LONDON, Jan 27 - Europe risks falling further behind other regions unless the European Union simplifies a regulatory framework that, the banking industry says, is currently constraining banks' capacity to lend.
In a January 19 letter to European Commission officials, the European Banking Federation (EBF) described the present regulatory and supervisory environment as "neither satisfactory, nor sustainable." The letter was signed by EBF President Slawomir Krupa, who also serves as CEO of French lender Societe Generale.
Krupa pointed to EBF-collected data covering 2021-2024 indicating that 15 major banks were required to hold in excess of 100 billion euros in additional capital because of discretionary supervisory measures. According to the EBF, 90% of the net capital these banks generated over that period was allocated to satisfying those measures, and an estimated 1.5 trillion euros in potential lending capacity was lost.
The industry group's message comes against a backdrop of persistently subdued economic growth across much of Europe and ongoing challenges in integrating the region's varied banking sectors. The Commission did not respond to a request for comment on the EBF letter.
The EBF also highlighted recent regulatory moves in other jurisdictions, saying they underscore the strategic importance of reform in Europe. U.S. President Donald Trump is pressing regulators to reduce regulatory burdens, a push that could widen the gap in competitive operating conditions for large banks. At the same time, regulators in the United Kingdom have been easing some rules.
"Recent changes in the U.S. and the UK highlight the strategic importance of regulatory reform, as Europe is risking further competitive disadvantage in terms of a level playing field that could be irreversible for our economy," Krupa wrote in the letter.
European banks have reported strong profitability recently, with share prices at their highest levels since the 2008 financial crisis. The EBF attributes those gains to improved lending margins and a generally supportive environment for lending.
In December, the European Central Bank proposed measures intended to simplify bank regulation, though it did not propose broad reductions in the overall financial burden on banks. ECB Vice President Luis de Guindos said this month that the approach was designed to preserve bank resilience, and he stated that capital requirements were not impeding lending.
Some supervisors, speaking privately, warn that loosening capital requirements could translate into higher shareholder payouts rather than increased lending to the real economy.
While the EBF says it supports the EU's stated priorities of simplification, competitiveness and the creation of a capital markets union through the Savings and Investment Union initiative, it has asked for additional changes. Specifically, the federation urged policymakers to remove capital duplications, eliminate the systemic risk buffer and align rules for banks' trading desks with those in the U.S.
For reference, the letter included the exchange-rate note: $1 = 0.8413 euros.
Key points
- The EBF warns that a fragmented regulatory landscape has forced 15 major banks to hold over 100 billion euros in extra capital, reducing lending capacity.
- EBF data indicate 90% of net capital generated from 2021-2024 was consumed by discretionary supervisory measures, contributing to an estimated 1.5 trillion euros in lost lending potential.
- The federation supports EU goals on simplification and a capital markets union but calls for further steps including removing capital duplications, scrapping the systemic risk buffer and aligning trading rules with the U.S.
Risks and uncertainties
- Regulatory fragmentation could continue to erode banks' lending capacity, affecting credit availability for businesses and households and weighing on economic growth - impacting banking, corporate finance and lending-sensitive sectors.
- Divergent policy moves in the U.S., UK and Europe could create an uneven competitive landscape for large banks, potentially influencing investment flows and capital allocation across financial markets.
- Calls to lower capital requirements may lead to higher shareholder distributions rather than increased lending, a concern cited by some supervisors - introducing uncertainty for the transmission of any regulatory easing into real-economy credit expansion.