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Europe’s banks are being held back by a patchwork of national rules that frustrate consolidation, stifle cross-border lending and weaken global competitiveness.
Fragmented rules are blocking growth
That is the stark conclusion of a new report from the Association for Financial Markets in Europe (AFME), which warns that the European Banking Union, despite more than a decade of reform, still suffers from critical implementation gaps.
At the centre of the problem is regulatory fragmentation.
According to AFME, more than €225bn of capital and €250bn of liquidity are “trapped” in subsidiaries across the bloc because regulators rarely grant cross-border waivers.
This ring-fencing means parent companies cannot easily move funds between units during periods of stress. By contrast, banks in the US operate with far greater freedom to reallocate capital across state lines, enabling them to achieve scale more efficiently.
Caroline Liesegang, AFME’s managing director for capital and risk management, described Europe’s framework as a “maze of national rules, fragmented deposit guarantee schemes and inconsistent supervisory practices.”
Potential mergers, she argued, are routinely bogged down in lengthy negotiations, eroding the very economies of scale consolidation is meant to deliver.
Scale without efficiency
The report highlights that European banks struggle to unlock economies of scale once they exceed around €450bn in assets.
Beyond that point, administrative costs rise relative to total assets, limiting efficiency gains. In contrast, US institutions benefit from an integrated market that supports far larger balance sheets.
The outcome, AFME suggests, is a structural disadvantage for European lenders competing in a global marketplace.
This lack of integration manifests in multiple ways.
The weighted-average minimum requirement for own funds and eligible liabilities (MREL) in the eurozone stands at 28 per cent of risk-weighted assets, significantly higher than the 22 per cent imposed on US peers and 27 per cent in the UK.
Such requirements increase funding costs and in some cases overlap with Total Loss-Absorbing Capacity (TLAC) obligations, effectively duplicating capital rules.
Cross-border mergers are another sticking point.
Banking acquisitions within the EU took an average of 285 days to complete over the past three years – a full 100 days longer than a decade ago and far slower than in other major markets.
In Switzerland, comparable transactions average just 85 days. This sluggish process deters consolidation, leaving Europe with a banking sector that remains fragmented and less resilient.
More than deposit insurance
One of the most visible gaps in the Banking Union is the absence of a European Deposit Insurance Scheme (EDIS), which has been stalled by political deadlock for years.
AFME stresses, however, that progress on other fronts should not be held hostage to this impasse.
The group points to divergences in macroprudential buffers, opaque contributions to the Single Resolution Fund, and inconsistent treatment of intra-group exposures as equally pressing barriers to integration.
Indeed, macroprudential rules vary widely between member states, with national authorities deploying different inputs and methodologies to calculate buffers.
The EU also designates a disproportionately high number of banks as “other systemically important institutions” compared with the US, UK or China, which raises compliance costs and undermines competitiveness.
What needs to change?
AFME proposes six policy steps to unlock Europe’s financial potential.
These include harmonising intra-group exposure limits, simplifying capital buffers, revising MREL requirements, and overhauling the resolution fund’s contribution methodology.
Crucially, the lobby group insists that national supervisors must build greater trust in the common supervisory framework to allow cross-border waivers.
Adam Farkas, AFME’s chief executive, warned that profitability is being “severely hindered by the fragmented approach that is trapping capital and liquidity.”
Removing these barriers, he argued, would be “transformational in terms of economic efficiency.”
A question of competitiveness
For Europe’s economy, the stakes are high. Without deeper integration, banks will struggle to finance growth, support investment and compete with global peers.
The current regime creates an uneven playing field, where size does not automatically translate into efficiency and where mergers are deterred by red tape.
The Banking Union was conceived to strengthen financial stability after the eurozone crisis. Yet more than a decade later, it remains unfinished.
Unless policymakers take concrete steps to harmonise rules, Europe’s lenders will continue to be constrained by fragmentation – and Europe itself will pay the price in reduced competitiveness on the world stage.
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