Europe’s debate on bank competitiveness is often framed in terms of high capital requirements. But a more fundamental challenge is the persistent fragmentation of the European banking market. Even as Europe has made progress in building resilience, Europeanising supervision and developing a common rulebook, key constraints remain national, limiting the ability to deploy capital and liquidity efficiently across borders and ensuring banks can scale up their operations.
The explainer argues that concluding Banking Union, notably by resolving the outstanding home-host issue, is thus key to competitiveness. Enhanced flexibility of capital and liquidity use requires appropriate safeguards to protect the host authorities, including through effective deposit protection and group-level supervision. Meanwhile, international comparisons of capital ratios of banks need to go beyond headline numbers. Differences in risk-weighted assets, internal models, business models and regulatory architectures complicate direct EU-US comparisons of capital ratios. The output floor is indicative of this: while it provides an important prudential backstop, reliance on a less risk-sensitive standardised benchmark may have material capital implications for certain exposures and should be assessed in the context of the entire capital stack.
Meaningful simplification should thus focus on ensuring coherence, proportionality and cumulative implications, not just deregulation. The forthcoming reform should tackle prudential calibration, supervisory convergence and market integration simultaneously. In the end, Europe’s task is to mutate its common regulatory architecture into a genuine common banking market.
