Fragmented market prevents EU banks from financing bloc’s ambitions, EBA chair says

Europe's fragmented banking market is hindering lenders' ability to finance the continent's goals in digitalization, economic security, and defense, according to François-Louis Michaud, the chair of the European Banking Authority. While European banks maintain high capital levels and strong profitability, they face limitations due to a market that is not as cohesive as it should be.

Michaud emphasized that financing Europe's digital, environmental, demographic, economic security, and defense transformations is critical for the future of the continent. The European Commission is promoting a competitiveness strategy aimed at mobilizing investment for digitalization, defense, and economic security, as well as simplifying cross-border banking and deepening the single market.

Michaud noted that mergers are not the sole solution and that increasing cross-border lending and financial integration are equally important. Differences in tax, insolvency, and consumer-protection regulations continue to make it costly for banks to provide standardized products across the bloc and achieve economies of scale. Consequently, wholesale banking by European financial institutions has declined, with a larger portion of funding coming from non-bank financial institutions, private-credit firms, and external entities.

Michaud highlighted that banks require scale to some extent, and they need to be able to scale up effectively. Michaud's EBA aims to reduce unnecessary bureaucracy, enabling banks and supervisors to concentrate on the most significant risks instead of spending excessive time and resources on compliance tasks. With the implementation of Basel banking reforms and US regulators planning to ease requirements for some banks, momentum is growing behind efforts to simplify European rules, including the capital regime, while maintaining resilience.

Strengthening European banks is also essential for competing with US rivals, as many American lenders possess substantial capital for expansion and are exploring new markets beyond their traditional business lines.