This article was initially published in the Eurofi magazine.
The typical discourse surrounding the European Banking Union starts with a baseline acceptance of the status quo, suggesting that only minor adjustments are needed or even possible.
In the current geopolitical context of trade wars and the erosion of the rules-based order, however, a much more ambitious strategy is needed.
Progress and challenges in banking integration
The industry has made significant progress toward integration in recent years through initiatives such as the Single Supervisory Mechanism (SSM) and the Single Resolution Mechanism (SRM). However, further integration is essential not only to ensure all banks adhere to consistent standards but also to improve competitiveness on a pan-European and, ultimately, a global scale.
Three lessons from successful sectors for banking integration
Other sectors, such as healthcare, telecommunications, and automotive, have embraced cross-border frameworks and are now well-positioned globally:
1. Healthcare
In healthcare, the European Health Data Space facilitates the secure exchange of health data across borders, fostering innovation and enhanced patient care, while the European Medicines Agency is the principal regulatory body, akin to the Food and Drug Administration (FDA) in the United States.
2. Telecommunications
The telecommunications sector has benefited from the European Union’s initiatives to abolish roaming charges and establish uniform standards.
3. Automotive
the entire homologation framework, encompassing all regulations for obtaining new vehicle roadworthiness certification.
In stark contrast, the banking sector is hindered by a patchwork of national regulations, limiting its growth and stability.
A vision for a unified banking framework
In the European banking landscape, a single license process would apply to all institutions of a certain scale operating across multiple markets, allowing them to function under a harmonized set of rules. Such an arrangement would enable them to provide services without the hindrance of varying national regulations or supervision.
All European banks would operate under a unified deposit insurance scheme, relieving them of contributions to national schemes where they exist. Liquidity would increasingly be managed in EU-level sovereign debt, with a weaker domestic sovereign nexus. Furthermore, consumer protection for banking clients and insolvency laws would be more aligned, fostering confidence in a genuinely single market.
This wouldn’t entail more regulation overall; indeed, quite the opposite. Given the importance and interconnectedness of finance, the EU may want to use the banking sector to create a blueprint that will ensure adequacy, effectiveness, and efficiency across all European regulations.
Such an approach would create a market environment in which the management of both sides of the balance sheet is not constrained by a multitude of domestic regulations. It would be further supported by a revitalized European securitization market, facilitating active balance sheet management.
What’s more, banks operating under an EU license would encounter significantly reduced challenges for cross-border mergers and acquisitions. Variations in legal structures between branches and subsidiaries would become absolute. Consequently, national regulatory and governmental bodies would play a substantially diminished role in these transactions.
Urgent banking reform needed for Europe’s transformation
As for timing, Europe’s broader objectives urgently require a new approach to banking oversight. The unprecedented financing demands arising from the war and new security imperatives, green initiatives, and digital transformation cry out for simplified bank-capital requirements.
Closing Europe’s investment gap to boost innovation
It is well-documented, for example, that Europe lags behind both the United States and China in financing for startups. US companies, specifically, receive five times the investment compared with European startups. And in 2024, China launched a tech lending program in which the central bank collaborated with 21 banks to provide loans to small- and medium-sized tech companies at reduced interest rates.
Balancing risk standards and political goals in Europe
Some might argue that adjusting capital requirements to provide relief for political objectives would violate the risk-based principle set out by the Basel standards. In that case, Europe would need to find a way to achieve its objectives with stronger involvement from development banks.
Building a fully integrated banking union for Europe’s future
Either way, a more harmonized pan-EU regulatory framework for European banks is imperative. This needs to be complemented by a strategy to align the banking sector with the strategic financing objectives of Europe, covering the entire financing spectrum of banks, non-banks, and capital markets.
The time has come to embrace a genuinely integrated banking union that will not only enhance financial stability but also stimulate innovation and growth — helping Europe become more competitive on the global stage than it is today.
Read the original piece here.