The European Commission has set out a long-term plan to reverse a two-decade decline in the global standing of EU banks, publishing a non-binding communication that diagnoses excessive fragmentation, regulatory complexity, and a risk-averse supervisory culture as the core weaknesses. The document notes that in 2007 Deutsche Bank’s market capitalisation exceeded Morgan Stanley’s; today the US investment bank is worth roughly six times its German rival. The communication does not contain legislative proposals, but it maps a path toward them from early 2027, signalling a push to create larger, more competitive European lenders.

Brussels identifies three main obstacles: a banking market still divided along national lines, an application of Basel III standards that fails to reflect the EU’s specific landscape, and overly burdensome reporting obligations. To address these, the Commission wants to remove prudential and non-prudential barriers to cross-border banking, simplify rules for both large and small institutions, and encourage consolidation. The text pointedly criticises “unjustified interventions at the national level” that block mergers, a reference to German resistance to UniCredit’s approach to Commerzbank and Spanish government opposition to BBVA’s bid for Sabadell. It also calls for a shift away from a “zero tolerance to risk” culture among regulators, arguing that supervisors should focus on risks that genuinely threaten financial stability.

Viewed from Frankfurt, the European Central Bank is watching the simplification agenda with unease, concerned that it could slide into deregulation. Berlin has long blocked a common deposit insurance scheme and has resisted cross-border takeovers, while Madrid and Rome have also defended national banking champions. In Washington, US regulators earlier this year proposed loosening some capital rules, adding competitive pressure. NGO Finance Watch warned that cutting capital requirements would give banks only one-time balance-sheet room and could undermine future lending capacity, calling the diagnosis correct but the remedy wrong.

The Commission is attempting to break a decade-long impasse on deposit protection by burying the original European Deposit Insurance Scheme proposal and resurrecting it as a new mechanism to ensure equitable protection of covered deposits across the banking union. The communication also flags the concentration of sovereign bonds in bank portfolios as a risk that diversification could mitigate. The next concrete milestone is the first quarter of 2027, when the Commission intends to table legislative proposals. Until then, the plan’s fate depends on political negotiations among member states and the ECB’s willingness to accept a recalibration of the regulatory architecture.