Once the consultation that the European Commission had open on the competitiveness of the banking sector is finished, it is expected that it will end up presenting its report, which will determine the review of the regulation of the rules governing banks during the next month of July. Two decades after the financial crisis, Europeans are opening a new chapter in the sector with a transformation of the legislation that was launched after the 2008 crisis.
Reform of the European supervisory framework
Already in December, the European Central Bank presented a comprehensive agenda for European banking reform. The texts presented then included its plan to modernize and perfect its supervision of the financial sector, with the ultimate goal of better addressing current challenges such as cyber threats or climate risks. The proposal is based on the desire for supervisory processes to be more efficient, directly risk-oriented, through a simplification of the current model and the adoption of digital technologies.
In order to improve agility, the agency's proposal included reforms in decision-making processes to improve agility, as well as simplified information requirements that reduce the administrative burden for banks. A key element of these drafts is the project that refers to "next-level supervision", which aims to strengthen capital supervision and internal model investigations, while maintaining high resilience standards.
These efforts by the Central Bank are supported by a new culture of unified supervision, designed to ensure coherent and transparent communication in all European countries. All of this with the aim of safeguarding financial stability, concentrating resources on the most significant risks facing the Banking Union.
The Commission takes sides
The Community executive has already closed the consultation process that it had kept open on this banking reform. Brussels aims to balance financial stability, achieved after the reforms of the last fifteen years, with the need to overcome the current market fragmentation to finance the Union's strategic priorities, as does the ECB, such as the green and digital transitions.
On the one hand, the executive's working documents raise the dichotomy that explains why European banks have often been undervalued by investors compared to their international counterparts. Brussels is studying whether banks adequately support key sectors such as defense, as well as the impact of technologies such as AI and digital currencies on business models.
Sources consulted by Demócrata acknowledge in the community capital that the Banking Union remains incomplete, which would be limiting development opportunities and the financing of the community economy. The executive proposes rethinking the design of a common safe deposit system to improve resilience in the face of crises and reduce member states' concerns about integration. At the same time, among the ideas being considered is that of a transparent mechanism to provide liquidity to large banks in crisis situations.
Regulatory simplification and technical debate
In this reform, a fundamental pillar is the reduction of the “undue complexity” of current regulations. The Commission is open to evaluating whether the current framework is too burdensome for small banks, even considering specific, lighter regimes for them. This also includes the simplification of the macroprudential framework, which has at times been perceived as very complex internationally, eliminating potential overlaps between the different capital buffers required.
NGOs and pressure groups have already submitted their proposals to the European Commission in Brussels; they mainly ask for simpler regulation, but without falling into deregulation that could weaken the system's resilience.
On the one hand, they recommend raising the requirements of the leverage ratio so that they have a similar weight to risk-based metrics. In the offices they explain that leverage ratios are much more difficult to manipulate and offer a clearer view of banking solvency.
They propose halving the number of capital requirement layers, eliminating overlaps and clearly distinguishing between releasable and non-releasable buffers. In the background, the objective is a more transparent and efficient system through lower compliance costs, similarly they ask that the European Union stop allowing banks to use their own models for any credit and operational risk, replacing them with the Standard Approach.
These models believe they could be costly, unreliable, and allow banks to “minimize capital” rather than manage risk. “Inadequate simplification reduces collateral. Proper simplification eliminates unnecessary complexity. The EU now has the opportunity to establish a clear capital framework that strengthens banks’ resilience and allows them to continue lending to the real economy,” says Finance Watch senior advisor, Greg Ford.
Furthermore, these groups support a simpler regulatory framework for small and non-complex banks as proposed by the European Commission, which are based on robust leverage and liquidity thresholds, in order to foster local lending to SMEs. In Brussels, researchers reject the idea that the European Union is stricter than the United States. According to the data they handle, these requirements for globally systemically important banks are usually much stricter.
That said, they criticize that if capital requirements are reduced, there is a risk that banks will use that money to pay dividends or reward shares instead of lending to companies. Between 2019 and 2025, eurozone banks increased their loans to financial firms 2.5 times faster than to companies in the real economy, which shows a possible diversion of credit.
A three-way plan
Meanwhile, the European Central Bank works to achieve a single supervisory culture. In 2025, an initiative was launched to integrate a common culture between the ECB and national authorities, as it was assured that supervision could be inefficient. Now, the reform relies on digitalization, the use of generative artificial intelligence, and integrated portals to automate routine tasks and free up resources for emerging risks.
Europe must now combine regulatory simplification with supervision without losing proportionality regarding the size and risk profile of the bank, avoiding falling into more unnecessary burdens for smaller entities. Safeguarding the resilience of the European financial system while reducing administrative costs and removing obstacles in the regulatory framework.