also encourages banks to take 
more risks, which in turn increases their exposure to aggregate  and local risk factors.  Chavez (2017) 
shows that more geographically diversified banks in the US take larger risks and hold smaller liquidity 
buffers, which increases their vulnerability to aggregate shocks. Other US research like  Meslier et al. 
(2016) or Goetz, et al. (2016) conclude that the relationship between geographical diversification and 
banks’ risk is non-linear. 
Cimodomo et al, ‘Risk sharing in the Euroarea’, Economic Bulletin Articles, European Central Bank, 
vol. 3, 2018. 
ESRB Working Paper No. 129, 2021, pp. 1, 12–16. 
Katharina Bergant, Mai Hakamada, Divya Kirti, and Rui Mano, ‘Inflation and Bank Profits: Monetary 
Policy Trade-offs’, Staff Discussion Notes, 2025. 
Hausenblas and Lešanovská (2018) and the literature quoted therein. For further details, see Hausenblas, 
V., and Lešanovská, J., How Do Large Banking Groups Manage the Efficiency of Their Subsidiaries? 
Evidence from CEE, Czech National Bank Working Paper 13, October 2018. 

36 

 
 
 
 
domestic entities. This effect  can be expected to  be stronger for third country branches that 
were not subject to any capital and/or liquidity requirements.  

Cross-border integration can also bring a more diversified offer, with more competitive pricing, 
of  banking  products  to  businesses  and  citizens,  including  local  and  internationally  active 
clients.  By  preventing  financial  exclusion,  unrelated  to  creditworthiness  but  linked  to 
geographical factors, market integration can also improve the trust of citizens in the financial 
sector, and boost interoperability, consumer experience, or accessibility and treatment of data.  

Integration also contributes to the financing of political priorities at EU level that cannot be 
expected to the same extent within a fragmented banking sector. 

Challenges linked to cross-border market integration 

Cross-border  presence  can  lead  to  difficulties  in  coordination  between  authorities  in 
the 
supervision,  resolution,  and  macro-prudential  authorities.  Also, 
accountability  mechanism  more  complex  and  multilayered,  that  means  with  an  EU  and  a 
national  dimensions,  especially  in  terms  of  cost  of  potential  failures  for  domestic  taxpayer 
triggered by the crisis  of a cross-border bank. Trust  among  authorities, enabled by a robust 
coordination  framework,  is  paramount  to  overcome  challenges,  some  of  which  may  be 
inherited from past crises and the withdrawal of certain groups from cross-border activity in 
the wake of the financial crisis or by freezing the supply of lending, liquidity and other critical 
services in host markets.  

this  can  make 

Foreign banks may significantly impact domestic market structures, as their presence can result 
in  local  markets  being  dominated  by  foreign  entities  or  lead  to  market  oversaturation 
(overbanking).  Especially  in  overbanked  markets,  authorities  may  be  cautious  about  the 
possible  impact  of  additional  large  foreign  players  on  the  consolidation,  employment, 
competitiveness and efficiency of the domestic banking sector. 

Cross-border activities also entail costs for the banking group to execute post-merger strategies, 
integrate new foreign activities (IT systems, compliance, legal costs, pressure to lower interest 
for  new  product  offering  to  gain  market  share,  etc.).  In  addition,  the  risk  remains  that  the 
expansion may be unsuccessful, showing insufficient business development and profitability 
and may push the cross-border subsidiary to be sold and the bank to retreat to and focus on the 
home market. 

3.1.4.  Barriers to market integration 

Prudential and supervisory barriers 

The application of capital and liquidity requirements at individual level may prevent banking 
groups that expand internationally from managing and allocating capital and liquidity centrally, 
thereby imposing higher costs and making banking groups less resilient to shocks, insofar as 
the group may not move resources freely to where they are most needed to absorb such shocks. 
Moreover, each national supervisor has an incentive to request a large share of capital, liquidity 
or  loss-absorbing  liabilities  in  its  jurisdiction.  National  supervisors  thus  compete  for  these 
resources, leading  to  potentially  unfavourable dynamics that further undermine the possible 

37 

 
 
 
benefits from the centralisation of resources63. The absence of any material implementation of 
cross-border liquidity waivers in the Banking Union64 is an example of a prudential limits to a 
more  efficient  allocation  of  funds  in  banking  groups.  Other  features  of  the  bank  regulatory 
framework  directly  limit  the  allocation  of  funds  within  cross  border  groups,  such  as  the 
application of risk weights to cross-border intragroup exposures or the current large exposure 
requirements  that  allow  for  a  Member  State  derogation  to  impose  restrictions  to  intragroup 
flows until 31 December 2028. Coupled with other parts of the framework, in particular the 
need for banks to put in place internal MREL to execute internal loss-transfer mechanisms, 
these intragroup restrictions contribute to lock resources at local level. 

A similar effect has been observed in relation to the level of Crisis Management and Deposit 
Insurance (CMDI) requirements that may be imposed on banks, with regard to building MREL 
buffers and contributing to financial safety nets. The fact that most banks have reached their 
MREL  targets  and  that  industry  funded  financial  safety  nets  (national  DGS  and  SRF)  are 
currently  well  capitalised  should  help  attenuate  these  barriers.  Nevertheless,  some  issues 
related  to  contributions  to  DGSs  remain.  Individual  entities  within  cross-border  groups  are 
affiliated to  different  DGSs  and have to  comply with  divergent  national  rules, including  on 
target levels, reporting and methodologies for the calculation and payment of contributions and 
additional fees. As highlighted in the consultation, this leads to uneven funding burdens for 
cross-border banks operating in multiple countries. This divergence increases compliance costs 
and undermines the level playing field within the Banking Union. 

In addition, the uncertain legal framework for the recalibration of contributions between DGSs 
when banks change their affiliation translated in some cases into an entry payment in the DGS 
of the Member State to which the activities were affiliated in order to rebalance the increased 
level of liabilities to insure depositors of the receiving DGS. Some banks see the contributions 
into the DGSs as well as entry fees as a form of tax as they could be transferred only in limited 
cases. The current  legislation  does not  sufficiently reflect  the transfer of the risk to  another 
DGS when a bank changes it legal establishment. The transfer of 12-month contributions that 
have been collected by the DGS to another one is possible only in case of DGSs which continue 
collecting  contributions  from  their  banking  sector  due  to  a  higher  than  the  minimum  target 
level or following a depletion.  

Differences  in  enforcement  and  supervisory  practices  across  Member  States,  fuelled  by  the 
existence of numerous options and national discretions in the regulatory framework, contribute 
to the increase of compliance costs for international banking groups and can prevent decisions 
to expand beyond borders.  

Cases  of  misconduct  (most  prominently  money  laundering)  in  some  banks’  foreign  entities 
have also led to reputational costs for supervisors and strengthened the perception of a possible 
failure in coordination between home and host authorities that the legislative initiatives and 
institutional progress (e.g. with the setting up of AMLA) are aiming to address. 

Sovereign exposures 

63 
64 

Ervin W., Understanding ‘ring-fencing’ and how it could make banking riskier, Brooking Institute, 2018. 
European Central Bank, Cross-border banking in the EU: from national silos to an integrated market, 
2025. 

38 

 
 
 
One  of  the  Banking  Union’s  objectives  has  been  to  address  the  bank-sovereign  nexus65  by 
reducing the need for public funds to act as a backstop to banking crisis as well as to isolate to 
a larger degree banks  from  sovereigns’ crises. Banks sovereign  exposures include debt  and 
loans, and can comprise of both central government as well as regional, local governments or 
public entities. 

Since the EU sovereign debt crisis several structural reforms have been made contributing to 
this  goal.  The  euro  area  sovereign  crisis-management  architecture  has  been  reinforced, 
including through the establishment of the European Stability Mechanism (ESM) and the SRM. 
The implementation of the SSM presents another pillar designed to prevent and manage more 
effectively  banking  crises.  Additionally,  the  EU  has  substantially  overhauled  the  banking 
regulatory framework to ensure the financial system is more resilient to future shocks.  

Further  progress  on  the  Banking  Union  as  part  of  the  SIU,  will  help  further  address  bank- 
sovereign  linkages  by  strengthening  bank  resilience,  improving  crisis  management,  and 
supporting more diversified financing channels. 

Issues identified: 

•  Absent  the  development  of  a  fiscal  union  or  the  existence  of  a  common  safe  asset 
through the permanent and substantial issuance of common debt, the bank-sovereign 
nexus has not been fully mitigated- although less of a concern as during the height of 
the  sovereign  bank  nexus.  A  particularly  relevant  aspect  of  bank  exposure  to  the 
sovereign is the so called ‘home-bias’ of bank sovereign exposures (i.e. whereby banks 
are  disproportionally  exposed  to  their  ‘home’  sovereign  relative  to  total  sovereign 
exposures). Recent EBA and SSM data (link, link) show that the home-bias persists, 
but that it has come down for most Member States in the last decade and sovereign debt 
portfolios have diversified. Generally, larger banks are more diversified and have less 
concentration to home sovereign debt than smaller banks. 

65  

Notably the case where banks hold significant amounts of their MS’s sovereign debt, and sovereign debt 
crises can trigger bank failures, and vice versa where bank difficulties reverberate on sovereigns’ debt 
market access. 

39 

 
 
 
 
 
Figure 25 - Euro area banks’ sovereign bond holdings 

Source: ECB, Speech by SSM Chair (link) 

Barriers to cross-border mergers and acquisitions 

Diverging supervisory practices that could deter banking groups from undertaking cross-border 
consolidation  could  be  linked  to  the  process  and  timing  to  grant  supervisory  approvals  for 
M&As,  fit  and  proper  approvals  or  approvals  for  the  acquisition  of  qualifying  holdings. 
Another example of such lack of coordination relates to additional supervisory requests from 
host  authorities  following  an  M&A  and  resulting  in  higher  Pillar  2  and  combined  buffer 
requirements  for  the  merged  or  acquired  entities  if  the  operation  is  perceived  as  bringing 
additional risks to the local market. 

The absence of a uniform and transparent EU-wide supervisory assessment regime, including 
the lack of predictability in relation to expected capital requirements, can contribute to the low 
level  of  M&A  deals  in  the  EU66.  Banks  may  be  concerned  by  the  lack  of  clarity  and 
transparency of the criteria to set Pillar 2 requirements to the entity resulting from the merger. 

Such prolonged approval processes may add delays and costs, discouraging potential deals on 
cross-border transactions. 

Moreover, the use of macroprudential policy tools at the national level increases the complexity 
of  cross-border  banks’  operations.  The  presence  of  banks  from  other  Member  States  may 
reduce the effectiveness of the policy intervention and requires reciprocity of policy actions by 
home  authorities,  which  multiplies  the  number  of  policy  measures  in  place.  Reciprocity  is 

66 

Gardella A., Rimarchi M and Stroppa D., Potential regulatory obstacles to cross-border mergers and 
acquisitions in the EU banking sector, European Banking Authority Staff paper series N.7, 2020. 

40 

 
 
 
 
particularly cumbersome in operational terms if the measures are overly detailed and require 
additional granular data collections. Certain buffers, such as G/O-SII buffer and some SyRBs 
apply  to  all  exposures  of  the  institution  and  by  construction  cannot  be  reciprocated,  which 
means  that  any  differences  in  their  calibration  between  Member  States  may  affect  the 
competitive position of the bank in all markets where the bank operates. 

In general, industry representatives tend to consider that cross-border M&As are less attractive 
than  domestic  deals  due  to  regulatory,  supervisory,  operational  and  political  frictions  that 
reduce expected synergies.  

Non-prudential barriers 

In the past decade, the low level of profitability of the EU banks has hampered cross-border 
banking in the EU. It discouraged banks from acquiring entities perceived as unproductive in 
another Member State, and low productivity at home narrowed the number of banks that were 
fit  to  undertake  cross-border  ventures.  This  effect  pushed  banks  in  the  EU  to  develop  their 
cross-border  activities  through  ancillary  services,  such  as  leasing  or  insurance.  While  the 
situation has improved in recent years, a number of the biggest potential deals have stumbled 
upon the opposition of national  governments67, showing that national  politics can also  be a 
barrier to the single market. 

Divergent legal systems (in particular company, insolvency, tax, employment or labour laws, 
collateral enforcement as well as judicial systems) and traditional factors such as differences 
in language, culture, and domestic product preferences fragment banking markets in the same 
way that they fragment other industries. Differences in taxation, including personal taxation 
for global employees or specific bank levies68, consumer protection (e.g. affordability checks, 
repayment account structures, bank contract terms, servicing/complaints handling, marketing 
and advertisement), anti-money-laundering provisions (e.g. different remote client onboarding, 
lack  of  cross-border  recognition  of  KYC  checks,  divergences  in  thresholds  for  suspicious 
activity  reports)  or  data  protection  (divergent  GDPR  interpretation)  at  Member  State-level 
result in bank-specific entry and adjustment costs that discourage cross-border banking.  

Diverging  product  offering  regulations  may  be  another  barrier  to  operate  cross  border. 
Examples include widespread advertising  specifications for consumer loans, no harmonised 
data set for credit bureaus or diverging minimum interest rates for different products (regulated 
savings accounts, mortgage loans). Equally, consumer preferences may also be biased towards 
more familiar “national” products and brands. 

While the possibility of acquiring ailing banks typically presents a good opportunity for banks 
to  expand  into  foreign  markets,  uncertainties  around  asset  quality,  collateral  enforcement, 
recovery  rates  (dependant  on  the  judicial  system)  and  high  levels  of  NPLs  seem  to  have 
discouraged banks from doing so in the last years. However, the steadily declining NPL ratios 
in the EU banking sector help attenuate this barrier.  

The decline in cross-border banking during the GFC was, among other things, the consequence 
of public support schemes that often required banks to restructure their activities. Activities to 

67 

68 

Steven Arons, ‘Big EU Bank Deals Hampered by Governments Despite Calls to Grow’, Bloomberg, May 
2025. 
AFME, Bank Taxes in Europe (EU and UK), February 2026. 

41 

 
 
 
support the domestic banking market could count on political backing, but there was much less 
appetite for banks to maintain activities in foreign markets. Such developments were also the 
result of the restructuring commitments undertaken by Member States for the approval of State 
aid operations, as it was perceived to be more difficult to communicate to taxpayers why public 
money should be used to prop up foreign operations. The fact that local policymakers might 
value the preservation of national banks above further banking integration seems also to be a 
factor that deters banks from entering a foreign market69 and indicates a high level of political 
interference  in  banking  operations  in  some  jurisdictions.  Several  respondents  to  the  public 
consultation noted the existence of, sometimes excessive, government interventions in banks’ 
financial decisions. Public pressure has been observed in relation to extraordinary taxes and 
sector-wide levies, administrative restrictions on prices and fees, intervention in distribution 
policies  and  constraints  on  structural  decisions  (branch  closure,  workforce  adjustment, 
territorial presence). Some respondents  also noted that recent times were characterised by a 
growing trend towards a highly politicised environment in which the banking sector is being 
used as a tool in broader conflicts. 

Stakeholders also indicate that non-prudential barriers are particularly prominent in discussions 
on digitalisation and retail expansion. Succeeding in one Member State does not automatically 
translate into success in another because of differences in national legal, tax, accounting and 
supervisory environments. Barriers are perceived particularly acute in smaller markets, where 
the costs of entry and adaptation may outweigh business opportunities. 

3.1.5.  Cross-border allocation of funds: efficiency and resilience 

The current barriers to a free flow of resources within cross-border groups is a material example 
of fragmentation, contributing to the absence of a European dimension in the banking sector 
and the economic inefficiencies it generates. While this is largely a feature of the regulatory 
framework and the debate on completing the Banking Union, it may also be explained by  a 
lack of initiatives from the banking sector itself to use the tools at its disposal to operate in 
other  markets  (e.g.  restructuring  of  business  lines  and  branchification,  direct  cross  border 
provision of services), either by choice or because of supervisory or political pressure. 

In this context, banks’ ability to operate cross border without barriers to allocate liquidity and 
capital  is  essential  to  improve  the  efficiency  of  banking  groups  and  their  financing  of  the 
economy.  Moving  towards  an  unhampered  management  of  resources  inside  cross-border 
groups  supports  market  integration  and  comes  with  important  benefits  such  as  freeing  up 
resources that can be allocated more efficiently  and agility in  dealing with  stress  located in 
specific parts of the groups. It may also generate substantial second order effects to the benefit 
of  all  Member  States,  including:  a  diversification  of  risks  across  markets,  scale  effects  that 
generate efficiency gains and support bank competitiveness, increased competition locally that 
can  improve  the  offering  of  adequate  financial  services  to  citizens  and  businesses,  reduced 
procyclicality  in  local  markets  thanks  to  the  presence  of  foreign  operators  that  may  react 
differently to local shocks, etc.  

69 

Empirical evidence that public support and especially nationalisation of banks lead to a withdrawal from 
foreign markets is presented in Kleymenova, A., Rose, A.K., and Wieladek, T. (2016), Does government 
intervention affect banking globalization?, Journal of the Japanese and International Economies 40. 

42 

 
 
 
 
Improving  market  integration  in  the  banking  sector  should  not  be  opposed  to  preserving 
financial stability or the presence of more local players. More efficient, more resilient banking 
groups, able to withstand shocks and be sufficiently competitive to support the financing of EU 
priorities can contribute to strengthen financial stability as long as adequate safeguards are in 
place, in particular a solid institutional and governance structure in the Banking Union. These 
safeguards  should  ensure  that  irrespective  of  what  happens  to  the  banking  group  and 
subsidiaries when they fail, the costs will not be borne locally.  

Moreover, improving market integration in the banking sector should not mean a mechanistic 
reduction of the level of credit to the local economy, as demand for credit, and the sources of 
profits and competition it implies, will remain unaffected by the way bank liquidity is managed. 
In addition, experience shows that the presence of local requirements in each subsidiary is not 
a protection against commercial decisions to lower the level of credit in host Member States 
during a downturn. 

Issues identified: 

•  Prudential regulation applies to all levels of consolidation. Liquidity requirements can 
be waived fully or partially on a cross-border basis, while capital requirements at solo 
level cannot be waived on a cross-border basis. However, in practice supervisors have 
not granted liquidity waivers on a cross-border basis in a substantive way. 

•  Other  requirements  constrain  or  limit  the  free  intra-group  transfer  of  resources. 
Including national large exposure limits as well as capital requirements on intragroup 
exposures. 

3.1.6.  Safety nets and resolution strategies 

It is complex to find the right equilibrium that would allow for favourable conditions driving a 
more integrated banking market, for example through a more central management of liquidity 
and  capital  at  group  level,  while  at  the  same  time  providing  assurances  and  safeguards 
protecting the financial stability in Member States where group entities are located.  

A key concern expressed by some Member States is the risk that, absent sufficiently robust pre-
positioned capital and liquidity, local subsidiaries of a foreign banking group would be cut off 
from the rest of the group in times of stress, forcing authorities to deal with the subsidiary in a 
disorderly manner. The arguments against more market integration in good times always come 
down to the risks at national level in bad (crisis) times, and are also related to a lack of trust 
among authorities. More specifically, most banking groups in the EU are subject to a single-
point-of-entry resolution  strategy, meaning  that crisis  management tools  are supposed to  be 
applied  at  the  level  of  the  parent  while  subsidiaries,  especially  when  they  provide  critical 
functions for the economy, are left untouched70. Breaking this ‘presumptive path’ is a source 
of  concern  for  authorities  who  seek  to  mitigate  any  risk  of  being  left  to  deal  with  local 
subsidiaries on their own. In addition, vulnerable subsidiaries insufficiently supported by the 

70 

Losses in subsidiaries belonging to a resolution group should be upstreamed to the parent who is the sole 
entity planned to be placed in resolution should it reach the conditions for failing or likely to fail. Under 
a single point of entry strategy, the resolution of the banking group is conducted from the parent entity 
who holds bail-inable resources and will be restructured in accordance with the resolution strategy, thus 
ensuring also the recapitalisation and continuation of group activities. 

43 

 
 
 
 
group  –  or  healthy  subsidiaries  not  considered  as  the  group’s  priority  – may  not  be  able  to 
provide  financing  to  the  real  economy  in  their  Member  States,  which  may  adversely  affect 
economic performance in these countries.  

Integration of the deposit insurance framework in the Banking Union 

Under the current crisis management framework, Significant Institutions (SIs) and cross-border 
less significant institutions (LSI) representing approximately 75% of covered deposits in the 
Banking Union fall under the direct responsibility of the SRB. Most of these banks are planned 
for  resolution  and  comply  with  the  requirements  to  have  sufficient  loss  absorbing  capacity 
(MREL). More than 95% of the covered deposits of those banks will be protected through other 
means  than  a  depositor  pay-out  such  as  by  the  application  of  resolution  tools,  which  will 
provide for uninterrupted access of depositors to their covered deposits. In the consultation, 
several  stakeholders  underline  that  banks  under  the  direct  SRB  remit  are  already  subject  to 
sound resolution planning and strong MREL buffers and are unlikely to rely on DGS support 
in case of resolution. 

The remaining 25% of covered deposits not held by banks under the SRB-remit are financing 
mainly national and local economies and governments. Crisis management tools used for these 
banks  differ  among  Member  States  and  specific  subsectors  of  the  national  banking  sectors. 
Most  LSIs  in  the  Banking  Union  are  members  of  Institutional  Protection  Schemes  that  are 
recognised as DGS, which together hold 70% of all covered deposits in all LSIs in the Banking 
Union, and problems in individual members are expected to be addressed via the use of IPS 
measures. 

Issues identified: 

•  While  not  the  default  scenario,  pay-outs  remain  a  possibility  for  banks  under  SRB-
remit. Under the current CMDI framework, the SRB can decide both in planning and – 
due to a change of circumstances – at the moment a bank is failing or likely to fail, that 
a bank has a negative public interest and therefore should be liquidated. A single point 
of entry resolution strategy for a group can also break at the point of failure and some 
or all of the individual entities within a group would  end up in  liquidation.  In these 
cases, the financial consequences of a negative public interest assessment or a failure 
of the resolution strategy – implying a depositor pay-out through the DGS – will be for 
the national banking sector to support, even though national authorities, while involved, 
are not in control of the bank’s supervision or resolution planning. Inasmuch as covered 
deposits under SRB remit are deposits in group subsidiaries located in Member States 
other than the Member State of the parent institution, this risk provides an additional 
incentive to ringfence bank capital and liquidity at entity level, limiting the benefits of 
liquidity and capital pooling at group level and failing to catalyse the potential benefits 
of the internal market.  

•  Without  prejudice  to  internal  support  measures  for  IPS  members,  in  case  of  failure, 
today most LSIs will be liquidated and covered deposits will be protected by way of 
DGS payout, preventive or alternative measures. Given the strong capital buffers in the 
system and the DGS super-preference, DGSs would rarely suffer material losses but 

44 

 
 
they might face substantial liquidity shortfalls, as demonstrated in the ECB occasional 
paper71 and highlighted by many stakeholders in the responses to the consultation. 

•  Other  LSIs  are  planned  for  resolution  by  national  resolution  authorities.  Where  the 
resolution of an LSI requires the use of the SRF, all requirements for access to the SRF 
should be fulfilled and the resolution scheme should be adopted by the SRB, despite 
the fact that the SRB has not been in the driver’s seat for the resolution planning and 
setting the MREL targets for the LSI. This results in subjecting LSIs that are considered 
‘too big to be liquidated’ to the same complex MREL rules and conditions for access 
to the SRF as SIs. This is one of the reasons for the reluctance of some NRAs to expand 
the scope of resolution to LSIs. This results in pushing authorities to choose national 
winding-up procedures and payout of covered deposits even when resolution would be 
more  efficient  and  would  provide  better  and  less  costly  protection  of  deposits,  even 
though the recent CMDI reform provides additional tools to use DGS to cover possible 
funding  gaps  to  access  resolution  funds.  The  consultation  also  indicates  that  some 
stakeholders consider access requirements to the resolution fund too rigid for smaller 
banks  and  not  sufficiently  reflecting  differences  in  size  and  business  model,  while 
supporting the underlying principle that shareholders and creditors should bear losses 
before financial safety nets are used. 

•  Overall, a system in which there is a risk of misalignment between control and financial 
liability  in  case  of  failure  and  banks  contribute  to  two  different  funds  –  one  for 
protection of covered deposits and one for resolution – while it is clear that there is a 
preferred route to manage a bank’s failure with the possible use of only one of the funds 
–  leads  to  overly  complex  arrangements  and  inefficiencies.  This  situation  combined 
with  the lack of any solidarity  mechanism among financial safety  nets  results in  the 
necessity  to  maintain  higher  total  amount  of  resources  in  the  safety  nets72,  and 
ultimately, in increased financial burden on banks.  

Predictability in the crisis management framework 

To  ensure  an  orderly  management  of  failing  banks,  resolution  authorities  are  required  to 
prepare and draft resolution plans which detail a bank’s characteristics, determine whether it 
carries critical functions to the economy and identify which functions should be continued in 
case  the  bank  fails.  Based  on  this  assessment,  resolution  authorities  determine  in  advance 
whether a bank should be designated for liquidation and wound up under normal insolvency 
proceedings or whether the bank would need to be supported in resolution and under which 
preferred resolution strategy. However, on the day of a bank failure, resolution authorities may 
decide that it is no longer in the public interest to resolve the bank or to change the resolution 
strategy. 

71 

72 

European Central Bank, Protecting depositors and saving money: Why deposit guarantee schemes in the 
EU  should  be  able  to  support  transfers  of  assets  and  liabilities  when  a  bank  fails,  Occasional  Paper 
Series, 2023. 
Simulations of the Joint Research Centre, Quantitative analysis on selected deposits insurance issues for 
purposes of impact assessment (2023) of a liquidity-only EDIS (fully pooled DGS resources but no loss 
mutualisation)  and  a  hybrid  EDIS  (partially  pooled  DGS  resources  and  mandatory  lending  of  the 
remaining funds in national DGS, no loss mutualisation) confirms that pooling resources in a specific 
manner could reduce the amount of funds needed in the system. 

45 

 
 
 
Issues identified: 

•  While it is essential that resolution authorities retain a certain degree of flexibility on 
the day of a crisis  to  adapt  to  conditions  which could  not  have been  foreseen in  the 
resolution plan, it is also important to recognise that last-minute changes to how bank 
failures  are  managed  can  create  significant  concerns  for  authorities  regarding  the 
potential fallout for the local economy beyond the protection of depositors. This is in 
particular relevant for Single Point of Entry (SPE) group resolution plans where local 
authorities may be called on managing the liquidation of a subsidiary without adequate 
planning, as this was not part of the initial resolution plan. 

3.1.7.  Liquidity in resolution 

The success of a resolution depends on its ability to restore market confidence and allow the 
resolved bank to finance itself on the market as soon as possible. Trust can be achieved through 
robust  resolution  planning,  timely  failing-or-likely-to-fail  declaration,  decisive  resolution 
actions, including the bail-in of shareholders and creditors, the return of bank to viability and 
effective  communication  that  provides  confidence  to  market  participants  (e.g.  clear  and 
credible messaging about the resolution strategy).  

However,  the  exceptional  nature  and  the  potential  impacts  of  resolution  actions  may  raise 
concerns from various stakeholders, affected or not by the resolution, who may decide to stop 
transacting  with  the  newly  resolved  bank  despite  the  successful  intervention  of  public 
authorities.  As  stated  in  the  FSB  2024  resolution  report73,  ‘[i]n  the  period  following  the 
commencement of a resolution process, even a recapitalised bank could experience heightened 
liquidity  needs  generated  by  market  volatility’.  In  this  respect,  several  jurisdictions  have 
introduced facilities to deal with such challenges. 

Issues identified:  

•  While  the  various  regulatory  steps  taken  since  2008  have  led  to  a  healthier  banking 
system  overall,  the  tail  risk  of  banks  that  are  deemed  too-big-to-fail  and  whose 
disorderly failure can affect, directly or indirectly, the entire EU economy in similar 
ways  as  during the great financial crisis  still remains  due to  the lack of an adequate 
framework  for  liquidity  in  resolution.  This  justifies  dealing  with  such  tail  risks 
beforehand in a predictable manner. Potential liquidity needs of a global-systemically 
important bank or several medium-size banks can be particularly large, even though 
only needed for a short period of time before the resolved bank secures again full access 
to private funding after resolution. These temporary liquidity needs may largely exceed 
resources  that could  be  available in the bank itself immediately  after the ‘resolution 
weekend’ – e.g. due to the lack of assets to be pledged as collateral – or in safety nets 
such as the SRF and, if implemented, the ESM common backstop to the SRF. These 
temporary liquidity needs may only partly be mitigated by stricter measures aimed at 
increasing banks’ resolvability or early failing-or-likely-to-fail declarations. To protect 
financial  stability  in  the  EU,  the  introduction  of  effective  public  sector  backstop 

73 

Financial Stability Board, 2024 Resolution Report, 2024. 

46 

 
 
 
 
mechanisms for the provision of liquidity in resolution is necessary, as recognised by 
the FSB74.  

In the Banking Union, and in absence of a European mechanism, the temporary provision of 
emergency liquidity assistance (ELA), provided by and at the discretion of the respective euro 
area  national  central  bank  (NCB)  to  a  solvent  bank,  has  historically  been  used  to  provide 
liquidity. This  has  usually required the use of national  guarantees to  ensure that the ELA is 
provided against adequate collateral. This approach as, however, drawbacks.  

-  All  losses  are  national.  Whether  directly  as  of  guarantees  or  indirectly  as  of 
recapitalising the respective NCB(s), any losses incurred by the provision of liquidity 
due  to  a  bank’s  default  are  attributed  to  the  individual  Member  State.  Under  such  a 
system,  there  is  no  possibility  to  ensure  that  public  support  is  fully  repaid  by 
contributions from all BU banks.  

-  Such transmission of bank risks to the sovereign with no mitigation or repayments has 
potentially  negative  implications  for  the  sovereign  financing,  reinforcing  the  bank-
sovereign nexus that BU reforms had intended to help weaken. 

-  The national specific approach goes against the design of the BU and is incompatible 
with the institutional architecture of the BU, where the responsibility for the supervision 
and the resolution of significant institutions has been allocated to the European level. 

Responses to the targeted consultation also show that various market participants consider that 
the discretionary nature of ELA creates uncertainty on the success of the resolution, requiring 
them to guess authorities’ reactions and increasing chances of a self-fulfilling liquidity crisis. 

The  lack  of  an  adequate  European  mechanism  results  in  persistent  gaps  in  the  crisis 
management framework that undermine credibility and trust in the ability of the Banking Union 
to deal with the failure of large banks in an orderly way. This uncertainty also creates risks for 
national budgets, the EU economy and the financing of the EU priorities.  

The  vast  majority  of  respondents  to  the  consultation  would  support  a  more  transparent  and 
predictable European mechanism ensuring the provision of liquidity in resolution as a key tool 
to strengthen the effectiveness and credibility of the European crisis management framework. 

Addressing  this  issue  would  greatly  contribute  to  strengthening  financial  stability  in  the 
Banking  Union,  and  more  largely  in  the  EU.  In  addition,  by  providing  adequate  means  to 
stabilise  the  financial  situation  of  a  parent  entity  within  a  group,  a  robust  mechanism  for 
liquidity in resolution can also help mitigate concerns about the impact of measures supporting 
a more efficient cross-border allocation of funds within banking groups as the probability that 
a parent could not support its own subsidiary due to lack of available liquidity would be greatly 
minimised. Progress  on the issue of liquidity in resolution  is  therefore closely  linked to  the 
ability to improve market integration and simplify the regulatory framework. 

3.2. 

Implementation of international standards in the EU – Main issues 

74 

Financial Stability Board, Guiding principles on the temporary funding needed to support the orderly 
resolution of a global systemically important bank, 2016. 

47 

 
 
 
 
3.2.1.  Output floor 

The output floor is one of the elements of Basel III, agreed in December 2017. It is a measure 
that sets a lower limit (‘floor’) on the capital requirements that banks calculate when using their 
internal models (‘output). In practice, the output floor acts as a backstop for the internal model 
approaches on the basis of the standardised approaches of the Basel standards. 

The output floor impacts specifically the computation of the own funds’ requirements for credit 
risk and for market risk, where institutions are still allowed to use internal model approaches. 
One of the criticisms against the output floor is that it compares the risk weights determined 
by  internal  models,  developed  by  banks  on  the  basis  of  their  real-life  observations  (e.g.  on 
default  data),  using  modelling  techniques  that  are  authorised  and  supervised  by  competent 
authorities, to the risk weights of the standardised approaches calibrated by the BCBS using 
US data only, whereas EU and US banking intermediation activities have structural differences 
in products, markets and clients. Another key criticism is related to the fact that its calibration 
at 72.5% may make the output floor binding in a too high number of cases, with detrimental 
effects  on risk sensitivity. In the EU, internal  models of banks have undergone a decade of 
supervisory scrutiny and are supervised on an ongoing basis. Examples of such supervisory 
activity  over  the  years  are  the  TRIM  project75,  supervisory  benchmarking,  ongoing  model 
monitoring activities76 and an established framework governing model changes.  

The output floor requirement was introduced into European legislation through the CRR3 in 
January 2025. The transitional arrangements for the output floor are set in Article 465(1) CRR. 
The output floor is expected to be fully phased in by 1 January 2030 and it is currently at the 
level of 55%. 

1 January 2025 to 31 December 2025 

1 January 2026 to 31 December 2026 

1 January 2027 to 31 December 2027 

1 January 2028 to 31 December 2028 

1 January 2029 to 31 December 2029 

1 January 2030 

50% 

55% 

60% 

65% 

70% 

72.5% 

Issues identified: 

Calibration of the output floor 

•  Heterogeneous  application  across  major  jurisdictions.  The  BCBS  framework  is 
designed  to  be  implemented  uniformly.  However,  the  international  practice  differs 
widely  among  major  jurisdictions.  The  newest  US  proposal  (March  2026)  includes 
more  than  20  downward  deviations  and  reduces  gold  plating.  The  UK  Prudential 

75  
76  

Targeted Review of Internal Models – see here (link) 
Including model validation – see here (link) 

48 

 
 
 
Regulation Authority published its  final Basel 3.1 policy statement in January 2026, 
delaying  the  implementation  by  one  year,  to  1  January  2027.  Thus,  like  for  other 
international agreements, the faithful transposition of Basel requirements is subject to 
specific features of the jurisdictions: they may have structural differences in banking 
markets and the role of bank lending for the economy, and they may thus be applied 
more progressively over time. 

Jurisdiction 

Current floor level 

Roadmap to 72.5% 

EU 
Australia 
Japan 
Canada  
UK 

55% 
72.5% 
60% 
67.5% 
Not started 

US 

Not implemented77 

By 1 January 2030 
n/a 
By 31 March 2029 
Frozen 
To  start  by  Jan  2027, 
Jan 
fully-fledged  by 
2030 

•  Relevance of risk-based requirements. The last EBA’s Basel III monitoring report 
(2024) shows that when fully implemented, nearly 80% of EU banks will be constrained 
by the output floor or leverage ratio, meaning that risk-based requirements will become 
secondary for the majority of EU banks. More recent research by the SSM suggests that 
approximately 20 significant institutions under their supervision may be bound by the 
output floor in the steady state. 

•  EU  structural  business  models.  EU  banks  rely  predominantly  on  on-balance  sheet 
lending  (mortgages,  corporate  loans  held  to  maturity),  whereas  US  banks  make 
extensive  use  of  fee-based  models  and  transfer  mortgages  to  government-sponsored 
enterprises,  moving  the  exposures  that  most  heavily  impact  the  floor  off-balance 
sheet78.  This  is  not  a  calibration  issue  but  a  structural  feature  of  European  financial 
intermediation that makes the same floor more binding in the EU than in the US. At the 
same  time,  the  output  floor  has  a  much  stronger  impact  on  the  European  economy 
because it is much more dependent on bank-based financing than the US economy that 
relies more heavily on well-developed and large capital markets. 

Level of application 

•  Divergent application in the EU. The BCBS framework calibrated the output floor at 
the  consolidated  group  level.  The  rationale  was  clear:  the  floor  is  a  portfolio-level 
backstop. A group with a diversified portfolio across subsidiaries in multiple countries 
may have low aggregate internal model risk while individual subsidiaries show higher 
or lower IRB-to-SA ratios, depending on their specific portfolio mix. Applying the floor 
entity-by-entity produces a mechanically different and more punitive outcome than the 
Basel Committee intended or modelled in its impact assessments.  

77 

78 

The  non  implementation  of  the  output  floor  by  the  US  should  be  read  in  conjunction  with  the 
discontinuation of internal models in the area of credit risk and the presence of the Collins floor. 
The June 2025 proposal on Securitisation aims to revive the securitisation market in the EU and offer 
EU player a more effective option in managing their balance sheet. 

49 

 
 
  
 
 
Following  a  proposal  by  the  Commission  in  2021  to  apply  the  output  floor  only  at 
consolidated  level,  the  interinstitutional  negotiations  led  to  a  different  approach, 
whereby  the  output  floor  would  apply  at  both  the  consolidated  level  and  at  the 
individual/sub-consolidated level, for each legal entity within the group (Article 94(4) 
CRR3). The logic was: 

-  Host country supervisory control: retaining the ability to ensure local entities held 
sufficient capital, particularly given the absence of a completed Banking Union (in 
particular  the  absence  of  common  deposit  insurance  and  unresolved  issues  to 
enhance cross-border crisis management). 

-  Capital drain risk: without solo-level requirements, parent groups could upstream 
capital from subsidiaries in stressed periods, leaving local depositors and taxpayers 
exposed.  

The application of the output floor at individual level is a deliberate EU gold-plating 
over the Basel III standard.  

Risk areas of application 

•  Scope of the output floor (credit risk only or full balance sheet). The application of 
the  output  floor  as  a  single  stack  considering  all  risk  areas  creates  disincentives  for 
banks to develop market risk internal models, which instead have positive effects on 
banks’ risk management practices. 

3.2.2.  Credit risk 

Credit risk is the dominant risk category for EU banks, amounting to approximately 82% of 
total risk-weighted exposure amounts (RWEAs), that reflects the central role of the banking 
sector in financing households and businesses. Notably, the corporate sector, especially small 
and medium-sized enterprises (SMEs), startups and scale ups, rely heavily on bank lending as 
main source of  financing.  Consequently, competent  authorities focus  strongly  on prudential 
requirements and financial stability objectives. 

The Banking Package adopted entered into application in 2025 (CRR3) led to amend the EU 
credit risk prudential framework for banks applying both the standardised approach (SA) and 
the internal ratings-based approach (IRB approach), and added a very relevant new element, 
markedly the Basel III driven output floor, agreed internationally in December 201779, as an 
additional prudential backstop. The objective of the output floor is to limit the variability in the 
estimation of RWEAs under the IRB approach and relates it to the RWEAs calculated applying 
the SA for credit risk.  

The objective of the prudential framework is to make sure banks adequately cover their credit 
risks  by  setting  aside  capital  for  unexpected  losses.  But  it  is  equally  important  that  the 
framework does not unduly restrict lending capacities by requiring levels of capital beyond the 
statistically defined level of economic stress. Effective supervisory review of lending practices 
and banks’ corporate governance should contribute to limit unexpected losses on EU banks’ 
credit portfolios. 

79 

Basel III: Finalising post-crisis reforms, 7 December 2017 (https://www.bis.org/bcbs/publ/d424.htm) 

50 

 
 
 
 
Getting the regulatory and supervisory balance right in the EU is instrumental for the safety 
and  soundness  of  the  banking  sector  and  for  maintaining  sufficient  funding  for  strategic 
economic sectors and the EU’s strategic priorities. It would also reduce the potential for moving 
funding sources to less-regulated non-bank lenders (e.g., private credit markets), a move which 
could even worsen the safety and soundness within the financial sector. 

Issues identified: 

•  Market transparency is an asset that can help corporates to tap capital markets. At the 
same  time,  there  is  a  need  to  make  sure  that  the  prudential  treatment  of  banking 
exposures  toward  unrated  corporates  with  good  credit  histories  remains  balanced, 
proportionate, and consistent over time. The EU framework presents a high structural 
insulation against borrowers’ default, which is reflected only to a limited extent in the 
standards  agreed  at  international  level  at  Basel.  This  is  the  case  also  considering 
segments  of  low-risk  residential  mortgages  based  on  a  wide-array  of  structural 
safeguards with a long and proven track record.  

•  Modelling outcomes under the IRB approach and the relative distance between the IRB 
approach and the SA resulting in major adjustments when applying the output floor, 
should  be  further  analysed.  This  is  especially  relevant  for  exposures  showing  low 
default  rates  and  for  which  strong  legal  and  structural  setups  protect  financial 
institutions.  In  these  lines  of  business  EU  banks  developed  good  expertise  and 
experience in controlling the inherent riskiness of their exposures, without an adequate 
recognition in the prudential framework e.g. specialised lending (e.g. aircraft, shipping, 
rail, critical and green transition infrastructures), leasing, trade finance, etc.80 

•  The current treatment of investments in software assets may determine disincentives to 
robust  investments  in  IT  capabilities,  while  the  prudential  framework  should  not 
hamper banks’ development of IT capacities both on grounds of competitiveness and 
regulatory compliance. 

3.2.3.  Market risk and FRTB application 

Basel  III  introduced  a  revised  standard  for  market  risk81,  also  known  as  the  Fundamental 
Review  of  the  Trading  Book  or  FRTB,  adopted  by  the  BCBS  in  January  2016  and  further 
reviewed in 2019. The EU implemented the FRTB in its legal framework in two phases, first 
as  a  reporting  requirement,  via  CRR2  (amending  Regulation  (EU)  2019/876)  and  then  as 
binding capital requirements via the 2024 Banking Package and CRR3 (amending Regulation 
(EU) 2024/1623). However, despite CRR3 and Basel III entered into application on 1 January 

80 

81 

See for example evidence from Moody’s analysis of long-term global infrastructure, which highlights a 
geographic  divergence  in  credit  resilience  benefitting  western  Europe  for  Infrastructure  Debt  Default 
Rates  (September  2020  -  https://www.gihub.org/infrastructure-monitor/insights/infrastructure-debt-
default-rates-by-region/), or from the International Chamber of Commerce (ICC) Trade Register, which 
underlines European trade and export credit transactions as consistently exhibiting near-zero risk profile 
with 
- 
commodity 
https://www.tradefinanceglobal.com/posts/breaking-trade-finance-default-rates-rise-icc-trade-finance-
register/). 
Financial instruments held by banks for trading purposes (e.g. shares, bonds, derivatives) are subject to 
market risk, that is the risk of losses due to decreases in the value of such instruments arising from adverse 
movements in market prices. 

(November 

finance 

regard 

2023 

trade 

and 

to 

51 

 
 
 
 
2025, the application of the FRTB in the EU was postponed twice via Commission delegated 
acts to 1 January 2027, in light of the US’ and UK’s delays in their own implementation of the 
Basel standards. On 4 June 2026, the Commission adopted a third delegated act on market risk, 
which  is  currently  under  scrutiny  by  European  Parliament  and  Council.  The  delegated  act 
introduces targeted amendments to the EU implementation of the FRTB. 

Competition between internationally active banks is very intense in trading activities, due to 
the ease with which those activities can be conducted across jurisdictions, including between 
Member States and third countries or through branches. Misalignments in the implementation 
of internationally agreed standards for market risk, both in terms of timeline and content, can 
have repercussions on the level playing field for EU banks and bring significant consequences 
on  the  capacity  of  the  EU  banks  to  compete  in  those  markets.  EU  banks  would  lose 
competitiveness / market share in trading activities to the advantage of their lighter-regulated 
international competitors, both in international markets (US, UK, Asia) and in the EU itself, 
where US banks hold a significant market share. Also, misalignment might cause some trading 
activities  to  migrate  from  EU  markets  to  other  lesser-regulated  jurisdictions,  actually  going 
against SIU objectives. 

Issues identified: 

•  Overall  uncertainty  over  other  jurisdictions’  implementation  of  the  FRTB,  both 

regarding timeline and content, and level playing field implications.  

•  More monitoring is needed, to feed reflections for the permanent solution regarding the 
FRTB  implementation,  together  with  the  measures  introduced  in  the  Commission 
delegated acts and broader reflections on the EU approach to Basel 

•  Only few banks have request competent authorities’ approval to use internal models. 
This is an issue as internal models are more appropriate for banks with sophisticated 
activities, they aid developing risk management capabilities and avoid herd effects on 
specific instruments or activities (which may be discouraged by the risk weighting of 
the standardised approach).  

3.3.  Undue complexity of the framework – Main issues 

Complexity  is  inherent  to  financial services  regulation,  in  particular in  the  area of banking. 
Banks require strict regulation and intrusive supervision, because they are fundamental to the 
financing  for  the  EU  economy  and  inherently  vulnerable  to  runs  on  their  primary  funding 
source, deposits, which may create financial instability. Banking also remains a highly complex 
endeavour, and the regulations reflect this complexity. 

3.3.1.  Institutional set-up 

(i) 

 Implementing international standards in the EU regulatory framework 

The EU bank regulatory framework is based on a central assumption that, in a single market, 
adequate regulation should apply to all banks across the EU. This led to subject the entire EU 

52 

 
 
 
 
banking  system  to  policies  deriving  from  international  standards  developed  in  the  Basel 
Committee for Banking Supervision (BCBS) and the Financial Stability Board (FSB), while 
they  were  initially  designed  for  systemic  banks.  This  approach  leads  to  further  complexity 
given the need to adapt rules to cater for EU specificities, while ensuring broad compliance 
with international standards82. These differences are based on political agreements among co-
legislators and reconcile the abstraction of international standards with the reality of the EU 
banking  sector  and  its  environment  (different  banking  landscape  compared  to  other 
international jurisdictions, European and national safety nets, differences in national laws, need 
for proportionality). Still, they are a source of complexity and lack of comparability. 

(ii) 

Interinstitutional architecture and transversality 

The EU is a complex multi-jurisdictional political structure with a democratic, transparent and 
accountable  legislative  decision-making  process,  but  which  often  produces  additional 
complexity through the political negotiation process.  

This  means  that, on  top  of adopting internationally agreed standards, introducing  numerous 
EU-specificities  (e.g.  exemptions,  derogations)  in  the  single  rulebook  to  cater  for  national 
interest groups or specific business models is necessary to achieve a consensus among the EU 
co-legislators. In addition, compared to other jurisdictions, the EU banking regulation in the 
EU tends to be more rule- than principle based, to ensure a harmonised application and level 
playing field among Member States. 

Complexity can also arise because of the design of the regulation, where simplicity is sacrificed 
to  attain  other objectives, notably risk sensitivity, robustness,  cost  efficiency, comparability. 
Complexity can also be the characteristic of the lack of transversality in the setting up of rules 
that does not consider the safeguards considered by other parts of a global framework. 

(iii)  Multiplicity of sources of legislation 

The  multiplicity  of  sources  of  legislation  and  guidance  also  contributes  to  complexity.  EU 
legislative  acts  (Directives,  Regulations)  and  secondary  acts  (Delegated  and  Implementing 
Regulations) are numerous and often very prescriptive. With 3 main Directives and 3 main 
Regulations83,  EU  legislative  acts  in  the  area  of  banking  regulation  have  reached  an 
unprecedented level of coverage and granularity, in Level 1. The complexity of the rules also 
leads to introduction of additional empowerments for a high number of Level 2 acts (more than 
100  in  the  latest  Banking  Package  alone),  requiring  important  efforts  to  ensure  that  the 

82 
83 

Annual Report 2025: Promoting global financial stability, Financial Stability Board, 2025 (page 52) 
Comprising:  

•  Capital Requirements Regulation (Regulation EU 575/2013) 
•  Capital Requirements Directive (Directive 2013/36/EU) 
•  Bank Recovery and Resolution Directive (Directive 2014/59/EU) 
•  Deposit Gurantee Scheme Directive (Directive 2014/49/EU) 
•  Single Supervision Mechanism Regulation (Council Regulation EU 1024/2013) 
•  Single Resolution Mechanism Regulation (Regulation EU 806/2014) 

53 

 
 
 
 
 
framework can be developed on time and implemented as intended84. In the financial services 
legislation at large, 430 empowerments have been added solely for the 2019-2024 legislature85 
(and  115  deprioritised).  The  banking  framework  also  interacts  with  other  EU  regulations, 
including ESG reporting or digital operational resilience (DORA) that amplify the impact of 
this accumulation of rules86. 

In  addition,  Level  3 guidance  (Guidelines and  reports, authorities’ guidance), which can be 
developed on the authorities’ own initiative to ensure harmonised implementation of the EU 
rules  or  to  limit  discretion  and  ensure  a  level  playing  field,  is  often  used  and  perceived  as 
binding to a similar extent as EU law. While guidance should contribute to the maturity of the 
prudential  framework  and  ensure  clarity,  homogeneity  and  a  level  playing  field  in  terms  of 
implementation,  their  degree  of  detail  and  prescriptiveness  can  often  be  seen  as 
counterproductive.  

Recurrent issues include:  

•  The nature of such guidance is debated: while guidelines are not legally binding, the 
‘comply or explain’ mechanism, combined with public disclosure of non-compliance, 
creates pressure on authorities to adhere to them. This, in turn, forces banks to follow 
the guidelines ad litteram, as Union law is silent on which would be the consequences 
for banks breaching guideline provisions (not following a guideline, for a bank, may 
increase the risk of non-compliance and of sanctions)87. 

•  Authorities  who  have  declared  compliance  with  a  guideline  can  in  any  event 
supplement it with additional measures nationally. This reduces convergence instead of 
fostering it. 

• 

In so far as the Banking Union is concerned, there are de facto two comply-or-explain 
mechanisms  per  Member  State:  one  by  the  European  authority  (ECB  and  SRB)  for 
banks in their remit, and a second one by the national authority for the rest of the banks, 
with possible inconsistencies between the two approaches. 

The use of Directives, requiring transposition in national laws, is also a factor that increases 
complexity and risks of divergent designs and applications of national laws that can ultimately, 
in particular for Directives of minimum harmonisation, lead to gold-plating practices.  

84 

85 
86 

87 

For  example,  the  European  Banking  Authority  published,  in  December  2023,  a  roadmap  on  the 
implementation  of  the  EU  Banking  Package  translating  Basel  3  standards  in  EU  law.  This  exercise 
included the preparation of 47 regulatory technical standards, 13 implementing technical standards, 29 
guidelines and 36 reports, all stemming from the amendments introduced in CRR and CRD during the 
legislative procedure. 
De-priorisation of Level 2 acts in financial services legislation, European Commission, October 2025 
ENISA’s threat landscape for the finance sector also helps to provide context and figures: ENISA 
Threat Landscape: Finance Sector | ENISA. 
Even if guidelines and recommendations are not intended to produce binding legal effects, courts are 
obliged  to  take  them  into  consideration  with  a  view  to  resolving  the  disputes  submitted  to  them,  in 
particular when they are intended to supplement binding European Union provisions (see, judgments of 
13 December 1989, Grimaldi, C‑322/88, EU:C:1989:646, paragraph 18; of 11 September 2003, Altair 
Chimica, C‑207/01, EU:C:2003:451, paragraph 41; and of 15 September 2016, Koninklijke KPN and 
Others, C‑28/15, EU:C:2016:692, paragraph 41). 

54 

 
 
 
Moreover, the governance of the requirements, i.e. the way supervisory, resolution and macro-
prudential  authorities  tend  to  apply  them  to  banks  in  concrete  cases,  can  further  increase 
complexity through additional layers of internal guidance and interpretative notices.  

Due to its legal nature, and the piece-meal approach to producing and adopting legislation, the 
EU  regulatory  framework  also  has  many  internal  and  external  cross-references  that  impede 
readability and a comprehensive understanding of the set of rules. Combined with legislative 
instability (since 2015, CRR88 has been amended 21 times and BRRD89 has been amended 11 
times—either  directly  or  indirectly  through  amendments  stemming  from  other  legal  acts90), 
this EU regulatory framework is a source of risk, slowing down decision making due to the 
potential side effects and the cross-references of a framework trying to be consistent in all its 
dimensions. This dynamic evolution of rules creates a "moving target" for compliance. This 
forces banks to continuously adapt their systems and processes, diverting resources from core 
risk management to reactive compliance efforts. 

The consultation reveals that there is a broad consensus among stakeholders that the primary 
sources  of  undue  complexity  lie  in  supervisory  soft  law,  the  proliferation  of  Level  2/3 
measures,  and  national  implementation  differences.  The  interaction  between  multiple 
frameworks—prudential,  macroprudential,  resolution,  and  emerging  areas  such  as  digital 
resilience and ESG—is also recognised as a key challenge, though stakeholders differ in their 
assessments of whether this complexity is justified by its policy objectives. In more details: 

-  Supervisory guidance and soft law stand out as the most quoted source of complexity. 
Banks and business associations consistently highlight that Pillar 2 requirements, EBA 
Q&As,  and  ad-hoc  supervisory  expectations  effectively  create  a  "fourth  layer"  of 
regulation,  operating  alongside  formal  legislative  instruments.  National  authorities 
acknowledge  the  necessity  of  supervisory  flexibility  but  recognise  that  greater 
structuring and transparency could reduce uncertainty. On the other hand, same of that 
complexity  is  derived  from  banks’  own  requests  for  further  clarity  (notably  through 
Q&As).  

-  The proliferation of Level 2 and Level 3 measures is the second most frequently cited 
concern, with stakeholders across all groups arguing that regulatory technical standards 
(RTS), implementing technical standards (ITS), and EBA guidelines are perceived to 
be at times too detailed and lacking proportionality. Banks and business associations 
criticise the excessive granularity and frequent updates of these measures, which divert 
resources  from  core  risk  management  activities  without  necessarily  enhancing 
prudential outcomes. Some highlight that delays or inconsistencies in implementation 
force  institutions  to  adopt  overly  conservative  interpretations,  further  increasing 
compliance  costs.  National  authorities,  while  recognising  the  necessity  of  technical 
specifications for harmonisation, suggest that a more disciplined approach—including 
the sunsetting of outdated measures and consolidation of overlapping requirements—
could reduce complexity. NGOs and academia adopt a more critical stance, arguing that 
these  instruments  often  amplify  rather  than  clarify  Level  1  provisions,  leading  to 
redundancies and distortions. 

88 
89 
90 

Capital Requirements Regulation (Regulation EU No 575/2013). 
Bank Recovery and Resolution Direction (Directive EU 2014/59/EU). 
Source: Eur-Lex . 

55 

 
 
 
-  National implementation differences are widely identified as the third major source of 
complexity, fragmenting the single rulebook and complicating cross-border operations. 
Banks  and  business  associations  emphasise 
that  gold-plating  and  divergent 
transpositions  of  national  options  create  an  uneven  playing  field  that  increases 
compliance costs without clear benefits. Some banking associations further note that 
differences 
the 
framework’s harmonising intent. While national authorities defend the need for some 
discretion  to  address  jurisdiction-specific  risks,  they  acknowledge  that  greater 
convergence in supervisory practices could reduce unnecessary complexity. 

insolvency  regimes  undermine 

in  macroprudential 

tools  and 

- 

Interactions  with  other  EU  and  national  legislation  are  also  identified  as  a  growing 
source of complexity, particularly as non-prudential requirements—such as those under 
DORA,  ESG  reporting,  and  accounting  rules—increasingly  overlap  with  banking 
regulation.  Banks  and  business  associations  highlight  that  these  obligations  often 
duplicate  or,  in  the  case  of  accounting  rules,  conflict  with  prudential  requirements, 
creating  redundant  compliance  burdens.  National  authorities  recognise  the  need  for 
cross-sectoral legislation but suggest that better coordination between the Commission, 
EBA,  and  other  EU  agencies  could  help  align  different  policy  areas  and  streamline 
compliance. 

-  Finally,  while banks and authorities focus  on operational  and procedural  challenges, 
NGOs and academia highlight deeper structural issues in the EU banking framework. 
They argue that the current "repair-based paradigm"—where successive crises lead to 
new layers of regulation without addressing fundamental design flaws—has resulted in 
a fragmented and overly complex system. 

(iv)  Multiplicity of actors 

The  multiplicity  of  actors  in  charge  of  implementing  the  framework  can  also  contribute  to 
complexity. 

For prudential matters, national competent authorities (micro-prudential supervision), national 
resolution  authorities,  national  macro-prudential  authorities,  national  central  banks  and 
national designated authorities overseeing deposit guarantee schemes, sometimes under a same 
roof, coexist with the European Central Bank (ECB), the Single Resolution Board (SRB), the 
European Banking Authority (EBA), the European Systemic Risk Board (ESRB) or even the 
European  Commission  (competition  policy,  specific  role  in  crisis  management  framework). 
Other actors complement this mapping on other areas that are relevant for banking activities91. 

Progress has been achieved through the establishment of the Banking Union with an integrated 
cooperation and decision-making in the Single Supervision Mechanism (SSM) and the Single 
Resolution  Mechanism (SRM)  , including  coordination between the ECB and the  SRB, the 
coordination between European Supervisory Agencies (EBA, EIOPA and ESMA) or, in the 
area  of  reporting,  the  recently  set-up  Joint  Bank  Reporting  Committee  (JBRC).  When 
expanding beyond prudential matters, other actors also play a role such as financial intelligence 
units,  data  protection  authorities,  consumer  protection  authorities  or  deposit  guarantee 

91 

Such as the European Securities Market Authorities, the Anti-Money Laundering Authority and its 
counterparts at national level, etc. 

56 

 
 
 
 
schemes. However, despite the existence of legal delineations granting different powers and 
tools to different authorities, the coexistence of a high number of authorities can be conducive 
to  complexity  and  inefficiencies  if  their  roles  and  responsibilities  are  not  clear  and  if 
coordination for their respective tasks is not optimal. 

(v) 

Implementation practices and supervisory culture 

The  consultation  reveals  that  supervisory  discretion  is  perceived  as  a  factor  leading  to 
inconsistent outcomes. The broad discretion exercised by supervisors—particularly in Pillar 2 
assessments, internal model approvals, and stress testing—is identified as a major source of 
complexity. Banks  report  that supervisory expectations frequently exceed formal regulatory 
requirements,  creating  additional  burdens  without  clear  risk  justification, exceeding  what  is 
necessary  to  ensure  prudential  stability  and  do  not  adequately  reflect  the  risk  areas  and 
specificities of different business models. The lack of transparency in how discretion is applied 
results in divergent outcomes across jurisdictions, reducing planning certainty and increasing 
compliance costs, especially for cross-border banking groups. 

3.3.2.  Micro-prudential requirements 

(i) 

Pillar 2  

Pillar  2  is  a  core  component  of  the  capital  framework  for  the  EU  banking  sector, 
complementing  the  standardised  Pillar  1  requirements  with  supervisory  tools  tailored  to 
individual  banks  by  addressing  bank-specific  risks  and  supporting  institution’s  capacity  to 
withstand potential stress scenarios. In its practical application, institutions are subject to the 
Supervisory Review and Evaluation Process (SREP) in which supervisors form a view of banks 
individual  risk  profiles  and  engage  in  a  dialogue  with  the  institution.  Following  the  SREP, 
institutions can be subject to supervisory capital add-ons covered by the Pillar 2 requirement 
(P2R), a legally non-binding Pillar 2 guidance (P2G) specifying the capital levels banks should 
maintain beyond mandatory requirements, and qualitative measures.  In the P2R supervisors 
assess risks  that are not,  or not  sufficiently, captured under Pillar 1. The P2G is a forward-
looking measure based on supervisory stress test outcomes. 

The EU Pillar 2 approach implements the “Supervisory Review Process” laid out in the Basel 
standards  a  principles-based  approach  granting  flexibility  to  jurisdictions  to  implement 
measures addressing additional risks not covered by the framework. The Basel framework does 
not prescribe a specific capital add-on, its order and interaction within the capital stack, nor 
does  it  specify  the  type  or  quality  of  capital  required  to  satisfy  Pillar  2  requirements  and 
disclosure obligations. The prescriptive and expansive nature of the EU Pillar 2 implementation 
of  the  Basel  framework  has  given  rise  to  concerns  regarding  consistency,  transparency  and 
global  competitiveness,  diverging  from 
jurisdictions. 
the 
Stakeholders have 
application  of 
concerns about the 
Pillar 2 requirements  and guidance, notably possible overlaps with other requirements which 
could lead to double counting. Concern has also been raised regarding the limited transparency 

implementation  by  other 
current  design 

raised 

and 

57 

 
 
 
 
of  the  methodologies  used  to  set  Pillar 2 measures  with  a  demand  for a  clearer  breakdown 
of decisions, increased clarity and incentives relating to remediation and a better reflection of 
underlying risks. At the same time, the robust supervisory approach is a key strength of the EU 
framework.  It  allows  supervisors  to  identify,  measure  and  manage  bank-specific  risks, 
incentivises banks to improve their risk management and strengthens the resilience of the EU 
banking sector by ensuring a sound capitalisation of individual banks.  

The following descriptive figures shed light on how Pillar 2 has been applied in practise. 

Figure 26 – Developments in overall capital requirements and Pillar 2 guidance – the total 
capital stack 

Source: ECB aggregated results of the 2025 SREP 

Figure 26 shows the evolution of the EU going-concern capital stack between 2018 and 2026 
for significant institutions supervised by the SSM, distinguishing between the different layers 
of the total capital stack. It illustrates that Pillar 2 capital layers have remained broadly stable 
in recent years. The chart also shows that P2R and P2G remain separate layers of capital within 
the capital stack, with different legal and supervisory functions. The P2R can be fulfilled with 
different capital instruments, while the P2G is expressed as CET1. The graph provides context 
regarding the discussion on simplification of the framework, as well as the development of the 
level of requirements over time. 

Figure 27 – Percentage contribution to P2R by risk (overall P2R = 100%) 

58 

 
 
 
Source: EBA Convergence Report – 288 banks  

The  pie  chart  presents  the  contribution  of  different  risk  categories  to  total  P2R.  Credit  and 
counterparty risk represents the largest share, followed by IRRBB, operational risk, internal 
governance, market risk, business model risk, concentration risk, model deficiencies and other 
risks.  The  figure  shows  the  distribution  of  P2R  components  that  are  capturing  risks 
insufficiently addressed in Pillar 1 (credit, market and operational risk), and risks not addressed 
in Pillar 1 (including IRRBB, governance, business model and concentration risk). 

Figure 28 – Distribution of total capital Pillar 2 requirements (percentages of RWA) 

59 

 
 
 
 
Source: ECB aggregated results of the 2025 SREP 

The graph shows the distribution  of total  capital P2Rs  over time, including the median, the 
interquartile range and the 5th and 95th percentiles. It indicates that the median P2R has been 
broadly stable in recent years, while the interquartile range fluctuates, and has narrowed in the 
most recent year.  

In recent years, the SREP and Pillar 2 requirements have been amended through regulatory 
changes93,  and  supervisory  methodologies  are  regularly  updated.  The  ECB  Banking 
Supervision has recently implemented a new P2R methodology and proposed a reform agenda 
intended  to  increase  the  efficiency,  effectiveness  and  risk-based  focus  of  prudential 
supervision. These reforms are an important step in ensuring an adequate supervisory review 
framework. 

Taking into account the international level playing field and the need to simplify the prudential 
framework, further steps could be considered, to ensure that supervisory requirements remain 
risk-based, proportionate and sufficiently predictable, while avoiding unnecessary complexity 
or overlaps within the capital framework. 

Issues identified: 

•  Competitiveness  and  level  playing  field  concerns:  EU  banks  argue  that  the 
implementation of Pillar 2 in the EU is more conservative and complex than in certain 
other  major  jurisdictions,  potentially  resulting  in  higher  capital  requirements  and 
placing  them  at  a  competitive  disadvantage.  Other  assessments  point  in  a  different 
direction  and  provide  evidence  that  the  capital  requirements  are  not  a  competitive 
disadvantage. 

•  Potential overlaps and double counting: Concerns persist regarding possible overlaps 
between  Pillar  1,  Pillar  2  and  macroprudential  buffers.  These  concerns  should  be 
assessed  carefully,  distinguishing  between  actual  double  counting  and  the  use  of 
different instruments for different prudential purposes. 

•  P2G perceived as quasi-binding: Although P2G is formally non-binding, many EU 
banks perceive it as a de facto requirement due to supervisory expectations and market 
sensitivities.  This  may  reduce  institutions’  flexibility  in  capital  management  and 
contribute to the build-up of management buffers above regulatory minima. This issue 
is also relevant for the broader discussion on the clarity of communication around the 
consequences of temporarily operating below P2G. 

•  Limited transparency and predictability: Stakeholders frequently report insufficient 
transparency regarding the methodologies underpinning the calibration of P2R and P2G 
and  the  supervisory  communication  of  the  final  SREP  decision,  including  how 
supervisory  findings  translate  into  specific  capital  add-ons  and  the  intensity  of 
supervision.  

•  Limited  risk  sensitivity  of  outcomes:  The  relatively  stable  and  clustered  nature  of 
Pillar  2  over  time,  and  between  institutions,  in  the  methodology  of  supervisory 

60 

 
 
authorities, has led to perceptions that the framework does not sufficiently differentiate 
between  institutions’  risk  profiles.  At  the  same  time,  stability  may  also  reflect 
supervisory  choices,  methodological  safeguards,  the  need  for  predictability  and 
similarities in risk profiles across institutions 

•  Pillar 2 leverage ratio elements: the number of elements in the EU leverage ratio stack 

exceeds that of the Basel standards. 

(ii) 

NPL framework 

The prudential treatment of defaulted exposures presents one key trade-off.  

On the one hand, a lenient treatment can potentially conceal the risks and losses building in the 
balance  sheets  of  banks,  thereby  artificially  inflating  their financial  position. In  turn, 
this would not  only mislead  creditors  (including  depositors) and investors  about the stability 
and  profitability  of  banks;  but  it  could also  mislead  their  supervisors about  the actual 
compliance  with  prudential  requirements,  thereby postponing corrective  actions to  a  stage 
which is too late to recover the situation. At the macro-level, when the losses finally crystallise, 
banks  might  be unexpectedly  declared as failing  –  potentially  at  the  same  time  –  with 
unforeseen consequences for financial stability. 

On  the  other  hand,  a  too  stringent prudential  treatment reinforces  the  pro-cyclicality  of 
prudential  requirements in  a  downturn. This  is  due  to  the  impact  of the  classification  of an 
exposure as defaulted for banks, obligors, and the economy at large. Classifying an exposure 
as defaulted forces banks to deduct the losses from their own funds and to apply higher risk 
weights to the remaining part. For obligors, a default classification adversely affects their credit 
risk score and triggers the default classification of potentially all their exposures to the bank. 
If  wrongly  calibrated,  the  combined effect  of  these  prudential  requirements could lead to 
prolonging downturns as banks would be forced to cut their credit supply, thereby limiting the 
access to credit by businesses and citizens when the economy most needs it. 

Therefore, the key objective of the NPL framework is to ensure the stability of both individual 
banks  and  the  banking  system  as  a  whole  while  preserving  their  ability  to  finance  the 
economy in stressed scenarios. 

The EU has introduced a set of measures – both legislative92 and non-legislative93 – to tackle 
the  exceptional  high  level  of  NPLs  built  up  in  the  aftermath  of  the  financial  crisis  and 
successive recessions, which was negatively affecting their soundness and thus their ability to 
provide credit to the economy. Such measures have decisively contributed to the current NPL 
ratio, which is at low levels. 

From a micro-prudential perspective, the most significant measures have been the introduction 
of the NPL backstop94 and the definition of default set by article 178 CRR as further specified 

92 

93 

94 

E.g. Directive (EU) 2021/2167 of the European Parliament and of the Council of 24 November 2021 on 
credit servicers and credit purchasers and amending Directives 2008/48/EC and 2014/17/EU. 
E.g. C(2022) 7277 final, Guidelines for a best-execution process for sales of non-performing loans on 
secondary markets. 
Regulation (EU) 2019/630 of the European Parliament and of the Council of 17 April 2019 amending 
Regulation (EU) No 575/2013 as regards minimum loss coverage for non-performing exposures. 

61 

 
 
 
 
by  the  EBA  Guidelines  on  the  Definition  of  Default95.  The  former  is  a  structural,  pillar 
1 measure which forces banks to comply with minimum provisioning within certain deadlines 
if  they  incur  into  non-performing  exposures  (NPEs),  whereas  the  latter  clarifies  when  an 
exposure should be considered as defaulted for prudential purposes. Although the definitions 
of  NPE  and  defaulted  exposure  are  slightly  different  (the  former  includes  the  latter)  due  to 
historical reasons, they overlap to such an extent that the relative difference between NPE and 
defaulted amounts is negligible in aggregate terms. 

Issues identified: 

•  While  it  has  proved  instrumental  to  reduce  the  stock  of  NPLs  in  the  EU  from 
dangerously high levels to historical lows, questions on the forward-looking nature of 
the NPLs framework across cycles are legitimate. In particular, it is worth considering 
whether  the  current  calibration  of  the  NPL  backstop  and  the  definition  of  default 
excessively reduce the ability of banks to proactively engage with clients at an early 
stage even if there are grounded prospects  of recovery, including  in  the presence of 
legislative moratoria. 

3.3.3.  Crisis management 

(i) 

Loss-absorption requirements (MREL and TLAC) 

EU banks are required to hold a minimum amount of own funds and eligible liabilities (MREL) 
set by resolution authorities, to ensure that a failing bank can be resolved without resorting to 
taxpayers’ money. This requirement derives from the Total Loss-Absorbing Capacity (TLAC) 
requirement  defined  by  the  FSB  and  applicable  to  G-SIBs.  The  introduction  of  MREL 
requirements  has  significantly increased the resilience of EU banks ensuring  that they have 
enough  resources  to  absorb  losses  and  to  reopen  after  bail-in  post  resolution.  However,  the 
current design of the MREL requirement has proved to be unduly complex, duplicative and 
opaque and should be addressed in a revised framework. 

Issues identified: 

•  Duplication of the capital stacks – MREL and TLAC do not use the same eligibility 
criteria for the instruments that can be used to comply, nor do they rely on the same 
calculation methods. This has resulted in a duplication of the capital stack required for 
globally systemic banks which need to meet both requirements separately. 

•  Complex and discretionary rules – the current calibration of rules tries to anticipate per 
bank the amounts necessary for the absorption of losses and recapitalisation of banks 
after the resolution. The number of adjustments per bank (linked to their balance sheet, 
resolution strategy, etc.) have made the framework overly bank-specific which hinder 
its predictability and consistency and weaken the level playing field across banks. 

95 

EBA/GL/2016/07. 

62 

 
 
 
 
 
 
(ii) 

Buybacks and liability management 

addressed 

as  well.  For 

The  MREL  framework  also  comes  with  ancillary  provisions,  inspired  from  the  own  funds 
requirements, that are sometimes unduly complex or do not deliver as expected which should 
eligible 
example,  prior 
be 
liabilities instruments used towards compliance with MREL, banks are required to obtain the 
authorisation of the resolution authority. This procedural burden has direct implications on the 
ability of banks to refinance their liabilities, in particular when market conditions would allow 
to benefit from more competitive market rates.  

to the early redemption of 

The  prior  permission  regime  has  been  subject  to  a  few  simplification  initiatives,  within the 
limits of what CRR and the Delegated Regulation on own funds and eligible liabilities96 allow. 
In particular, the Single Resolution Board published on December 202597 a new approach to 
accelerate  the  process  and  ease  the  implementation  of  these  provisions.  However,  these 
changes do not provide meaningful relief for banks operating in volatile market environments 
and still represent an important source of administrative burden for resolution authorities. A 
vast  majority  of  respondents  to  the  targeted  consultation  also  recalled  the  importance  of  a 
speedy  and  unhampered  process  for  the  redemption  of  eligible  liabilities  when  authorities 
consider there is no impact on financial stability. 

Issues identified: 

•  While originally designed to safeguard the soundness and integrity of institutions’ loss-
absorbing capacity, the prior permission regime has introduced unnecessary complexity 
and administrative burden on banks and resolution authorities, for little added-value in 
terms of resilience and financial stability. 

(iii)  Resolution planning activities 

Under  the  EU  bank  resolution  framework,  the  SRB  and  National  Resolution  Authorities 
(NRAs) are required to develop and draft resolution plans for the banks under their remit, with 
the  aim  of  preparing  to  manage  their  orderly  failure.  Resolution  plans  are  comprehensive 
documents, which describe the characteristics of a bank and outline the preferred resolution 
strategy and resolution tools to apply. The framework also specifies the frequency and the key 
steps  of  the  resolution  planning  cycles,  as  well  as  the  procedures  to  be  followed  for  their 
preparation and adoption in cooperation with other relevant authorities.  

Some  respondents  to  the  targeted  consultation  emphasised  the  importance  of  further 
harmonising data requirements to reduce duplication, inconsistencies, and operational burden, 
which  can  be  achieved  by  enhancing  the  alignment  between  the  resolution  framework  and 
supervisory  reporting.  Others  advocated  for  enhanced  cross-border  cooperation  through  the 
expansion  of  joint  testing,  information-sharing  mechanisms,  and  international  coordinated 
drills,  aiming  to  ensure  the  efficient  and  predictable  operation  of  cross-jurisdictional  crisis 
management. 

96 

97 

Commission Delegated Regulation (EU) No 241/2014 of 7 January 2014 supplementing Regulation (EU) 
No 575/2013 of the European Parliament and of the Council with regard to regulatory technical standards 
for own funds and eligible liabilities requirements for institutions, OJ L 74, 14.3.2014, pp. 8–26. 
Single Resolution Board, SRB’s approach to simplification, 2025. 

63 

 
 
 
 
Issues identified: 

•  Despite  the  important  steps  to  shorten  and  standardise  resolution  plans  which  have 
already been conducted by the SRB and by EBA with the revised RTS on resolution 
plans, the requirements in the Level 1 framework remain cumbersome as they constrain 
banks and resolution authorities to operate in rigid yearly planning cycles and do not 
always provide sufficient flexibility to resolution authorities to tailor their resolution 
planning to the specificities of each bank. 

3.3.4.  Macroprudential 

The EU macroprudential framework for banks includes capital-based measures (capital buffers 
in  the  CRD  and  risk-weight  tools  in  the  CRR)  which  support  banking  sector  resilience  by 
enabling banks to absorb systemic shocks and maintain the provision of financial services and 
lending to the economy in periods of economic downturn. The current capital framework sets 
out  five  capital  buffers  which  together  form  the  combined  buffer  requirement:  i)  a  capital 
conservation buffer (CCoB) to  be set  aside by all banks;  ii) a countercyclical  capital  buffer 
(CCyB) and a systemic risk buffer (SyRB) to increase the resilience of the banking sector to 
cyclical and structural systemic risks; iii) a buffer for global systemically important institutions 
(G-SII  buffer)  applicable  to  the  largest  global  banks  and  a  buffer  for  other  (domestic) 
systemically important institutions (O-SII buffers) set to lower the probability of failures of the 
critical  entities  in  the  financial  system.  To  tackle  vulnerabilities  stemming  from  specific 
exposures  (e.g.  real  estate exposures), national  macroprudential  authorities can tighten risk-
weights  on  these  exposures  (Art.  124  and  Art.  458  CRR)  or  parameters  in  the  risk  weight 
calculation (Art. 164 CRR). While these capital measures have helped increase the resilience 
of the EU banking sector to systemic shocks in the aftermath of the euro area debt crisis, the 
macroprudential framework is perceived as unduly complex and raises the issues of potential 
overlaps between various buffers. Moreover, the multilayered institutional framework for the 
implementation of macroprudential policies – involving both national and EU institutions, with 
national authorities playing a central role – leads sometimes to inconsistent policy responses.  

The  CCoB,  CCyB,  G-SII  and  O-SII  buffers  are  transposed  into  EU  rules  from  the  Basel 
framework  while  the  SyRB  is  an  EU  specificity.  The  O-SII  framework  represents  the  EU 
implementation of the Basel domestic systemically important institutions (D-SIB) framework, 
which  provides  discretion  to  set-up  the  calibration  in  function  of  each  jurisdiction’s 
specificities.  In  the  EU,  the  O-SII  designation  is  following  the  2014  EBA  Guidelines 
(EBA/GL/2014/10)  based  on  a  scoring  methodology  for  the  determination  of  systemic 
importance.  The  calibration  of  O-SII  buffer  rates  is  not  based  on  an  EU  harmonised 
methodology,  but  on  national  approaches.  In  2025,  national  macroprudential  authorities 
designated 172 institutions as O-SIIs and set buffer rates ranging between 0.25% and 3% of 
RWA.  In  the  UK,  13  institutions  and  building  societies  are  identified  as  O-SIIs  with  the 
maximum  buffer  rate  reaching  2%  RWA.  In  the  US,  banks  over  100  USD  bn  in  assets  are 
subject  to  tailored  risk-based  capital  requirements.  The  FED  tailoring  framework  groups 
currently 24 large banking organisations in the categories II, III and IV (non G-SIBs). Banks 
included  in  these  categories  based  on  their  risk  profile  are  subject  to  enhanced  prudential 
requirements. The US implemented the Basel buffer framework via the Stress Capital Buffer 
which is floored at 2.5% RWA and includes the CCoB and an additional buffer for systemic 

64 

 
 
 
importance, which is set on a bank-by-bank basis based on the results of stress tests. Overall, 
the Stress Capital Buffer for individual large domestic banks ranges between 2.5-6% RWA. 
Recently, the FED froze the calculated Stress Capital Buffer through to 2027, while regulators 
are reassessing the framework.  

A recent study98 included in the replies to the targeted Commission consultation focusing on 
national practices in setting capital requirements for O-SII and covering six EU Member States 
(Belgium,  Denmark, Germany, Netherlands, Poland, Sweden) and Norway, offers inter alia 
insights into the O-SII identification methodologies in these countries and their alignment with, 
or  deviation  from  the  EBA  Guidelines  on  O-SII  identification.  Moreover,  the  2024  data 
provided on O-SII scores and buffers (page 24) allows drawing a few takeaways regarding the 
way  O-SII  scores  in  these  countries  are  mapped  into  O-SII  buffer  rates.  Consistent  with 
previous analysis (by the EBA) on the heterogeneity of O-SII buffer rates in the EU, the data 
for the countries included in the scope of the analysis shows that similar O-SII scores can lead 
to  materially  different  O-SII  buffers  across  Member  States.  Denmark  applies  higher  O-SII 
buffer rates for moderate O-SII scores, as banks with systemic scores between 300-1000 basis 
points  (bp)  receive  buffer  rates  around  1.5%.  The  Netherlands  also  applies  relatively  high 
buffers,  particularly  for  banks  with  higher  systemic  scores.  Dutch  banks  with  scores  above 
roughly 1,500 bp receive buffers between 1.25% and 2.25%. In Poland, many banks with scores 
up to roughly 2,000 bp have O-SII rates ranging between 0.25% and 1.0%, with only limited 
movement toward higher buckets.  In Sweden, banks with scores between around 1,500 and 
2,700 bp receive O-SII buffers close to 1.0%. Belgium and Germany are placed somewhere in 
between, with more standardised or bucket-based approaches. In Germany, for instance, the 
buffer rates of banks with lower systemic scores range between 0.5% and 1.0%, while banks 
with higher scores get buffers close to 2%. 

Evidence  gathered  from  the  targeted  consultation  indicates  that  the  O-SII  identification 
methodology  reflects  the  structural  role  of  banks  in  the  banking  sector  without  capturing 
forward-looking or climate-related risk drivers. O-SII buffer rates measure the static systemic 
footprint of banks but do not create dynamic incentives to reduce climate-related exposures 
over  time,  consistent  with  prudential  objectives.  Moreover,  the  assessment  of  systemic 
importance does not appropriately capture the use of derivatives as risk mitigation tools, by 
moving  away  from  a  purely  notional-based  approach  in  the  complexity  category  and 
considering netting arrangements. In addition, resolution strategies, particularly multiple point 
of  entry  approaches,  are  not  considered  when  assessing  systemic  relevance  under  the 
“interconnectedness” and “complexity” O-SII identification criteria. 

Responses also provide evidence that the current approach to O-SII identification led to the 
designation as O-SII of 30 banks (based on 2024 data) which have total assets below EUR 10 
billion, out of which 13 banks have assets below EUR 5 billion. These 30 smallest O-SIIs were 
identified in 11 Member States with the smallest banking sectors. Meanwhile, a few of these 
banks are not considered critical enough to be earmarked for resolution under the resolution 
and recovery framework. Moreover, some O-SII identification indicators display significant 
differences across Member States raising questions on whether a pre-determined weight for 
such indicators is feasible for all Member States. For instance, estimates of the Debt securities 

98 

Between Consistency and Discretion: A Study of National Practices in Setting Capital Requirements for 
Systemically Important Financial Institutions, 2026.  

65 

 
 
 
indicator (as percentage of the domestic GDP) in the period Q1 2015 – Q4 2024 using ECB 
data, show that the total stock of debt securities did not breach the 5% GDP threshold in 10 
Member States, did not exceed 50% of GDP in 12 Member States in this period, while in other 
five Member States it almost reached– in few cases - the 150% of GDP mark.  

Issues identified: 

•  Capital stack: the design of the macroprudential capital buffer framework includes five 
different  buffers  which  can  be  used  by  authorities  in  Member  States  for  tackling 
systemic risks. The boundaries between theses buffer are not always well understood, 
which  may  lead  to  overlaps  and  different  application  across  Member  States.  For 
instance, some Member States are using a broad-based SyRB to tackle structural risks 
not yet elevated to tackle similar risks.  

•  Buffer calibration: the lack of a harmonised calibration methodology at EU level for 
certain capital buffers (e.g. the calibration of the SyRB, the O-SII buffer and the CCyB) 
coupled  with  the  decentralised  macroprudential  policy  implementation  leads  to 
heterogenous capital levels across Member States, which cannot be fully explained by 
economic fundamentals. 

•  Countercyclical 

resources:  although  many  Member  States  have 

tightened 
macroprudential policy in the aftermath of the COVID-19 pandemic, the share of the 
releasable buffers (in the total combined buffer requirements) which can be freed up by 
macroprudential  authorities  to  help  banks  to  absorb  potential  losses  in  periods  of 
downturn has remained relatively low. Some Member States may still lack sufficient 
macroprudential space.  

•  Governance: the complex macroprudential governance framework, which provides a 
prominent role to the national macroprudential authorities, is often a source of cross-
country  heterogeneity  in  the  application  of  macroprudential  policy  tools  and  has  an 
unwarranted impact on the level playing field among banks.  

3.3.5.  Transversal issues related to capital stack 

(i) 

Buffer usability 

Capital  buffers—unlike  minimum  requirements—are  not  intended  to  function  as  hard 
constraints. Banks are allowed to draw them down, subject to restrictions on distributions to 
prevent undue capital depletion. In practice, however, banks may be reluctant or unable to use 
these buffers as intended. 

Numerous  reports99  have  noted  that  banks  may  be  constrained  from  dipping  into  buffers 
because doing so could lead to breaches of other requirements—the leverage ratio or MREL—

99 

In particular Report of the Analytical Task Force on the overlap between capital buffers and minimum 
requirements, ESRB, December 2021, Buffer usability and cyclicality in the Basel framework, BCBS, 
October 2022 and De  Bosio, R. and Loiacono, G. (2022)  Measures of banks’  capital buffer usability 
under prudential and resolution requirements in the Banking Union, SRB Working Paper No. 2. It should 
be noted, however, that even in the absence of constraints from parallel requirements, banks may still be 
reluctant to draw down their buffers. This reluctance can stem from potential market and supervisory 

66 

 
 
 
 
 
that  apply  in  parallel.  This  issue  reflects  the  fact  that  different  layers  of  the  regulatory 
framework were developed in isolation, without fully considering their interaction. 

The root cause of limited buffer usability is that risk-based minimum capital requirements—
on top of which buffers are built—are not always the binding constraint for every bank. Where 
a bank’s risk-weight density is  sufficiently low, the leverage ratio may become the binding 
requirement.  Similarly,  where  resolution  requirements  exceed  prudential  requirements  and 
banks lack sufficient eligible liabilities, MREL may become the effective constraint. In such 
cases, the usability of capital buffers is fully or partially reduced. 

Limited  buffer  usability  has  several  adverse  consequences.  First,  it  undermines  the 
countercyclical role of buffers: banks may be unable to draw them down in stress, and instead 
reduce lending to preserve capital, thereby amplifying the economic downturn through tighter 
credit conditions for households and firms. Second, changes in buffer requirements may have 
limited impact  on bank risk taking  if buffers are not  usable. Third, reduced buffer usability 
implies a smaller effective distance to breaching minimum requirements than would be the case 
if buffers were fully usable. Finally,  from  a regulatory design  perspective, unusable buffers 
represent a redundancy in the framework. 

Issues identified: 

•  Limited buffer usability mainly due to double counting of CET1 instruments at the same 
time  towards  compliance  with  the  combined  buffer  requirements  and  with  other 
minimum requirements (MREL, leverage ratio).  

•  Market stigma in using capital buffers due to restrictions on distributions (MDA) which 

have market signalling. 

(ii)  Governance 

Despite  the  existence  of  coordination  arrangements  between  certain  authorities,  bank 
requirements  are  currently  set  on  a  decentralised  basis  across  the  microprudential, 
macroprudential and resolution frameworks. The absence of a unified structure supporting a 
holistic view across the three frameworks has resulted in overlaps and inconsistencies across 
banking requirements.  

For instance, the output floor established under CRR3—designed to harmonise risk weights 
and minimise discrepancies across banks—overlaps with pre-existing mechanisms addressing 
similar risks, such as Pillar 2 requirements (P2R/P2G) and macroprudential instruments (e.g., 
risk-weight adjustments for specific exposures like real estate). Moreover, while P2G focuses 
on a firm’s ability to absorb stress and the countercyclical buffer targets system-wide cyclical 

reactions, as well as concerns about the need to replenish buffers. From a market perspective, a decline 
in CET1 ratios associated with buffer breach may be interpreted as an increase in default risk, potentially 
leading to higher funding costs or credit rating downgrades. In addition, restrictions on dividends and 
AT1  coupon  payments  may  be  viewed  unfavourably  by  investors.  From  a  supervisory  standpoint, 
drawing  down  buffers—and  the  associated  requirement  to  submit  a  capital  conservation  plan—may 
subject banks to increased supervisory scrutiny. Finally, if buffers are expected to be replenished quickly, 
the benefits of using them may be limited, further reducing banks’ willingness to do so. See also Behn, 
M., Rancoita, E. and C. Rodriquez  d’Acri, Macroprudential capital buffers – objectives and usability, 
ECB Macroprudential Bulletin 11, October 2020, for an overview of limitations to buffer usability. 

67 

 
 
 
 
risks, their combined application—both addressing cyclical vulnerabilities—risks resulting in 
duplicative risk coverage. 

Issues identified: 

•  The development of bank requirements in silos and in different sequences has led to 
inconsistent, duplicative or overlapping requirements which in certain cases address the 
same or similar risks.  

Setting  bank  requirements  under  a  stronger  cooperation  mechanism  across  the  three 
frameworks,  both  at  bank  level  (to  assess  what  is  the  appropriate  level  of  capital  for  the 
individual  bank)  and  at  system  level  (to  evaluate  whether  there  is  sufficient  or  excessive 
resilience in  the system) can help  address  these inconsistencies.  However,  it would have to 
consider  the  perspectives  and  objectives  of  the  different  authorities  involved  and  take  into 
account the split between Banking Union and non-Banking Union members. A more holistic 
approach would also have to consider whether powers to cap or limit the requirements would 
be necessary. 

3.3.6.  Proportionality 

In accordance with the principle of proportionality, in the banking framework the regulatory, 
supervisory and resolution requirements should be commensurate with the risks posed by an 
institution, ensuring financial stability and depositor protection without imposing obligations 
that go beyond what is necessary to adequately achieve those objectives. 

Proportionality  is  ensured  differently  in  various  parts  of  the  framework,  with  independent 
microprudential, macroprudential and resolution rules.  

In  the  current  prudential  framework,  smaller  and  less  complex  banks  face  a  regulatory  and 
supervisory burden that is often not adequately aligned with their risk profile and scale. This 
affects their ability to compete, innovate, and continue providing financing to households and 
businesses, especially at a more local level. Feedback from the public consultation confirms 
this  concern,  with  81%  of  respondents  considering  that  the  current  framework  does  not 
sufficiently respect proportionality for smaller and less complex institutions. 

In the crisis management framework, the simplified obligations (SO) regime under Article 4 
BRRD only provides some additional relief: in the Banking Union, 97% of those LSIs with a 
liquidation  strategy  benefit  from  simplified  obligations,  which  reduce  the  frequency  and 
content of resolution plan updates, reporting requirements and resolvability assessments.  

Currently, the SNCI framework in CRR ensures that banks which are “large”, including SIs 
(for supervisory purposes) and O-SIIs (for macroprudential purposes) cannot be designated as 
SNCI. An O-SII bank (considered systemic in a Member States) receives an additional capital 
charge. 

Smaller banks,  when they are  exposed  in parallel to  similar risks, can become systemically 
relevant when they fail together. This principle was recognised in BRRD that granted powers 
to  resolution  authorities  to  resolve  any  bank,  using  extraordinary  powers  justified  by  the 
protection  of  the  public  interest.  "Too  many  to  fail”-  risks  in  the  banking  sector  can  be  an 

68 

 
 
 
important source of instability and require an adequate framework to minimise moral hazard 
and ensure fair competition in the single market. 

Issues identified: 

•  Even if the successive reviews of the framework led to introduce the concept of SNCI 
and dedicated (but limited in their use) approaches for the computation of the capital 
charge for interest rate risk in the banking book and for stable funding requirements, on 
top  of  a  limited  relaxation  of  reporting  and  disclosure  requirements,  the  overall 
proportionality of the framework needs to be enhanced.  

•  Detailed  technical  standards  and  guidance  supplementing  minimum  Pillar  1 
requirements apply to small banks with very simple business models. The overall level 
of sophistication of the EU prudential framework can be considered as not appropriately 
addressing the lower risk levels of banks with simple business models.  

•  However,  the  risk  sensitivity  of  the  capital  charge  and  the  development  of  a  risk 
management culture by banks are seen as important elements for supporting the real 
economy over the cycle. 

•  The  application  of  the  regulatory  framework  depends  in  several  areas  on  national 
discretion,  contributing  to  uneven  implementation  across  Member  States.  This 
heterogeneity creates legal uncertainty, distorts the level playing field, and reduces the 
benefits of the single market for smaller cross-border or regionally active banks. 

•  The prudential framework for small and non-complex banks relies on a static eligibility 
size threshold set at EUR 5 billion as well as other criteria; the threshold is seen as too 
low and static  in certain Member States, also in relation to  the rise in inflation. 

•  A  further  complexity  lies  in  the  interactions  between  the  various  prudential 
frameworks,  when  it  comes  to  proportionality.  Thresholds  and  scope  do  not  align, 
creating overlaps and gaps that affect the effectiveness of the framework. 

3.3.7.  Other issues 

(i) 

Remuneration  

The  EU’s  current  banking  remuneration  rules  were  shaped  after  the  global  financial  crisis, 
when reforms were introduced to address the failures of pre-crisis governance, particularly by 
tightening remuneration structures for staff whose activities materially affected an institution’s 
risk  profile  (“material  risk-takers”).  To  prevent  excessive  risk  taking  linked  to  variable 
remuneration, the rules introduced a range of measures, including a maximum ratio between 
the  fixed  and  the  variable  component  of  the  total  remuneration,  a  requirement  to  pay  out  a 
proportion of the variable remuneration in shares and other instruments and the deferral of a 
portion of variable remuneration. These measures aim to align the pay of material risk-takers 
with  long-term  soundness  of  institutions  by  discouraging  aggressive  trading  and  credit  risk 
build ups via short term bonus incentives.  

These objectives are  still  relevant  today.  However,  the  current  landscape  presents  different 
challenges  from  those  of  the  immediate  aftermath  of  the  crisis,  including  increased  global 
competition,  recurring  economic  disruptions,  an  urgent  need  to  finance  investment  and  the 
imperative to retain talent (risk, compliance, cyber, quantitative finance) in a sector that faces 

69 

 
 
 
new  sources  of  risk.  The  current  framework  is  also  based  on  rules  that  may  not  reflect  the 
systemic risks institutions face today or the diversity of the EU banking sector.  

A  majority  of respondents  to  the  targeted  consultation  expressed  concern  that  the 
current remuneration rules are overly complex and not adapted to the current challenges. They 
are considered to create undue costs and hamper the competitiveness of the European banking 
sector without a clear benefit in risk-alignment.  

Adjustments to the remuneration framework for material risk-takers could reduce unnecessary 
burden  and  complexity,  address  unintended  effects  on  pay  structures,  avoid  distortions  in 
competitions for specialised talent, adapt the framework to current systemic risks and better 
reflect institutions’ varied risk profiles, thereby fostering competitiveness of the EU banking 
sector, while preserving the underlying policy objective.  

Issues identified: 

•  Respondents consider the process for identifying material risk-takers to be complex and 
creating  operational  challenges  for  institutions  seeking  compliance.  The  main 
administrative  burden  stems  from  the  quantitative  criteria  and  exclusions  that  are 
subject to notifications and approvals by competent authorities.  

the 

•  The maximum ratio  between 

fixed  and 

the 
total remuneration is  considered  to  be an  inflexible  regulatory  requirement  that  may 
have led to increased fixed remuneration and reduced flexibility in cost structures. Its 
implementation  has  been  subject  to  gold-plating  at  the  national  level,  resulting  in 
fragmentation across the EU, and the ratio is not in line with international practice in 
other major financial centres.  

the  variable component of 

•  Respondents 

the 

find 

requirement 

to  pay  out 

a  proportion  of 

the 
variable remuneration in shares and other instruments overly complex, especially for 
small and non-listed firms that do not qualify for the derogations. In some cases, they 
must create instruments solely for remuneration purposes in order to pay out a mix of 
different 
substantial portion of  variable 
remuneration must be paid out in a balance of instruments applies to both deferred and 
non-deferred  components,  which  creates  operational  complexity.  In  addition, 
respondents  consider that  the retention  period for instruments  adds to  the burden on 
both the institution and the identified staff.  

financial  assets.  The 

that  a 

rule 

•  According 

to 

respondents, 

the  period  over  which  a  substantial portion of 
variable remuneration is deferred is unclear, setting a minimum of 4 to 5 years. This 
requirement is not aligned with other sectors. For the members of the management body 
and senior managers the minimum period is 5 years, which increases the burden.  

•  Respondents point out that the implementation of ex post risk adjustments through the 
clawback  mechanism  is  often  limited  in  Member  States  by  legal  and  labour  law 
constraints.  

•  The  scope  of  the  existing  derogations  excludes  a significant  number of  banks  and 
material risk-takers98. The thresholds, however, have not evolved in line with risks and 
economic  developments.  Furthermore,  the  provision  allowing  Member  States  to 
increase  the  institutional  derogation  threshold  to  €15  billion  deepens  regulatory 
divergence across the EU.  

70 

 
 
(ii) 

Supervisory reporting and disclosures 

The role of supervisory reporting in banking is to provide supervisors with regular, comparable 
and high-quality data that support risk assessment, compliance checks, and timely supervisory 
action to preserve financial stability and protect depositors. Public disclosures facilitate market 
discipline and investor protection by allowing investors and creditors to reward well-managed 
institutions and penalise risky behaviour.  

While reporting and disclosure requirements have been around for a long time, the volume and 
granularity of the data required to be reported and disclosed significantly increased following 
the  global  financial  crisis.  While  this  improved  data  availability  helped  the  authorities 
overseeing the banking sector, it also led to an increased burden for reporting entities.  

A comprehensive fitness check conducted by the Commission on supervisory reporting100 (and 
a subsequent fitness check on public reporting101) confirmed that the EU reporting framework 
is overall relevant and effective and contributes to ensuring financial stability, market integrity 
and  investor  protection.  This  is  also  widely  acknowledged  in  studies  by  multiple  EU  and 
international organisations102. 

However,  the  fitness  check  and  other  assessments  also  revealed  that  the  efficiency  and 
consistency of reporting could be improved to reduce the overall burden on reporting entities 
as  well  as  for  authorities  as  the  recipients  and  users  of  supervisory  data.  It  identified  the 
following key root causes for a high burden: insufficient alignment and coordination between 
authorities (including inconsistent definitions, standards, formats, data overlaps, redundancies 
and  mis-aligned  timing  of  requests,  insufficient  data-sharing),  a  lack  of  proportionality  of 
requirements (including complexity, lack of clarity, improper use of level 1 and level 2 acts, 
inefficient  data-validation  processes,  lack  of  consultation  with  reporting  entities  and  the 
absence of evaluations or feedback-loops on data usage), a high prevalence of ad hoc requests 
and  a  lack  of  harmonisation  with  national  gold  plating.  Subsequent  studies,  such  as  EBA’s 
2023 Feasibility Study on integrated reporting103, and multiple reports by the ECB104 came to 
similar conclusions. 

 In  2021,  the  EBA  estimated  the  total  reporting  costs105,  including  expenditure  on  staff,  IT 
systems,  legal,  accounting,  auditing  and  consultancy  services,  covering  both  expenditures 
related to the one-off implementation and operation on an ongoing basis to amount to about 
EUR 11.2 billion (using median values of its sample to extrapolate), which corresponded to 

100 
101 
102 

103 

104 

105 

COM (2019) 402 final, Fitness Check of Supervisory Reporting. 
COM(2021) final, Fitness Check on the EU framework for public reporting by companies. 
E.g. the IMF described the Single Supervisory Mechanism as "a highly capable supervisor supported by 
excellent risk analysis" in its 2025 Euro Area Financial Sector Assessment Program (FSAP) and noted 
in its earlier 2018 FSAP work that it relies on "comprehensive and granular supervisory data" provided 
through the ECB/SSM supervisory infrastructure. 
EBA  Feasibility  Study  on  integrated  reporting:  The  EBA’s  feasibility  study  on  integrated  reporting 
system provides a long-term vision for increasing efficiencies and reducing reporting costs | European 
Banking Authority. 
E.g.  ECB  Occasional  Paper  No  363  (December  2024)  “The  evolution  of  the  supervisory  reporting 
framework for the EU banking sector” or High-Level Task Force on Simplification Report (December 
2025):  “Simplification of the European prudential regulatory, supervisory and reporting framework” 
EBA (2021): Study of the cost of compliance with supervisory reporting requirements. 

71 

 
 
 
 
about  2.9% of operating expenses. SNCIs  account  for EUR  1.9 billion of the total.  A 2020 
study  conducted  on  behalf  of  the  Commission  had  estimated  the  portion  attributable  to  EU 
level  reporting  requirements,  excluding national requirements and normal business  costs, to 
amount  to  EUR  1.5–4.0 billion  per  year.106  The  average  number  of  data  points  reported  by 
GSIIs  is  42,000,  whereas  it  is  24,000  for  large  credit  institution  and  7,000  for  SNCIs. 
Proportionality is embedded in the framework as illustrated by the fact that SNCIs are reporting 
only 30% of the amount of data that large institutions report107.   

Recognising  these  challenges,  the  European  Commission  (in  line  with  its  strategy  on 
supervisory  data108)  and  other  EU  authorities  have  taken  substantial  steps  to  simplify  and 
streamline  reporting  requirements.  The  2023  EU  Banking  Package  introduced  measures 
allowing  the  European  Banking  Authority  (EBA)  to  reuse  supervisory  data  for  Pillar  3 
disclosures, significantly easing the reporting load for small and non-complex banks. Similarly, 
the  2023  proposal  to  revise  the  EU’s  framework  for  bank  crisis  management  and  deposit 
insurance  seeks  to  reduce  redundant  obligations  and  improve  information-sharing  between 
authorities,  thereby  minimising  duplicative  reporting.  CRR3109  simplified  the  content  of 
implementing technical standards on reporting by excluding detailed reporting templates and 
instructions, and publishing those separately in a form that relies on modern technologies. The 
Better  Data  Sharing  Regulation110  aims  to  curb  duplicative  data  requests  and  requires  EU 
authorities  to  regularly  review  and  remove  redundant  reporting  and  also  advance  on  their 
efforts  on  integrated  reporting.  The  Omnibus  I  package  and  subsequent  changes  to  the  EU 
taxonomy  and  European  Sustainability  Reporting  Standards  include  simplifications  of 
sustainability reporting for banks111. The European Single Access Point (ESAP), once up and 
running, will also improve accessibility and reduce duplication by providing easy centralised 
electronic access to public data about banks and their products. 

Following  its  2021  cost  of  compliance  study,  the  EBA  has  implemented  15  of  25 
recommendations on reporting simplification proposed in the study112, with the remaining 10 
at various stages of development. For example, the EBA has streamlined reporting for smaller 
institutions,  particularly  liquidity  and  interest  rate  risk  disclosures.  By  2027,  these  efforts, 
currently  under  public  consultation,  are  expected  to  cut  the  number  of  data  points  in  EU 
harmonised reporting by 50%. Additionally, stress-test and benchmarking data collections will 
be integrated into regular reporting, reducing overlaps and increasing consistency. To further 
enhance  transparency,  an  EU-wide  public  repository  of  supervisory  data  requests  will  be 
established in cooperation between EBA and the ECB, discouraging national gold-plating and 
fostering  greater  coordination.  Meanwhile,  the  ECB’s  Integrated  Reporting  Framework113 
(IReF)  is  set  to  harmonise  statistical,  prudential,  and  resolution  reporting,  reducing 
fragmentation  and  improving  efficiency.  The  Joint  Bank  Reporting  Committee  (JBRC),  a 

106 
107 
108 
109 
110 
111 
112 

113 

Study on the costs of compliance for the financial sector - Publications Office of the EU 
EBA/REP/2025/26 
COM(2021) 798 final 
Regulation (EU) 2024/1623 
Regulation (EU) 2025/2088 
COM/2025/80 final 
Simplification  and  efficiency  of  the  Regulatory  and  Supervisory  Framework  |  European  Banking 
Authority 
Integrated Reporting Framework (IReF) 

72 

 
 
 
coordination body established jointly114 by the EBA and ECB, has made progress in fostering 
semantic integration and common data standards. 

While significant progress has been made to date, which stakeholders confirm in their feedback 
to the consultation, there is the need for further streamlining and modernisation. Due to the 
multilayered  structure  with  a  host  of  EU  and  national  authorities  and  multiple  levels  of 
regulation,  it  takes  time  for  the  necessary  simplification  and  modernisation  measures  to  be 
agreed, implemented and take effect on the ground. The approach taken has also been a gradual 
one, taking into account the legacy reporting systems and the costs incurred of changing those 
systems. The stakeholder consultation, however, confirms the need to continue the efforts to 
further streamline and modernise reporting and identifies several issues that deserve continued 
attention. They are also highlighted in recent reports by the EBA task force on the efficiency 
of the regulatory framework115 and the ECB high-level task force on simplification116. 

Issues identified: 

•  A  fragmented  coordination  framework  among  prudential,  statistical,  resolution,  and 
sustainability authorities creates inefficiencies, with duplicative or conflicting reporting 
requests  and insufficient sharing of the data  adding to  the  reporting burden. Ad  hoc 
requests and national gold-plating are prime examples. Insufficient impact assessments 
for  new  obligations  mean  that  cumulative  compliance  costs  and  benefits  are  not 
rigorously evaluated before implementation.  

for 

•  Banks perceive a continued lack of proportionality, as reporting frequency, granularity, 
and scope  often fail to  align with  institutional risk profiles, resulting  in  unnecessary 
for 
complexity 
resubmissions—pose significant challenges, as current absolute thresholds are seen as 
disproportionate  for  institutions  with  large  balance  sheets.  Unpredictable  change 
management  exacerbates  compliance  burdens,  with  frequent  updates  and  short 
implementation timelines leading to cumulative costs.  

low-risk  activities.  Materiality 

thresholds—particularly 

•  Despite the relief provided for small banks, certain Pillar 3 disclosures are widely seen 
as overly complex with redundant efforts, not justified by the value of the information 
they provide due to their misalignment with supervisory reporting. 

•  Outdated technological infrastructure further complicates reporting, with the absence 
of  a  common  data  dictionary  resulting  in  inconsistent  templates,  definitions,  and 
identifiers  across  prudential  and  resolution  datasets.  The  persistence  of  table-based 
reporting—rather 
to  data-element-based  reporting—hampers 
efficiency.  Banks  also  struggle  with  decentralised  submission  processes,  lacking  a 
single EU gateway for granular supervisory data which forces multiple submissions to 
different authorities. 

transition 

than  a 

114 

115 
116 

ECB and EBA step up efforts to make banking industry data reporting more efficient | European Banking 
Authority 
Report on the efficiency of the regulatory and supervisory framework 
Simplification of the European prudential regulatory, supervisory and reporting framework 

73 

 
 
 
 
 
(iii)  Moving from directives to regulations in the bank regulatory framework 

The use of Directives is important to capture national specificities and ensure that the objectives 
set out in EU law are achieved in the most effective way, in line with national legal systems 
and institutional organisations. The bank regulatory framework builds on Directives (e.g. CRD, 
BRRD, DSGD) to introduce specific requirements and ensure that Member States supplement 
national laws or entrust national authorities with specific powers. 

Issues identified: 

•  The transposition of Directives in national laws can create risks of inconsistencies, lack 
of harmonisation  or incorrect application of EU law, leading  to  additional efforts in 
enforcement from EU authorities. Reliance on national transpositions that deviate from 
EU law or create additional provisions can be particularly impactful when the actions 
of EU authorities rely on the application of national laws (e.g. ECB, in the context of 
the  SSM)  or  in  cross-border  crisis  management  procedures.  Provisions  included  in 
Directives are also more complex to monitor, for instance by market participants, as 
they  require  additional  efforts  to  map  out  27  national  provisions  as  opposed  to 
Regulations that offer one directly applicable source of law. 

• 

• 

In certain areas, the provisions located in Directives already have a direct, normative 
formulation akin to Regulations, when they are not already mirrored in Regulations as 
is the case for BRRD and SRMR that largely overlap on key issues. This is particularly 
true for elements linked to licensing and capital buffers (CRD), recovery and resolution 
planning (BRRD) or MREL (BRRD).  

It is therefore essential to ensure more predictability and harmonisation in the single 
market by minimising risks from national transpositions, especially in areas where the 
nature  of  the  provisions  does  not  necessarily  justify  the  need  to  introduce  tailored 
adjustments to fit national legal systems. A similar shift has been initiated in other areas 
of financial legislation, such as markets for financial instruments or payment services. 

3.3.8.  Prudential framework for investment firms (IFR/IFD) 

The Investment Firms Regulation (‘IFR’) and the Investment Firms Directive (‘IFD’) establish 
a prudential framework for investment firms authorised under MiFID. The framework entered 
into force on 25 December 2019 and is in application since June 2021. The review clauses in 
Article 60 of the IFR and Article 66 of the IFD mandate the Commission to submit a report to 
the Council and to the Parliament regarding the functioning of the prudential framework on 
investment firms, which may be complemented, if appropriate, by a legislative proposal. For 
the purposes of this review, the Commission issued a call for advice (CfA) to the EBA and 
ESMA in early 2023 to evaluate the functioning of the prudential framework for investment 
firms.  The  final  technical  advice  was  sent  to  the  European  Commission  and  published  in 
October 2025.  

The  EBA/ESMA  joint  advice  confirms  that  the  IFR/IFD  framework  has  achieved  its  core 
objectives  and  has  significantly  improved  the  regulatory  treatment  of  investment  firms 
compared  with  the  previous  regime.  At  the  same  time,  it  identifies  several  areas  where  the 
framework could be refined to further strengthen its effective functioning. These findings are 

74 

 
 
 
echoed in responses to the banking consultation and stakeholder discussion, which suggested 
that  targeted  amendments  may  be  warranted  to  enhance  the  framework’s  proportionality, 
coherence and ensure it remains fit for purpose.  

In more detail,  the consultation  responses confirm  that stakeholders  generally recognise the 
IFR/IFD as a significant improvement compared with the previous regime, while identifying 
areas  where  the  framework  could  be  further  refined.  Some  banks  and  banking  associations 
focused on the need to avoid regulatory arbitrage, competitive distortions and the migration of 
risks to entities operating outside the banking perimeter, particularly where investment firms 
perform  activities  that  may  be  comparable  to  those  of  banks.  Investment  firms  and  their 
respective associations, by contrast, stressed that the prudential treatment of investment firms 
should remain clearly distinct from that of credit institutions, especially for firms trading on 
own account that do not take deposits, grant loans, create money-like liabilities or engage in 
maturity transformation. These respondents considered that certain conservative requirements, 
including  nominal  balance-sheet  thresholds,  Class  1  and  Class  1  minus  classifications  and 
certain K-factors, may be insufficiently risk-sensitive. Other investment firms, trading venues 
and market infrastructures further linked these issues to the broader objective of deepening EU 
capital  markets,  noting  that  insufficiently  proportionate  requirements  could  affect  market 
depth,  spreads,  price  discovery  and  competitiveness.  Public  authorities  generally  supported 
targeted  revisions  rather  than  a  fundamental  redesign,  with  a  view  to  preserving  the 
differentiated  nature  of  the  IFR/IFD  while  enhancing  its  proportionality,  clarity  and 
supervisory consistency. 

The introduction of a tailored prudential framework for investment firms sought to establish a 
more  proportionate  and  risk-sensitive  regime,  better  aligned  with  the  nature,  size  and 
complexity of their activities, than the CRR/CRD, which previously applied. The largest and 
most systemic investment firms are authorised as credit institutions and thus continue to fall 
under the CRR/CRD. Furthermore, the IFR/IFD aimed to better reflect the diversity of business 
models of investment firms and to accommodate the business they conduct. It also introduced 
a streamlined and targeted regulatory and supervisory toolkit to facilitate effective oversight 
by CAs. 

The  term  ‘investment  firm’  serves  as  an  umbrella  definition  capturing  a  diverse  group  of 
financial institutions, varying significantly in size and scope, and performing a broad range of 
investment  services (in  public speak  also  referred to  as “brokers”, “market  makers”, “high-
frequency  traders”,  “asset  managers”,  “market/investment  intermediaries”,  specific  “trading 
venues”  amongst  others).  This  ranges  from  a  one-person  German  firm  offering  investment 
advice  and  portfolio  management  to  a  local  community,  to  a  ten-person  Latvian  brokerage 
platform  offering  asset-backed  securities  to  retail  clients  across  borders,  to  internationally 
active medium-sized market makers in the Netherlands and to a global top ten asset manager 
in  France,  amongst  many  other  examples.  Moreover,  it  is  evident  that  investment  firms’ 
business models are not distributed uniformly across the Union but tend to cluster in specific 
Member States. This pattern reflects differences in national market structures, the presence of 
specialised  financial  centres,  and  the  development  of  local  expertise  around  particular 
investment  services  and  activities.  Consequently,  changes  to  the  regulatory  or  supervisory 
framework may affect Member States differently, even where EU rules are harmonised. The 
substantial diversity in the activities, size and complexity of investment firms, highlights the 
importance of a framework that is sufficiently proportional, simple, and prevents barriers to 

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entry. The diversity also underlines the importance of taking into account single market impacts 
when assessing the framework. 

The development of supervisory practices under the IFR/IFD also merits further consideration. 
While the framework establishes a harmonised prudential regime and a common supervisory 
toolkit, its effective application depends on consistent and sufficiently convergent supervisory 
approaches  across  Member  States.  Given  the  diversity  of  investment  firm  business  models, 
their  uneven  distribution  across  the  Union  and  the  cross-border  nature  of  some  activities, 
differences  in  supervisory  priorities,  expectations  and  information  available  to  competent 
authorities may affect the comparability of supervisory outcomes. Further efforts to strengthen 
supervisory  convergence,  home-host  cooperation  and  horizontal  oversight  would  therefore 
support the coherent functioning of the IFR/IFD framework, while preserving proportionality 
and allowing supervisory practices to reflect the size, complexity, risk profile and cross-border 
relevance of the firms concerned. 

Investment firms perform an important intermediation function in the EU financial system and 
make a significant contribution to the functioning of Union capital markets. Market makers 
support  secondary-market  liquidity  and  orderly  trading  conditions.  Underwriters  and 
placement agents facilitate primary-market issuance and corporate access to funding. Portfolio 
managers and investment advisers contribute to the allocation of savings across asset classes, 
sectors and Member States. Trading venues, brokers and other intermediaries support market 
access  and  execution.  Taken  together,  these  activities  are  relevant  to  the  development  of 
deeper, more integrated and more competitive EU capital markets. At the same time, EU capital 
markets remain less deep and liquid than those of other major jurisdictions, which reflects a 
comparatively  smaller  scale  of  capital-market-based  financing.  Against  this  background, 
investment firms have an important role to play in supporting the objectives of the SIU, notably 
by  strengthening  market  intermediation,  improving  access  to  finance,  and  helping  channel 
savings  towards  productive  investment.  The  prudential  framework  should  enable  this 
intermediation and ensure there are no undue obstacles to growth. 

A further consideration is the need to ensure appropriate competitive conditions for investment 
firms within and outside of the Union. Without international standards tailored to investment 
firms,  regulatory  frameworks  have  evolved  differently  across  jurisdictions.  This  has 
implications  for  the  assessment  of  international  competitiveness  and  level  playing  field 
considerations. As in banking, large third-country investment firms are active in EU markets 
and compete successfully in several segments. At the same time, EU-headquartered investment 
firms with significant international activities perceive certain elements of the EU regulatory 
framework as constraining their ability to compete globally, including (1) the EU classification 
system  that  is  primarily  based  on  nominal  thresholds  such  as  gross  total  assets  and  (2) 
governance and remuneration requirements. These external competitive considerations should 
be assessed alongside the competitive dynamics within the EU single market. For example, in 
some  areas,  investment  firms  provide  services  that  are  complementary  to  those  offered  by 
banks,  thereby  supporting  a  diversified  financial  ecosystem.  In  other  areas,  they  compete 
directly  with  banks,  including  in  market  making,  brokerage,  portfolio  management  and 
advisory services. The intensity of this competition varies depending on the specific investment 
services  and  activities  concerned.  In  addition,  while  the  IFR-IFD  provides  a  bespoke 
framework  for  investment  firms,  many  built-in  links  remain.  Consistency  between  the 

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prudential treatment of credit institutions and investment firms should therefore be considered, 
while taking into account proportionality and the different nature of investment firms. 

Through  the  Communication  on  the  competitiveness  of  the  banking  sector  and  the  single 
market  in  banking,  together  with  this  complementary  Staff  Working  Document,  the 
Commission fulfils the abovementioned IFR/IFD review clauses. The Commission recognises 
that the prudential framework for investment firms generally functions well. At the same time, 
it concludes that any obstacles limiting investment firms’ contribution to the European capital 
markets, such as a lack of proportionality, undue complexity or an uneven international level 
playing field, should be addressed. 

Issues identified: 

•  The  IFR/IFD  provides  a  bespoke  regime  for 

investment  firms.  However, 
proportionality can be further increased to better reflect the diversity of investment firm 
activities  and  reduce  the  compliance  burden.  This  review  should  include  concerns 
raised  by  stakeholders 
in  EBA-ESMA 
the  consultation  and 
recommendations.  These  topics  include:  the  perceived  over-conservatism  of  the 
threshold-based classification system; the appropriateness of the calibration of capital 
and liquidity requirements; undue complexities and red tape, especially where specific 
governance and remuneration requirements constrain the investment firms’ activities or 
give rise to unintended consequences. 

reflected 

in 

•  The application of the IFR/IFD may not yet be sufficiently convergent across Member 
States.  More  consistent  practices  and  information  would  support  the  coherent 
application of the framework across the Union. 

• 

In  the  absence  of  international  standards  for  the  regulation  of  investment  firms,  the 
stringency and design of prudential regimes differ across jurisdictions. To foster strong 
EU capital markets, it is essential to ensure the competitiveness of EU investment firms 
vis-à-vis international peers, both within the single market and on the global stage. 

•  As  financial  intermediaries,  investment  firms  make  an  important  contribution  to  the 
functioning of EU capital market and to the efficient allocation of capital within the 
Union. They support cross-border investment and foster market integration, while also 
contributing  to  market  liquidity  and  price  discovery.  Moreover,  they  facilitate  the 
issuance  of  equity  and  debt  securities  –  activities  that  are  essential  to  the 
competitiveness of the EU economy. However, there are indications that, in some cases, 
the prudential framework may create unintended incentives, constrain growth and place 
burdens on a more integrated market for investment services. It should be ensured that 
investment firms can effectively support the well-functioning of EU capital markets. 

•  Taking into account the recommendations in the EBA and ESMA joint advice, where 
necessary, targeted changes should be made to existing technical standards to ensure 
they  are  fit  for  purpose  and  continue  to  support  the  effective  and  proportionate 
application of the framework. 

•  The IFR/IFD draws on bank regulation and interlinkages between the two frameworks 
remain.  Given  these  interlinkages,  consistency  should  be  maintained,  taking  into 
account any amendments to the CRR/CRD. 

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