Europe’s economy could slip further behind global competitors unless the European Union urgently reforms its banking regulations, according to a warning from the European Banking Federation (EBF). The industry body argues that the current rulebook is constraining banks’ ability to lend, ultimately weighing on investment, innovation, and long-term growth. In short, Europe faces economic decline unless it overhauls its rules, banking group warns.
In a letter sent to senior European Commission officials, including Commission President Ursula von der Leyen, the EBF described the existing framework as “neither satisfactory nor sustainable.” The federation stressed that the regulatory environment has become overly complex, fragmented, and difficult for banks to navigate.
Heavy Regulatory Burdens on Banks
Slawomir Krupa, President of the EBF and Chief Executive of French lender Société Générale, said the regulatory and supervisory system has expanded to a point where it is actively undermining banks’ core role in the economy. While banks are already required to hold significant capital buffers, they continue to operate under the constant threat of even higher demands.
Data compiled by the EBF covering the period from 2021 to 2024 shows that 15 major European banks were forced to set aside more than €100 billion in extra capital due to discretionary supervisory measures alone. According to the federation, around 90% of the net capital these banks generated during that period went solely toward meeting regulatory requirements. As a result, the region lost an estimated €1.5 trillion in potential lending capacity—money that could have supported businesses, households, and economic expansion.
Weak Growth Remains a Longstanding Concern
Europe’s sluggish economic growth has troubled businesses and policymakers for years. Despite repeated efforts to better integrate the EU’s fragmented banking sector, progress has been slow, limiting the region’s ability to compete with more unified financial markets elsewhere.
A spokesperson for the European Commission acknowledged that simplifying rules is a “central priority” and noted that steps have already been proposed to cut complexity and strengthen the single market. However, the spokesperson emphasized that responsibility does not rest with the Commission alone. Europe’s Parliament, national governments, and supervisory authorities all play a role in shaping and streamlining regulation.
The Commission is also preparing a report on the competitiveness of the European banking sector. Its findings are expected to help identify targeted measures that could strengthen banks’ ability to compete globally and finance the European economy more effectively.
Global Pressure Mounts as Others Deregulate
The call for reform comes as other major economies move in the opposite direction. In the United States, President Donald Trump has urged regulators to roll back red tape, potentially boosting the power and profitability of large Wall Street banks. UK regulators have also begun easing certain financial rules.
Krupa warned that these developments underline the strategic importance of regulatory reform in Europe. Without action, he argued, the EU risks suffering a lasting competitive disadvantage, creating an uneven playing field that could be difficult—if not impossible—to reverse.
Profits Rise, but Debate Continues
Ironically, European banks are currently reporting record profits, with share prices at their highest levels since the 2008 financial crisis. Improved lending margins and a relatively favorable economic backdrop have supported earnings. Still, critics argue that profitability does not negate the need for reform.
The European Central Bank proposed measures in December to simplify banking regulation but stopped short of reducing overall capital requirements. ECB Vice President Luis de Guindos has said that current rules support financial resilience and do not restrict lending. Some supervisors, however, privately worry that looser requirements would mainly benefit shareholders through higher payouts rather than boosting credit to the real economy.
The EBF maintains that the EU could go further by eliminating duplicated capital requirements, removing the systemic risk buffer, and aligning rules for banks’ trading activities more closely with those in the United States. Without such steps, the federation warns, Europe may struggle to keep pace in an increasingly competitive global financial landscape.
