The EU banking sector

The profitability of European banks has been fairly high across the board in the last couple of years, mostly thanks to the increase in interest rates. This follows several years where profitability was a pressing concern, particularly in the context of an international environment that presents numerous challenges. Factors such as the high segmentation of the banking system across national markets, varied national regulatory practices and competition from fintechs and other financial and non‑financial firms complicate the landscape for European banks. Progress towards a European savings and investments union (SIU) is crucial to preserve the competitiveness of the EU banking sector. In particular, action that banks themselves could be taking should boost profitability, and hence their competitiveness.

From a regulatory and supervisory perspective, the EU banking sector is well regulated and well supervised – and resilient, as proven during the 2023 banking turmoil and as confirmed by successive stress test exercises. The uneven implementation of Basel III regulations across jurisdictions will impact mostly on the wholesale markets. While the EU started to apply the standards from 1 January 2025, except for the market risk rules, other major jurisdictions have not implemented yet, leading to distortions in the international level playing field and competitive disadvantages to EU banks in their trading activities. This unlevel playing field not only distorts the global financial system, but also creates inefficiencies in the banking sector and generates regulatory arbitrage likely causing risks to financial stability.

The EU has already delayed by one year the implementation of the Basel III market risk framework, until 1 January 2026. This was complemented by several supervisory steps coordinated by the European Banking Authority (EBA). The European Commission is currently consulting stakeholders to gather their views on possible further steps in relation to market risk. Similarly, the Commission is proposing to address banks’ international level playing concerns in relation to liquidity requirements, by proposing to render permanent the currently transitory treatment of short‑term securities financing with financial customers for the calculation of the net stable funding ratio, and will propose a review of the rules applying to securitisation, including prudential requirements in this area for banks later this year.

In addition to addressing regulatory and economic challenges, there is a pressing need for European banks to embrace digital transformation and innovation. Banks should be encouraged to invest in digital infrastructure and to prioritise initiatives that foster innovation within the banking sector. In this way, European banks can enhance their efficiency, lower their operating costs, ultimately boosting their profitability.

Despite the very significant progress in banking regulation and supervision – with the single rulebook and with the European Central Bank (ECB) now supervising banks in the 21 Member States taking part in banking union, banking markets are still somewhat organised across national lines. This in part reflects national differences in markets – for instances mortgage practices are not uniform across the EU, in part out of tradition, in part in response to tax and regulatory requirements. Also, retail markets often remain organised along national lines, reflecting consumer laws. As a result, the banking sector has not been able yet to reap the benefits of the Single Market, partly due to the fact that the regulatory and supervisory framework itself requires banks to meet all prudential requirements at all levels – parent and subsidiaries.

Banks have been extremely prudent in scaling up, in part because their profitability was scarce for a period, in part because the progressive build‑up of capital required by the implementation of Basel standards took precedence over external growth. It is urgent that this process of scaling‑up the banking sector is allowed to continue, as the EU financial systems needs large banks present across the EU. Cross‑border mergers are even more necessary for the development of the Single Market and for the success of the SIU; they are essential for enhancing the efficiency of banking operations and optimising resource allocation within the EU. This consolidation not only strengthens the competitiveness of banks in the EU but also serves as a critical step toward achieving a true Single Market in banking, where optimised cross‑border capital and liquidity allocation can provide consumers with better services and products.

In conclusion, by prioritising regulatory harmonisation and focusing on preserving an international level playing field, promoting cross‑border integration, streamlining regulatory frameworks, and embracing innovation, policymakers can contribute to the growth and the competitiveness of European banks.

Ugo Bassi is Director for banking, insurance and financial crime, Directorate‑General for Financial Stability, Financial Services and Capital Markets Union (DG FISMA).
This article was previously published in the April issue of the Eurofi Magazine.

Related links

Savings and investments union
Banking regulation
Prudential requirements
Banking union

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