Wall Street’s profit boom has Europe ripping up its banking rulebook
US investment banks deliver record quarter as European rivals continue to lag; But now a major push for deregulation across the Atlantic could provide a much-needed boost for the continent’s beleaguered banks.
At stake is whether Europe can build banks with the scale and firepower to compete with the US giants, which have spent more than a decade gaining market share in trade, investment banking and capital markets. A major EU deregulation drive could reduce capital burdens, free up balance sheets and pave the way for more cross-border mergers; could potentially reshape a banking industry that has long been seen as too fragmented to challenge Wall Street.
The European Commission will outline its proposals in a report on banking competitiveness on Friday, setting out regulatory changes for the sector for 2027.
It is reportedly preparing to abandon parts of its “Pillar 2” capital requirements rules on leverage ratios as part of a sweeping regulatory overhaul aimed at boosting banks’ competitiveness. These rules allow national supervisors to apply additional optional add-ons on top of the EU’s basic 3% leverage ratio rule.
Stoxx 600 Banks Index.
The draft version also includes measures to reduce the amount of extra capital buffers that European banks must meet, reducing reporting requirements for lenders and more details on a common European Deposit and Insurance Scheme that could help unlock cross-border banking consolidation in the region, according to a report by the FT.
European regulators are trying to catch up
Taken together, these measures will lead to a shocking change in the way European banks are regulated. They follow similar plans by regulators in the US and UK to relax certain banking rules, including US proposals to cut capital requirements for the largest banks by about 5%.
“European authorities are aware of regulatory developments in the UK and US and do not want to put the banking sector at a disadvantage,” said Jakub Lichwa, a member of TwentyFour Asset Management’s multi-sector bond portfolio management team.
Lichwa said the lower amount of capital banks hold would make it easier to generate higher returns on equity and make shares of European banks more attractive to investors. “Lower capital requirements, per se, would not necessarily lead to operational improvements in the sector, but to some extent could facilitate better competition with global peers,” he told CNBC via email.
US investment banks bask in the stars It’s second-quarter earnings season, with JPMorgan Chase, Bank of America, Citigroup, Wells Fargo and Goldman Sachs beating expectations with higher trading revenue and a rebound in deal-making.
Now, as European banks’ earnings come into focus Santander, UniCredit, UBS And German Bank Andrew Stimpson, KBW’s head of European banks research, said they were all set to report at the end of this month – the EU’s policy change will be key to encouraging more action and confidence in European bank boards.
“Europe has realized that it is competing globally and that focusing so far solely on ‘simplifying’ banking rules will not achieve its strategic objectives,” Stimpson said. he said.
‘Strategic weaknesses’
He noted that European leaders are increasingly recognizing the continent’s strategic weaknesses and the importance of investments in defence, AI infrastructure and energy infrastructure, all of which are capital-intensive projects.
“To address these weaknesses, Europe needs its banks and capital markets to help finance these projects. Telling a bank it can fill out one form instead of 20 will not get any of these projects done.”
UniCredit.
As a result, Friday’s report on banks’ competitiveness will be important, he said.
“He will talk about some deregulation, but also about changing the rules and laws to make cross-border consolidation more likely, which will allow Europe to have some banks of real scale and the ability to compete domestically and internationally.”
With the continent’s banking landscape historically fragmented, cross-border consolidation is seen as essential to create a pan-European banking champion that can compete with US giants. This dovetails with the European Central Bank’s ambition to create a single banking jurisdiction where capital and liquidity can move freely within cross-border groups and where depositors enjoy equal protection.
But a notable example of a potential regional merger is Italian lender UniCredit. Pressure to establish controlling stake commerzbank – It faced legal and political resistance in Germany, where the federal government is the German lender’s second-largest shareholder.
“Their US counterparts have a huge advantage and have been taking market share from European banks for about 15 years, especially in capital markets,” Stimpson said. “It’s possible to catch up, but there will need to be a really big cross-border consolidation within Europe and all of that will take time.”
Caroline Liesegang, head of capital and risk management at the Association for European Financial Markets, said fragmentation, trapped capital and liquidity and regulatory complexity continued to hinder banks’ ability to support growth and investment in the European single market.
He called on the Commission to take an ambitious approach to remove what he called “unnecessary barriers” and improve the efficiency of capital allocation across Europe.
“The focus now needs to shift from diagnosis to delivery,” Liesegang told CNBC via email. “The legislative proposals expected in early 2027 represent a critical opportunity to move the dial on the competitiveness of the EU banking sector.”
