Cross-border banking in the EU: from national silos to an integrated market

Article by Patrick Montagner, Member of the Supervisory Board of the ECB, for Eurofi Magazine

Warsaw, 8 April 2025

In today’s competitive landscape, the number of pan-European entities remains very limited in the EU’s still fragmented Internal Market, with many different national options permitted by the Capital Requirements Directive. This prevents European banks from achieving economies of scale, especially in terms of their IT systems. Removing barriers to integration will be key for European banks to remain globally relevant and continue to serve Europe’s strategic interests. Restrictions on the movement of capital and liquidity persist, a legacy of the 2008 financial crisis, which resulted in ring-fencing practices that trap financial resources within national boundaries. The banking union was designed to break this cycle of fragmentation, but it remains incomplete.

When supervising a consolidated banking group, the ECB gives no preference to either the parent entity or its subsidiaries. Our supervisory decisions are based solely on prudential considerations, not on national interests, and we have a strong track record of balanced, evidence-based supervision. The Capital Requirements Regulation does not, however, allow cross-border capital waivers. And while cross-border liquidity waivers are permitted, they have not been taken up.

The limited extent of cross-border integration reduces the potential for private risk sharing in the European banking market, increasing risks to financial stability rather than alleviating them. This fragmentation also hinders banks’ ability to optimise liquidity management and undermines the diversification benefits of cross-border operations.

In the absence of major legislative changes, several practical options could foster banking sector integration.

As former ECB Supervisory Board Chair Andrea Enria suggested, “branchification” – converting subsidiaries into branches of a single legal entity – could be a way of overcoming capital and liquidity fragmentation within the current regulatory framework.^[1] This model, while requiring careful coordination with deposit guarantee schemes, would avoid financial resources being trapped by allowing them to be allocated freely within a single legal entity. Obstacles to “branchification” still exist, however, in the areas of corporate law and governance, taxation, deposit insurance and relations with host-country authorities.

Cross-border liquidity waivers are another way of fostering integration, and they could potentially be enhanced through contractual intragroup guarantees made enforceable through supervisory tools. The ECB has proposed incorporating group support agreements into recovery plans, which could facilitate cross-border liquidity waivers while maintaining prudential safeguards.^[2] These practical approaches show that some progress towards integration is possible even in the absence of comprehensive legislative reforms.^[3]

More importantly, completing the banking union would enhance the resilience of the European banking sector and Economic and Monetary Union more broadly. The European deposit insurance scheme (EDIS) is clearly a critical missing element. Currently, the prevailing perception is that in a crisis, a bank’s credit standing would still reflect the strength of its respective national deposit guarantee scheme and the sovereign’s ability to provide the ultimate backstop.^[4] EDIS, however, would significantly mitigate host countries’ concerns about deposit protection and make it possible to move financial resources more freely. Furthermore, the ECB strongly welcomed the European Commission’s proposal on crisis management and deposit insurance as an important step to increase the resilience of European financial markets in crisis situations and to address possible or actual failures of credit institutions within and across Member States.^[5]

While legislative reforms are essential to reduce fragmentation in the European banking sector in many different areas, it is equally important for banks themselves to take proactive steps. European banks should leverage their current profitability to invest in modernising their IT platforms, ensuring they remain competitive and continue to provide high-quality services to customers across several countries. By enhancing their IT capabilities and by developing integrated and tailored platforms, banks can overcome the constraints of outdated, fragmented IT systems and increase synergies and scale. This would enable smooth cross-border operations while providing a consistent customer experience throughout the EU. However, tailoring these platforms to align them with the diverse array of national laws, such as those related to consumer protection, can present challenges and incur additional costs. Nonetheless, these technological advances will improve efficiency and customer service while complementing regulatory efforts to create a more unified and competitive European banking landscape.