12 Mar 2024

Europe’s Banking Union needs to give more space to cross-border banking

The desired single market for banking products and services is within reach if legal restrictions are removed

Ten years after the creation of the Banking Union, Europe still needs a fully functioning single market for banking products and services. To remedy this, broad-ranging new rules are not required, only a series of changes to existing laws to allow for a uniform jurisdiction for cross-border banks in the area covered by the Banking Union. The timing is favorable now because bank profits have improved after the return of interest rates to more normal levels, making cross-border expansion easier.

This is the conclusion of a recent analysis presented by Ignazio Angeloni, Senior Fellow at the Leibniz Institute for Financial Research SAFE, on behalf of the European Parliament’s Committee on Economic and Monetary Affairs. “What continues to be underachieved and not properly addressed is the goal of creating a true banking union: a single market in banking commensurate to Europe’s dimension and desired role in the global scene,” says Angeloni. “Cross-border integration does not require a change in the rules for all European banks.” 

The changes suggested in the report refer to the way cross-border banking is treated in the main EU legal acts regulating the banking sector – the Capital Requirements Directive (CRD IV) and the Capital Requirements Regulation (CRR), the Bank Recovery and Resolution Directive (BRRD), the Single Resolution Mechanism Regulation (SRMR), and the Deposit Guarantee Scheme Directive (DGSD).

Restrictive legislation and need for a CMDI reform 

Angeloni identifies two fundamental problems that stand in the way of further integration of the European banking sector: Firstly, legislation, primarily in the CRR, restricts capital and liquidity requirements for credit institutions to the national level. “This forces the Single Supervisory Mechanism to enforce individual national regulatory requirements for cross-border banking groups,” explains Angeloni. Secondly, there is the absence of provisions that ensure intra-group support and cohesion when some components of those groups face difficulties. To remedy this, the crisis management and deposit insurance (CMDI) framework applied to cross-border banks needs to be made “country blind” from a regulatory, supervisory, and crisis management perspective. Reform of this framework should cover the phase before to the resolution of a bank (“recovery phase”), the resolution decision, and the subsequent process.

A comparison of data from the US and Europe shows that in both jurisdictions, cross-border banks (in the US this means cross-state or cross-county) are a small minority. “Cross-border banking is conducted by a few credit institutions, even in well-integrated markets such as the US,” says Angeloni. “In general, EU law subjects all categories of banks to the same rules. This is understandable and desirable in other contexts but is a hindrance from the point of view of cross-border integration,” he explains.

To open the door to seamless cross-border banking transactions and more integration in the European banking sector, Angeloni demands that EU banking law should not stand in the way of efficient “country-neutral” business processing, allowing banks to expand abroad, subject to the European Central Bank’s prudential oversight. “The next goal should be to remove the regulatory impediments that have prevented banking integration from progressing since 2014, despite an otherwise successful Banking Union,” says Angeloni. 

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Scientific Contact

Ignazio Angeloni

SAFE Senior Fellow