EU Banks Held Back by Fragmented Market, Says Banking Watchdog Chair

Europe's fragmented banking market is preventing lenders from reaching the scale required to finance the continent's digital, economic-security and defence ambitions, the chair of the European Banking Authority has said.

François-Louis Michaud said in an interview on Wednesday that while European banks remain highly capitalised and continue to report strong profits, they are constrained by a single market that is "not as single as it should be".

"We know that Europe needs to finance all those transformations: digital, environment, demographic, economic security and defence," he said. "It's existential for the future of Europe."

The European Commission is pursuing a competitiveness agenda aimed at mobilising investment for digitalisation, defence and economic security, while examining ways to make cross-border banking easier and deepen the bloc's single market.

National differences raise costs

Michaud said mergers were not the only answer and that, from the EBA's standpoint, greater cross-border lending and financial integration mattered just as much.

Divergences in tax, insolvency and consumer-protection regimes, he added, continue to make it costly for banks to offer standardised products across the bloc and to achieve economies of scale.

As a result, wholesale banking by European financial institutions has shrunk over time, with a growing share of funding coming from non-bank financial institutions, private-credit firms and players outside the bloc.

"Again, it's a question of scale to some extent, banks need to be able to scale up," Michaud said.

Push to cut red tape

He said the EBA aims to reduce unnecessary red tape so that banks and supervisors can concentrate on the most significant risks instead of spending too much time and money on compliance alone.

With the Basel banking reforms now implemented and US regulators moving to ease requirements for some banks, Michaud said momentum was building behind efforts to simplify European rules, including the capital regime, while preserving resilience.

Strengthening European banks is also necessary to compete with US rivals, he added, noting that many American lenders have substantial capital available for expansion and that some are looking beyond their traditional business lines and venturing into new markets.