EU Aims to Remove Barriers to Bank Competitiveness -Fitch
The European Commission’s (EC) push to improve banks’ cross-border fungibility of capital and liquidity could remove a key obstacle to increased sector consolidation, Fitch Ratings says.
According to the global rating agency, the proposal forms part of the EC’s recent communication on measures to improve the competitiveness of the EU banking sector and to build incentives for banks to fund investments in EU economies.
The communication includes proposed reforms of the bank regulatory framework through simplifying requirements for small banks, reviewing capital requirements for certain types of lending and streamlining banks’ capital stacks. A detailed consultation will be held in early 2027.
The EC proposes to make the cross-border allocation of capital and liquidity for multinational banking groups more efficient by mandating that requirements need to be met at the parent entity only.
Fitch said this should reduce excessive capital and liquidity being held at subsidiaries. It also proposes to harmonise the treatment of intragroup exposures for domestic and cross-border groups, and is additionally considering using its toolkit to support cross-border mergers and acquisitions against national intervention.
The proposals also address the risk of high concentration of sovereign exposures, another impediment to cross-border mergers. These proposals could facilitate cross-border banking consolidation, although they do not remove other obstacles, such as differences in insolvency and consumer protection legislation.
The EC plans to simplify the framework of national deposit schemes instead of creating a single EU-wide deposit insurance scheme.
The communication emphasises the importance of resolution strategies for cross-border groups that must ensure the viability of subsidiaries following a resolution and underlines the role of the Single Supervisory Mechanism and the Single Resolution Board in this area.
Fitch said the EC will also issue proposals on how to adapt Basel III standards to incentivise more bank lending to the economy. These include a review of risk-weights for small and medium-sized enterprise and residential mortgage lending, project and trade finance and the structure and scope of the output floor.
The regulatory framework for small and less complex banks will be streamlined. Fitch expects that measures to simplify regulatory and supervisory requirements for smaller banks are unlikely to result in materially weaker capitalisation but should help to reduce costs and complexity.
The EC will also address level-playing-field considerations in market risk, prudential treatment of software assets and the remuneration framework. A series of proposals will aim to simplify the various capital stacks in the risk-based, leverage and resolution frameworks, Fitch noted.
A simplification of the capital buffer stack would reduce complexity but it is unlikely that, by itself, this would improve a bank’s ability to use the releasable portion of the buffer in times of stress due to the buffers’ limited size, potential stigma surrounding use of the buffer and the need to rebuild it.
The Pillar 2 leverage ratio add-on could be removed, the minimum requirement for own funds and eligible liabilities framework could move closer to the total loss-absorbing capacity standard, and the systemic risk buffer could be merged with the countercyclical buffer. Finally, the other systemically important institutions buffer framework could be harmonised across the EU.
The EC largely follows the ECB’s high-level task force suggestions from December 2025, but is not proposing a reform of the additional Tier 1 capital framework to improve the instrument’s loss-absorption capacity. US, European Markets Rebound on AI Momentum
