The European Union is preparing proposals to remove barriers that prevent banks from moving funds more freely across the bloc, according to a draft European Commission report on banking competitiveness. The initiative aims to strengthen the competitiveness of European lenders against larger U.S. rivals by addressing a long-running weakness: capital and liquidity are often trapped inside national subsidiaries despite banks operating within a single market. This structure limits banking groups' ability to allocate resources where demand is strongest and forces lenders to hold excess buffers in individual countries. European lenders argue the current framework constrains credit supply at a time when the bloc is trying to fund energy transition, defense, digital infrastructure, and industrial investment. The European Banking Federation has estimated that the EU faces a €1.4 trillion annual investment gap, a figure that has become central to the debate over whether the region's banking rules are too fragmented to support its policy ambitions.
European Commission Proposes Capital Relief on Mortgages and Unrated Company Loans
The draft proposals include possible capital relief on mortgages and loans to unrated companies. Capital requirements directly influence how much lending banks can extend and how profitable certain loan books are to maintain. Mortgage lending is a core business line for European banks, while loans to unrated companies are especially important for smaller and medium-sized businesses that rely heavily on bank financing. Easing capital treatment in these areas could support credit growth, particularly in economies where capital markets remain less developed than in the United States.
Lower capital burdens can improve lending capacity and returns, but they also raise questions about resilience if credit conditions deteriorate. Policymakers must balance competitiveness with the post-crisis safeguards that were designed to prevent weakly capitalized banking systems from amplifying downturns. The report also proposes reforming the structure of bank deposit insurance schemes and reviewing capital requirements for investment firms, pointing to a wider effort to address the unfinished parts of Europe's banking union.
EU Antitrust Chief Urges Cross-Border Bank Merger Support
The banking competitiveness review comes as EU officials are pushing the case for cross-border consolidation. EU antitrust chief Teresa Ribera urged member states to support cross-border bank mergers, arguing that deeper integration is needed to complete the single market. Capital and liquidity mobility is central to that debate. Cross-border mergers are less attractive when national rules require banks to maintain separate buffers in each country, reducing the financial benefit of combining balance sheets.
Greater flexibility to move resources across borders could make larger banking groups more efficient and give them better scale against U.S. competitors. It could also strengthen the investment case for consolidation, particularly among banks with overlapping regional operations. National regulators may be reluctant to give up control over capital and liquidity held inside their domestic banking systems. During periods of stress, countries want assurance that local subsidiaries can support domestic depositors and borrowers. That tension has slowed banking union reforms for years.
Commission Assessment Expected in July, Legislative Proposals in 2027
The European Commission's assessment of banking sector competitiveness is expected in July, with legislative proposals likely to follow in 2027. For large cross-border banks, the issue affects lending capacity, profitability, merger logic, and the ability to finance Europe's broader economic objectives. The proposals would be positive for large cross-border EU banks if they reduce trapped capital and improve group-level balance sheet efficiency.
The challenge is political. Deposit insurance, capital relief, and cross-border liquidity movement all touch national sovereignty over banking systems. Member states may agree that Europe needs stronger lenders, but they do not always agree on how much control should move from national authorities to the EU level. If the proposals advance in meaningful form, large diversified banks could benefit from improved capital efficiency, stronger merger economics, and greater lending capacity.
FAQ
What proposals is the EU preparing for cross-border bank funding?
The European Union is preparing proposals to remove barriers that prevent banks from moving funds more freely across the bloc. The draft European Commission report on banking competitiveness focuses on allowing banks to allocate capital and liquidity across national subsidiaries, which are currently often trapped inside individual countries. The proposals also include possible capital relief on mortgages and loans to unrated companies.
Why is the EU targeting cross-border bank funding barriers?
The initiative aims to strengthen the competitiveness of European lenders against larger U.S. rivals. The current structure limits banking groups' ability to allocate resources where demand is strongest and forces lenders to hold excess buffers in individual countries. European lenders argue the framework constrains credit supply at a time when the bloc is trying to fund energy transition, defense, digital infrastructure, and industrial investment. The European Banking Federation has estimated that the EU faces a €1.4 trillion annual investment gap.
When will the European Commission finalize these banking proposals?
The European Commission's assessment of banking sector competitiveness is expected in July, with legislative proposals likely to follow in 2027.
