Less regulation, more growth? It’s not that simple

Speech by Sharon Donnery, Member of the Supervisory Board of the ECB, at the SSM Senior Forum organised by A&O Shearman

Königstein im Taunus, 25 June 2025

Introduction

It’s a pleasure to be here at this year’s SSM Senior Forum.^[1] Thank you for inviting me to share the ECB’s perspective on a topic that continues to spark lively debate: the competitiveness of European banks.

Competitiveness. Simplification. Deregulation. These three words are everywhere – in Brussels, in bank boardrooms and at conferences like this one. But how often do we stop to ask: what do they actually mean? Too often, debates falter not because of true disagreement, but because we lack a shared understanding. We talk past each other.

So let me start by unpacking these concepts: what do they mean, how do they relate to each other and why does that matter? Only with a clear and common diagnosis can we have a meaningful debate.

Based on that diagnosis, I will then set out what I see as the key priorities to strengthen Europe’s competitiveness: completing the banking union, deepening capital markets and advancing the Single Market more broadly.^[2]

Finally, I will reflect on the role of supervision in supporting a robust and competitive European banking sector.

Framing the competitiveness debate

In the film “The Princess Bride”, the character Inigo Montoya famously says: “You keep using that word. I do not think it means what you think it means.” So, let me ask: when we talk about “competitiveness”, what do we actually mean?

According to Eurostat, competitiveness is “a measure of the comparative advantage or disadvantage of enterprises, industries, regions, countries or supranational economies like the European Union (EU) in selling their products in international markets”.^[3] It is fundamentally about the ability to generate high levels of income and employment on a sustainable basis while competing globally.

That’s a helpful starting point, but too often we conflate two distinct debates: the competitiveness of the European economy and that of the European banking sector.^[4] These are related, but not identical.

Yet, the lines between them often get blurred – sometimes inadvertently, sometimes perhaps because it makes for a more convenient narrative. When the two are conflated, it becomes easier to argue that what is perceived to be hindering the competitiveness of banks – so-called “overregulation” – also stands in the way of Europe’s economic competitiveness more broadly. This risks oversimplifying a far more complex reality.

Banks of all shapes and sizes play a vital role in our economies by channelling funds from savers to borrowers, enabling businesses to grow, households to buy homes and governments to finance public goods. They support innovation, employment and economic growth. Because of this, well-functioning banks are more than just private institutions: they serve a public good.

That’s precisely why they are regulated and supervised. Their decisions have far-reaching consequences, and when a bank fails, it’s not just the shareholders who suffer. It’s households, businesses and society at large who bear the burden, often for years to come.^[5] Our job as supervisors is to ensure that banks remain safe, resilient and capable of fulfilling their essential role – even in times of stress.

When we talk about Europe’s competitiveness challenge, we must be clear about the root cause. As Mario Draghi’s report^[6] convincingly shows, the widening GDP gap between the EU and the United States is primarily driven by weaker productivity growth in Europe. As Paul Krugman once quipped, “competitiveness” may just be a funny way of saying “productivity”.^[7]

And when it comes to productivity, economists largely agree that one key reason for the gap is that Europe is adopting digital technologies more slowly and is unable to fully capture the efficiency gains of the digital transformation. Many firms remain below the technological frontier. There could be a number of reasons for this, including limited management attention, short-term shareholder pressures and a lack of strategic focus on IT at the top. But the lack of a true Single Market amplifies these challenges.^[8] Removing barriers to the free movement of goods, services and capital – completing the Single Market – is the clearest path to unlocking that economic potential.^[9] In theory, the internet has removed many of the traditional limitations to economies of scale. Yet in practice, those limitations persist in Europe – not because of technology, but because of regulatory fragmentation.

But let’s return to the second strand of the debate: the competitiveness of Europe’s banking sector. Here, too, we must be precise. Competitiveness is a relative concept. It’s about how well European banks can compete with other actors – especially their international peers – for global business. And the US banking sector remains the most important comparator in this context. So, what is driving the relative decline in the profitability of European banks compared with their US peers?

To understand the current gap, we need to distinguish between two things: first, the structural differences between the euro area and US financial systems and, second, the different responses to the global financial crisis.

While the number of credit institutions is similar, the United States has a more concentrated banking market, with its largest players operating across the country. This allows the biggest US banks to exert more pricing power. On top of that, they operate in a more market-oriented financial system – one that has helped them scale up high-margin investment banking activities and dominate this business globally. The securitisation market in the United States – supported by government-sponsored enterprises – also allows banks to move certain mortgages off their balance sheets while collecting mortgage origination and servicing fees.^[10]

However, we also need to look back to the global financial crisis. While the shock was broadly symmetrical, the responses were not. The United States acted swiftly to recapitalise banks and clean up balance sheets. In Europe, the response was slower and complicated by the sovereign debt crisis, delaying the recovery and weakening trust in the banking sector for much longer. The profitability of European banks suffered as a result, leading to a lasting loss in global market share.

And here lies the twist: the problem was not too much resilience – it was too little. European banks entered the crisis with weaker capital positions^[11] and the response to the crisis was slower and more fragmented than elsewhere. But even once the immediate clean-up was underway, another obstacle remained: the absence of a truly integrated European banking market. Without a complete Single Market, European banks could not fully capitalise on their recovery. They were unable to fully benefit from economies of scale or allocate capital and liquidity in the EU as efficiently as their global peers in the United States.^[12] A lack of resilience was the root cause of the crisis but a lack of integration is what prevented a stronger and faster recovery. The answer to Europe’s banking challenge is not less regulation – it is more Europe.

Just as Europe learned that by pooling sovereignty, countries gain influence rather than losing it, we must recognise that by strengthening resilience, we don’t weaken competitiveness. We enable it. Resilience is not a constraint on competition – it is the foundation that makes it possible.

The claim that regulation hinders competitiveness is not new. In fact, it tends to resurface at predictable moments: when memories of previous crises begin to fade. The question isn’t whether we can afford resilience. It’s whether we can afford to compete without it. And history gives us a clear answer.^[13]

Research shows that a more stable banking sector reduces the negative impact of a banking crisis on GDP growth, thereby providing economic resilience during crisis periods.^[14] Well-capitalised banks don’t retreat in downturns – they continue lending. That’s exactly what we saw during the pandemic: banks were part of the solution, not the problem.

That said, we fully acknowledge that our regulatory framework is complex. So, we welcome the debate on simplification.

But let’s be clear: simplification must mean making the framework more efficient, more transparent and more proportionate, without sacrificing resilience.^[15] Undue deregulation, by contrast, means rolling back safeguards that protect us. And undermining resilience ultimately undermines competitiveness over time.

Fortunately, completing the Single Market and simplification go hand in hand. After all, what is simpler: applying one European regulation or complying with 27 different national regulations?

Policy priorities for a more competitive Europe

Let me now turn to what I see as the policy priorities to strengthen Europe’s competitiveness.

In the first part of my remarks, I argued that the central challenge for Europe’s competitiveness lies in its weak productivity growth. From a policy perspective, boosting productivity must therefore be the top priority.

That said, I am here today in my capacity as a supervisor to speak specifically about the competitiveness of European banks. Fortunately, the two issues are not unrelated. And the solution, in many ways, is the same: completing the Single Market. For the banking sector, this means pushing ahead with the banking union and deepening the integration of capital markets.

Completing the banking union

The European Parliament, in its most recent annual report on the banking union^[16], reaffirmed that the primary objective is to safeguard the stability of the banking sector in Europe and prevent the need for taxpayer-funded bailouts of banks at risk of failure.

However, the Parliament also noted that completing the banking union would be a positive step for both citizens and the EU economy – by strengthening the sector’s competitiveness and resilience, reducing systemic risk, enhancing consumer choice and improving access to finance across borders. Indeed, Nicolas Véron recently argued that it would be the most important step in enhancing the competitiveness of the European banking sector.^[17]

A complete banking union would enable credit to be allocated much more efficiently across the EU. And it would bring us closer to the vision of a truly single European banking system, where capital and liquidity flow freely and financing conditions no longer depend on national borders.

A complete banking union rests on three pillars: a Single Supervisory Mechanism, a Single Resolution Mechanism and a common deposit insurance scheme. While the first two are in place, the third is still missing. A European deposit insurance scheme (EDIS) would bring multiple benefits. First and foremost, it would offer depositors a more consistent level of protection across the EU – helping to build trust and potentially encouraging cross-border deposits. Because if trust in deposits continues to depend on where those deposits are located, the banking union will be a union in name only. As Mario Draghi said on the first anniversary of European banking supervision: “for money to be truly one […], deposits […] have to inspire the same level of confidence wherever they are located.”^[18]

EDIS would also ease concerns about banks’ host countries having to bear the full cost of their failure, reducing the pressure to ring-fence capital and liquidity. For banks, this would mean greater flexibility in managing resources across borders, making it more attractive to expand internationally.

Importantly, a common deposit insurance scheme would also strengthen confidence in Europe’s crisis management framework by showing that we are serious about sharing risks in a responsible way. And politically, progress on EDIS could pave the way for a more integrated Single Rulebook – one that enables cross-border liquidity and capital waivers and brings us closer to a truly unified banking market.

In this context, I remain convinced that much of the complexity in Europe’s regulatory framework is a by-product of national fragmentation. Instead of a single, harmonised rulebook, we still operate with a patchwork of nationally transposed directives across a broad range of financial legislation. This opens the door to undue differences in national implementation and makes it unnecessarily complex and costly for banks to operate across borders under such divergent conditions.

However, this fragmentation goes beyond the area of prudential regulation, which brings me to my next topic: the need to advance the integration of capital markets.

Integrating European capital markets

Earlier, I argued that the core of Europe’s competitiveness challenge lies in weak productivity growth, not in a lack of credit. But I would like to add some important context.

Europe’s financial system remains heavily reliant on bank lending. And while banks play a vital role in supporting the real economy, traditional lending is not necessarily always well suited to the needs of the young, high-risk firms that Europe requires in order to catch up to the technological frontier. In their scaling-up phase, innovative companies require more than just credit. They need access to risk capital, and to investors who bring not only funding, but also networks, experience and the willingness to take risks – even to fail.^[19]

This is why advancing the integration of Europe’s capital markets is essential for strengthening competitiveness and supporting long-term growth. Greater harmonisation must be a key priority. This means moving from a patchwork of national rules to a more unified framework by turning key directives into directly applicable regulations. Targeted alignment in areas such as corporate insolvency, accounting standards and securities law would go a long way in reducing legal uncertainty and lowering cross-border transaction costs. Just as importantly, we need a more integrated supervisory approach to ensure that the rules are applied consistently across Member States. Taken together, these steps would deepen capital markets, increase liquidity and make Europe a more attractive destination for investment and innovation.^[20]

Enhancing the efficiency and effectiveness of supervision

Let me now turn to my final point: the role of supervision in supporting a robust and competitive banking sector.

In spring 2023, nearly a decade after the start of European banking supervision and in the midst of renewed banking stress, the European Commission^[21] and an independent expert panel^[22] both concluded that ECB Banking Supervision had matured into an effective and forward-looking supervisory authority that ensures banks are well prepared for crises.

Building on this strong foundation, our focus has evolved. We are now moving from establishing a common supervisory framework to enhancing the efficiency, effectiveness and strategic focus of our work. Our aim is clear: to ensure that supervision remains proportionate, risk-based and fit for purpose in a rapidly evolving environment.

A key pillar of this transformation is the reform of our Supervisory Review and Evaluation Process (SREP). Following the expert review, we launched a comprehensive agenda to streamline supervisory processes while reinforcing our focus on material risks.

As part of this agenda, we are more closely integrating our supervisory tools to avoid multiple overlapping requests. Our processes have become more agile: decisions are clearer, faster and more risk-focused. In fit and proper assessments, for example – which make up over half of our decisions – we have reduced average turnaround times, and further streamlining is underway.

Digitalisation is playing a central role in this shift. New IT platforms like CASPER and the IMAS portal allow banks to validate submissions and track processes in real time.^[23] We are investing in data harmonisation and improving analytics to detect risks earlier and focus supervisory attention where it is most needed.

Simplification also means recognising where current practices are too resource-intensive. In the area of internal models, for instance, we are exploring more proportionate approval processes. At the same time, banks also have an important role to play. Maintaining overly complex or fragmented internal models can absorb disproportionate resources and complicate risk management, especially when applied to smaller portfolios or those with limited data. A more consistent and streamlined model landscape supports not only simplification, but also more effective and robust risk management.

Reliable reporting is essential, both for effective supervision and for banking, but today’s framework is too complex. National and European requirements often overlap and multiple authorities may collect similar data, which in some instances are then not used effectively. That is why we welcome initiatives to streamline reporting and promote data sharing.^[24] We are mapping the entire reporting landscape to identify outdated or redundant requirements and we are exploring ways to simplify, including through adjusted materiality thresholds.

Reducing complexity requires a joint effort – from supervisors, policymakers and banks alike.

As supervisors, we are committed to doing our part: streamlining decision-making, improving communication, ensuring stable supervisory methodologies and adjusting reporting requirements where possible. But simplification also requires action from the industry, through standardised products and more efficient structures that support a more integrated and navigable financial system.

Modern banks are complex and our regulatory framework reflects that complexity. Simplifying it – especially in areas like capital requirements – is possible but requires careful impact assessments.

Europe’s capital framework is undeniably complex. With up to nine different layers of requirements and buffers, each serving a specific purpose, the system can be difficult to navigate and, at times, creates unintended interactions. That complexity can and should be addressed but it must be done carefully. Any simplification needs to be guided by thorough impact assessments and must not come at the expense of resilience. The challenge is to strike the right balance: a framework that is both more transparent and easier to manage, while continuing to safeguard financial stability.

Conclusion

This vision may sound ambitious. To some, it may even seem like chasing a unicorn: a framework that is streamlined yet resilient, proportionate yet harmonised, more European yet still attentive to national realities.

But every morning, when I walk into the Eurotower, I am greeted by a quote by Václav Havel: “Without dreaming of a better Europe, we shall never build a better Europe.”

Thank you very much for your attention.