Europe has recently pivoted to regulatory simplification with the aim to boost competitiveness. This column argues that in banking the debate needs to go beyond competitiveness and be embedded within a broader strategic vision fit for the new geopolitical context. The broader vision should consider the dependence on the US dollar-centric financial system, the increasing complexity of global financial networks, and the emergence of new financial technologies such as stablecoins. At the same time, the strategy should bolster the euro’s use in trade, finance, and reserves in order to reduce Europe’s exposure to external financial shocks and geopolitical leverage. By enhancing trust in our financial institutions, this strategy would contribute to their competitiveness and that of the overall EU economy.
Spurred by the publication of the Draghi Report on Europe’s competitiveness predicament (Draghi 2024) and the announcement of a deregulation drive of the second Trump administration, Europe has pivoted towards ‘regulatory simplification’. At the beginning of 2025, the European Commission presented its ‘Competitiveness Compass’ and subsequent agenda for a ‘Simpler and Faster Europe’. Both aim to reduce regulatory burden and boost competitiveness. We argue that in banking, this agenda, while welcome, needs to be broadened to prepare Europe for the geopolitical sea change.
The competitiveness agenda in banking: Where does Europe stand?
The competitiveness strategy charted by the Draghi Report and endorsed by the European Commission would require a major increase in investment to boost innovation, decarbonisation, and security. As both the Letta Report (Letta 2024) and the Draghi Report have argued, there is no shortage of savings in Europe to finance its increased investment needs. The constraint lies instead with the investment climate and financial intermediation. Regarding the financial system, the Draghi Report emphasises that fragmented and undersupplied capital markets, and their mirror image, the excessive reliance of European firms on bank financing, are the major cause of Europe’s unsatisfactory investment performance, especially for innovative firms. Nonetheless, the report also ascribes an important responsibility to EU banks, whose ability to finance major investment it views as “constrained by lower profitability, higher costs, and smaller scale than their US counterparts” (Draghi 2024, Vol. B, p. 287). The report makes three recommendations to improve the competitiveness of EU banking: (i) enabling the European securitisation market, (ii) assessing whether the current EU prudential regulation regime is “adequate to have a strong and international competitive” EU banking system, and (iii) completing the EU banking union (Draghi 2024, Vol. B, p. 294).
The call by Draghi to improve the competitiveness of the EU banking sector was echoed in a letter to the European Commission earlier this year in which the central bank governors of France, Germany, Italy, and Spain more narrowly called for the simplification of European banking rules where they are “unduly complex”, while stating that “simplification is not and should not be deregulation”.
Following the letter by the four governors, the European Commission recently decided to launch an assessment of European banking regulation, which is due to be completed in 2026. The ECB has also formed a task force to explore ways to simplify European banking regulation. The task force is led by ECB Vice President Luis de Guindos, and includes central bank governors from Germany, France, Italy, and Finland.
Initiatives to address concerns that existing regulations may be overly complex and burdensome should obviously be welcome, provided that their outcome is indeed ‘simplification rather than deregulation’ and, therefore, that higher banking competitiveness does not come at the cost of lower financial stability. Yet, the discussion on banking competitiveness should not be narrow. On the contrary, it should encompass a proper assessment of the major risks to Europe’s position in banking, and finance more generally, stemming from the current geopolitical turmoil.
How geopolitics poses unprecedented risks to Europe’s financial system
The stability of the largely dollar-based global financial system critically depends on the US to uphold the responsibilities that come with the dollar’s central role. These include the rule of law, the provision of a safe asset (Treasuries), ensuring orderly dollar liquidity conditions, and taking a leadership role in managing global financial crises. There have been worrisome signals that the current administration puts into question these conditions, arguing that what many Europeans qualify as ‘exorbitant privilege’ is in fact a net liability for the US, a free riding on a public good provided by the US. This is a source of systemic uncertainty.
We identify four principal avenues through which US geopolitical changes create new uncertainties and risks for Europe’s financial system – requiring a re-think of the competitiveness agenda towards a broader strategic autonomy concept.
First, the US has become a big source of geoeconomic uncertainty. In particular, it creates uncertainty on US Treasuries, the anchor of the global financial system. The flip-flopping on US tariff policy combined with the increase in US deficits has made investors wary of the prospects of US treasuries. While it is premature to predict that US treasuries will lose their status, their safe-haven status has been, although briefly, questioned in markets when stock prices were down and US Treasury yields up recently.
The second concern relates to the willingness of the US to ensure orderly dollar liquidity conditions. It is important to acknowledge that the important role of the dollar in trade and finance is reinforced by the fact that the dollar serves as the vehicle currency even for transactions where the dollar is not the final settlement currency. For example, European bond issuers (like the European Investment Bank, EIB) issue high volumes of dollar-denominated bonds to be swapped into euros. The depth and liquidity of US markets explains why issuers can often get better terms in issuing in dollars than they would in euros, even after accounting for the costs of swapping. In foreign trade, a European exporter wishing to hedge an exposure to the Thai baht would typically realise a two-step route via the dollar for lack of baht/euro liquidity. The importance of the dollar is best illustrated by its size in the foreign exchange (FX) swap, forwards, and currency swaps. The outstanding obligations to pay in US dollars in foreign exchange swaps and forwards amounts to $80 trillion in 2022, roughly 90% of the total (Bank for International Settlements, 2022, 2025). Since foreign exchange swaps and forwards are short term, they must be rolled over frequently, making them vulnerable to funding squeezes (Shin 2023). This explains the key importance of central bank swap lines for global financial stability. Also of concern is that, thanks to the widespread use of the dollar, the US has been able to use its currency for strategic or coercive purposes, e.g. Europe’s biggest bank, BNP, was fined $8.9 billion in 2014 for violating US sanctions.
To date, the US remains central, representing around 60% of reserve currency holdings. Russia and China have recognised that US financial dominance can be leveraged for geopolitical gains due to the centrality of the US financial system for some time. However, what has changed more recently is that several emerging economies seek to diversify their reserve currency holdings, explaining the rising share of gold. Similarly, the European debate on the role of the US dollar and Europe’s dependence on it has also started in foreign policy circles.
A third concern is that only a small number of banks, mainly from the US, are at the core of a financial network which has become increasingly complex, interconnected and difficult to map. Although the direct dollar exposure of European banks has been considerably reduced since the Global Financial Crisis, indirect exposure (through interconnectedness and wide participation of non-bank financial institutions, or NBFIs) stays high. In this context, the US appears to be moving in the direction of light-touch supervision and possibly also deregulation. Trump’s appointment of US Fed vice chair Michelle Bowman has been widely interpreted as part of such a move. A possible light-touch US implementation of the Basel III Endgame, more ‘transparent’ stress tests, and no new debt rules for regional banks may generate a new boom-bust financial cycle and greater financial volatility for which Europe needs to prepare.
Fourth, the US administration openly supports a new financial system with a stronger role of distributed ledger technology. Cryptocurrencies, and in particular stablecoins, will be a lasting feature of the US and global financial system. They pose challenges and opportunities to the financial system. Barry Eichengreen highlights that Trump’s ‘Genius Act’, which has been passed by the US Senate and is currently debated by the House, could push the US financial system towards a period like what prevailed from the mid-1830s until the Civil War, known as the Free Banking Era. The Genius Act would allow the widespread adoption of privately issued stablecoins, reintroducing internal exchange rates. More worryingly, Eichengreen argues that since stablecoins are supposed to be backed by US Treasuries, any instability in stablecoin markets could lead to fire sales of Treasuries. While the stablecoin market currently is only worth around $200-300 billion dollars, estimates are that it could quickly grow to one trillion, thereby becoming a significant factor in Treasury markets. Beyond the concerns on the effects of stablecoins on Treasuries, the European Central Bank worries about their implications for the payment system.
Going beyond competitiveness in EU banking policy discussion
As already mentioned, Europe suffers from being insufficiently financial-market-oriented – lacking enough venture capital, private equity ventures, pension funds, and insurance companies that can all take longer-term risks to sustain innovation. The focus on improving European capital markets needs to be complemented with a focus on challenges to the payment system resulting from the rise of distributed ledger technology (DLT) and stablecoins. Both topics will need to be addressed in a further column.
Here we focus on the banking agenda. Indeed, banking activities should not receive less attention since several banking-sector activities are complementary to capital market activities, for example investment banking (e.g. Schoenmaker and Goodhart 2016), and maintaining a strong banking sector will remain crucial for the EU.
The current state of euro area banking competitiveness
Since financial stability is a necessary condition for the competitiveness of the overall economy, greater banking sector competitiveness should not be achieved through deregulation. In particular, lower capital requirements would lead to higher risks, hence undermining the competitiveness of the economy. The table below, which compares the situation of top EU and US banks, in fact suggests a positive link between market capitalisation and solvency (measured as book capital over total assets) in banking (see also Heider et al. 2025).
Table 1 is divided into three panels: the first shows the six biggest US banks by asset size, all belonging to the list of 29 global systemically important banks (G-SIBs) identified by the Financial Stability Board (FSB); the second, the six biggest publicly traded EU banks by asset size, all G-SIBs; and the third one, the next six biggest publicly traded EU banks by asset size, none of which belongs to the list of G-SIBs. Beyond the heterogeneity which is present within each group, three findings clearly emerge from this comparison. First, comparing the top six banks in the US and the EU indicates that the size of the largest banks is not that different across the two sides of the Atlantic, but market capitalisation clearly is: asset size ranges from $4.4 to $1.3 trillion in the US versus $3.0 to $1.2 trillion in the EU, whereas market capitalisation ranges from $764 to $147 billion in the US versus $121 to $44 billion in the EU. Second, this contrast is primarily explained by differences in the price-to-book ratio, which ranges from 2.17 to 1.16 in the US versus 1.07 to 0.51 in the EU, but also, to some extent, by differences in book capital over assets, which ranges from 9.4% to 7.1% in the US versus 6.1% to 3.7% in the EU. Third, the next six biggest EU banks by asset size do better than the top six EU banks, but still less well than US banks, in terms of both the price-to-book ratio, which ranges from 1.52 to 0.94, and book capital over assets, which ranges from 8.1% to 4.7%.
Table 1 Big banks in the US and the euro area, 20 June 2025
Source: https://companiesmarketcap.com/
These lessons are relevant in terms of necessary reforms: work is needed to make EU banks, especially the largest ones, more profitable, through ‘defragmentation’, i.e. completing the banking union, and possibly through some simplification of complex reporting, but definitely not by relaxing solvency ratios. Indeed, regulatory ‘gold plating’ in the EU operates essentially through the ubiquitous application of Basel III to all banks, albeit an imperfect application since the EU remains unfortunately the sole jurisdiction which does not comply with Basel III. Moreover, it is fair to say that some of the EU’s biggest banks, which are meant to respect Basel III anyway, are allowed to take ‘generous’ advantage of their internal models (something which is not possible in the US).
Therefore, next to regulatory defragmentation, an effort by euro area banks to further improve their efficiency is needed. This holds especially for Europe’s G-SIBs with low price-to-book ratios. This is crucial since three of them, BNP Paribas, Deutsche Bank, and Société Générale, are universal banks and Europe’s key players in investment banking.
Increasing euro area bank competitiveness through improved resilience
The question of bank competitiveness has opened discussions over a number of regulatory and supervisory issues, often with level playing field considerations: competitive position vis-à-vis non-EU jurisdictions, vis-à-vis non-bank financial institutions, and vis-à-vis big tech platforms. We are not going to comment in detail on these. What we want to stress here is that in an environment where finance and geopolitics are more intertwined, where zero-sum mentality becomes the mindset, where trust in multilateral cooperative solutions has been shaken, the resilience of the banking sector to geopolitical stress must get greater attention. Indeed, improving it will inspire trust in euro area banks and thereby enhance their competitiveness.
In this respect, promoting the international role of the euro as pleaded by Christine Lagarde (2025) would, if successful, reduce vulnerabilities to stresses in dollar liquidity, and “protect Europe from sanctions and other coercive measures” and at the same time open new business perspectives to major banks. Concrete measures include the supply of safe assets, the extension of the network of ECB euro swaps and repo lines to key partners, and the consolidation of key financial market infrastructures.
A solid financial framework is also key for earning trust in international finance. In this respect, the position of euro area (EA) institutions has considerably improved since the banking and sovereign debt crises. And it is interesting to observe that the Basel Committee has recognised the risk-reducing effect of single supervision and resolution: since 2022, euro area G-SIBs have benefited from lower risk weights for cross-border exposures within the banking union than for exposures outside the banking union.
There remain, however, gaps in the banking union. We flag two sets of issues where further progress would be particularly helpful: resilience to asymmetric intra-euro area shocks and crisis resolution.
A. Facilitating country risk diversification
Lower country risk concentration would make the euro area financial system more resilient to asymmetric shocks, thereby strengthening its international position. Measures include facilitating cross-border mergers, securitisation, and risk weights for sovereign risk concentration.
As far as cross-border mergers within the banking union go, they could reduce the ‘bank-sovereign doom loop’, which remains a key issue in a monetary union with no fiscal union.
Helping resolve the ‘home-host supervisor standoff’ would be key here. Among possible solutions, it would be worth re-examining the proposal by Dewatripont et al. (2021) to combine a significant weakening of National Options and Discretions concerning intragroup cross-border bank capital and liquidity mobility with a group structure where structural subordination of capital at group level would protect group subsidiaries.
Another inducement for cross-border mergers that would help reduce sovereign risk concentration would be the introduction of concentration risk charges for euro area banks but only at group level and not at subsidiary level. Concretely, consider two banks of equal size in terms of total assets, active in countries A and B respectively, and each having X% of their assets in its domestic sovereign but 0% in the other country’s sovereign. If they were to merge, the new entity would automatically see its group concentration divided by two (to X/2%) for each sovereign.
B. Further improving the crisis resolution framework
The European resolution framework has significantly improved in recent years. The Bank Recovery and Resolution Directive (BRRD) initially introduced the ‘8%-bail-in-obligation-before-any-public-bailout’ rule as of 1 January 2016, a well-intended rule that has unfortunately been unworkable (and thus de facto ignored) until now, because of a lack of sufficient bail-in-able subordinated long-term debt that would exempt deposits from bail-in and thereby avoid (very costly) bank runs. Over the years, big banks have, however, been able to accumulate sufficient amounts of long-term subordinated minimum requirement for own funds and eligible liabilities (MREL), thereby making their orderly resolution more credible. And the Commission’s Crisis Management and Deposit Insurance (CMDI) proposal does make significant progress towards doing the same for smaller banks (see Dewatripont et al. 2023).
One remaining gap, however, concerns liquidity in resolution: contrary to other jurisdictions like the UK and the US, the issue of provision of liquidity for banks in resolution remains open (see for example Demertzis et al. 2018). The problem is that even after a successful recapitalisation of a failing bank it may take time to restore trust. A public sector liquidity backstop may then be critical to ensure the success of the resolution plan. The Financial Stability Board published Guiding Principles in 2016 for credible public sector backstop mechanisms to enable the temporary funding needs of G-SIBs in resolution. Given the potential size and volume of a temporary liquidity support, the intervention of the central bank is often unavoidable. In the resolution of Credit Suisse, the Swiss National Bank (SNB) “provided at its peak CHF 168 billion liquidity support, half of which through a federal emergency ordinance allowing the SNB to lend against a preferential bankruptcy status and a public liquidity backstop” (Jordan 2023). In the UK, even if taxpayer money is at risk, the Bank of England can still provide liquidity in resolution if it is backstopped by a Treasury guarantee. In the EU, the Single Resolution Fund (SRF) has very limited firepower and government guarantees to backstop the provision of central bank liquidity are seen by some as contravening the EU treaty’s prohibition on monetary financing (e.g. Mersch 2018). This cannot remain unaddressed. As the chair of the EU’s Single Resolution Board (SRB), Dominique Laboureix, put it in an interview with the Financial Times: “If we are confronted with a resolution decision during a weekend…we cannot say, let’s ask the central bank to give a liquidity line supported by a guarantee from the government. That is not possible in the European context” (25 June 2023).
Conclusion
While improving the competitiveness of the EU banking sector through regulatory simplification and structural reforms is a necessary step, it is not sufficient in the face of growing geopolitical uncertainties. The current focus on streamlining regulation must be embedded within a broader strategic vision that takes into account Europe’s vulnerabilities stemming from several factors: dependence on the US dollar-centric financial system, increasing complexity of global financial networks, and the emergence of new financial technologies such as stablecoins.
To respond effectively, the EU must adopt a dual-track strategy: enhancing the internal efficiency and profitability of its banking sector — through the completion of the banking union, reduction of regulatory fragmentation, and improvement of bank productivity — while also bolstering the resilience and autonomy of its financial system.
Equally important is the promotion of the international role of the euro. Expanding the euro’s use in trade, finance, and reserves would reduce Europe’s exposure to external financial shocks and geopolitical leverage. Strengthening the supply of euro-denominated safe assets, extending the ECB’s international liquidity tools, and consolidating market infrastructures are essential components of this effort.
In an era where financial interdependence is increasingly weaponised, Europe cannot afford to adopt a narrow attitude towards banking competitiveness. A resilient, integrated, and strategically autonomous financial system is a prerequisite not only for economic competitiveness, but also for Europe’s political sovereignty and global standing.
Source : VOXeu
