EU prepares banking deregulation to close gap with Wall Street

The European Commission will on Friday publish a report on banking competitiveness that amounts to a regulatory pivot: parts of the discretionary "Pillar 2" leverage ratio add-ons are to be dropped, extra capital buffers reduced, reporting requirements cut, and a European Deposit Insurance Scheme fleshed out. The aim is explicit, to give the continent's lenders the balance-sheet room and legal certainty to merge across borders and, in time, challenge the US investment banks that have spent more than a decade taking market share in trading, underwriting and capital markets.

The move follows parallel deregulatory signals from Washington and London. US regulators have proposed cutting capital requirements for the largest banks by nearly 5%, while the UK's Prudential Regulation Authority has its own simplification agenda. European authorities, in the words of Jakub Lichwa at TwentyFour Asset Management, "simply do not want to put the banking sector at a disadvantage." The Stoxx 600 Banks Index has long traded at a discount to its US counterpart, a gap that policymakers now hope to narrow by making European equities more attractive through higher return on equity.

What the Commission is proposing

According to a draft seen by the Financial Times, the Commission's report will recommend removing the national discretionary add-ons that sit on top of the EU's basic 3% leverage ratio. These Pillar 2 requirements allow supervisors to demand extra capital based on institution-specific risks, but banks argue they create opacity and uneven playing fields. The report also envisages lowering the additional capital buffers, the systemic risk, countercyclical and conservation buffers, that have accumulated since the financial crisis. Reporting obligations, which have grown into a compliance industry of their own, are to be trimmed.

Perhaps most consequential is the detail on a common European Deposit Insurance Scheme (EDIS). Without a single deposit guarantee, cross-border banking groups cannot pool liquidity and capital freely; national supervisors ring-fence subsidiaries, trapping capital in local entities. A credible EDIS would remove that obstacle, allowing a German parent to deploy French deposits in Italian loans, for example. The European Commission's banking union page has long identified EDIS as the missing third pillar after the Single Supervisory Mechanism and the Single Resolution Mechanism.

The US earnings backdrop

The urgency is visible in the numbers. JPMorgan Chase, Bank of America, Citigroup, Wells Fargo and Goldman Sachs all beat second-quarter estimates, powered by a rebound in equities and fixed-income trading and a pickup in merger advisory fees. European banks, Santander, UniCredit, UBS and Deutsche Bank report later this month, have not enjoyed a comparable cycle. Since the 2008 crisis, US firms have consolidated domestic market share and expanded in Europe, while the continent's own sector remains fragmented along national lines. The Stoxx 600 Banks Index has underperformed the S&P 500 Banks Index by a wide margin over the past ten years.

Why simplification is not enough

Andrew Stimpson, head of European banks research at KBW, argues that the Commission's previous focus on "simplifying" rules, fewer forms, lighter reporting, misses the strategic point. "Europe has realized that it is competing globally and that its focus so far on just simplifying bank rules is not going to achieve its strategic objectives," he said. The continent faces capital-intensive imperatives: defence spending, AI infrastructure, energy transition. Banks are the primary channel for that finance. "Telling a bank it can fill in one form rather than 20 forms does not get any of these projects built," Stimpson added.

The ECB has long advocated a single banking jurisdiction in which capital and liquidity move freely within cross-border groups. Supervisory Board Chair Claudia Buch has repeatedly warned that fragmentation raises funding costs and reduces lending capacity. The Commission's report appears to align with that diagnosis, but the prescription, legislative changes for 2027, will test whether national capitals are willing to cede control over deposit protection and resolution.

The UniCredit-Commerzbank test case

Nowhere is the political friction clearer than in UniCredit's pursuit of Commerzbank. The Italian lender has built a stake above 20% and signalled its intention to seek a controlling interest, which would create a genuine pan-European franchise. The German federal government, Commerzbank's second-largest shareholder since a 2009 bailout, has resisted. Chancellor Olaf Scholz's coalition has signalled that any takeover would need to preserve German jobs and lending to the Mittelstand. The Bundesbank and BaFin have also voiced concerns about cross-border risk management.

This resistance is not unique. France blocked a potential BNP Paribas-Commerzbank tie-up in 2019. Spain's BBVA faced political pushback over its bid for Sabadell. In each case, national supervisors and finance ministries treated cross-border mergers as a loss of sovereignty rather than a gain in scale. The Commission's report will not change that calculus overnight, but a credible EDIS and harmonised capital rules would at least remove the regulatory arguments against consolidation.

Industry reaction: from diagnosis to delivery

Caroline Liesegang, head of capital and risk management at the Association for Financial Markets in Europe (AFME), welcomed the direction but pressed for speed. "Fragmentation, trapped capital and liquidity, and regulatory complexity continue to hamper banks' ability to support growth and investment across Europe's single market," she said. "The focus must now shift from diagnosis to delivery. Legislative proposals, expected in early 2027, represent a critical opportunity to move the dial on the competitiveness of the EU banking sector."

Lichwa at TwentyFour struck a cautious note. Lower capital requirements "do not necessarily lead to operational improvements of the sector, but at a margin could facilitate better competition with global peers." The risk, unspoken, is that freed capital flows into share buybacks rather than lending, or that weaker buffers leave the system exposed when the cycle turns. The Commission's draft will need to show how it calibrates the trade-off between competitiveness and resilience.

The strategic finance gap

Behind the regulatory debate lies a harder economic reality. The EU's strategic autonomy agenda, defence, semiconductors, green hydrogen, data centres, requires hundreds of billions of euro in investment this decade. The ECB's financial stability reviews have consistently shown that European non-financial corporates rely on bank lending for roughly 70% of external finance, compared with roughly 30% in the US, where capital markets dominate. If European banks lack the scale to underwrite large syndicated loans or the capital markets depth to place bonds, the projects stall or move to New York.

This is why the Commission's report links banking competitiveness to the broader Capital Markets Union. A deeper EU securitisation framework, harmonised insolvency laws and a genuine single market for retail investment would reduce the burden on bank balance sheets. But those files have moved slowly for a decade. The banking package may be the more tractable lever, if member states agree.

What happens next

Friday's report is a communication, not legislation. The Commission will follow with concrete proposals in early 2027, which then enter the ordinary legislative procedure: Parliament and Council must agree. The European Parliament's economic affairs committee has historically defended strong capital rules; the Council, where finance ministers meet, will reflect national banking interests. The German election in 2025 and French political fragmentation add uncertainty. The UniCredit-Commerzbank saga will likely still be unresolved when the legislative text lands, providing a live test of whether the new rules actually enable a deal.