Banking supervision, integration and competitiveness in Europe

Keynote speech by Patrick Montagner, Member of the Supervisory Board of the ECB, at the European University Institute and Bank Policy Institute 2026 Research Conference on Banking Regulation

Florence, 18 May 2026

Thank you for inviting me to speak here today. There is currently a great deal of discussion about the future of banking regulation and supervision, about whether the frameworks built after the global financial crisis are still appropriate, and about competitiveness and modernisation. In Europe we have our own views on these issues, and I think we should state them confidently rather than cautiously.

The role played by banks in financing the European economy is different from the role they play in some other jurisdictions. Domestic credit provided by banks accounts for over 90% of GDP in the euro area, and euro area bank assets are equal to roughly twice euro area GDP.^[1]

What can we deduce from this? Two things. First, any severe shock in the European banking sector could have particularly severe economic consequences, as finding alternative sources of financing through capital markets is more difficult and the depositor protection framework is less complete. Second, there is a very strong case for robust, forward-looking supervision in Europe. Resilient banks and credible supervision are part of the foundation of economic stability.

What past failures can teach us

The most important lessons in banking supervision come from studying past crises. And bank failures tend to follow recognisable patterns.

Since the failure of Bankhaus Herstatt in 1974, which led authorities to create the Basel Committee on Banking Supervision, one lesson has remained broadly constant: banks depend critically on the confidence of their depositors, creditors and counterparties. When this confidence is lost, weaknesses can emerge very quickly. Weak governance and decisions that are inadequately challenged by boards and senior management, risk management frameworks that are technically sophisticated but insufficiently linked to the bank’s actual level of risk-taking, concentrations that are tolerated for too long because they are profitable, complacency about liquidity in benign conditions, underestimated operational deficiencies and slow remediation can all erode confidence, sometimes abruptly and with systemic consequences.

The succession of banking crises and economic shocks since the 1970s, culminating in the global financial crisis, showed that international cooperation and coordination are essential for all jurisdictions. The Basel Committee and the Financial Stability Board are cornerstones of the financial stability globally. The Basel framework has been continuously strengthened since the first accord in 1988. At the same time, experience has shown that when prudential requirements are tightened in one part of the system, some activities may move to less regulated segments. This is of course not a call for deregulation, but an argument for paying close attention to the loopholes, omissions and blind spots in the wider financial architecture, especially where risks can build up and spill over to the banking system.

The global financial crisis of 2007-09 displayed all of these patterns across multiple jurisdictions and business models. It also showed how quickly weaknesses in different parts of the system can cross borders and amplify each other. Two lessons from that crisis shaped the European response and remain, in my view, fully valid today.

The first lesson is that light supervision does not work, and it has repeatedly and expensively failed in the past. The supervisory literature presented at this conference makes this point in a variety of ways. One paper frames bank supervision as a process of producing information that is not available from public financial statements.^[2] Supervisors with genuine access to institutions see things that market participants cannot. Another paper shows that even when formal rules have been relaxed, active supervisory attention can prevent banks from taking the excessive risks that deregulation would otherwise encourage.^[3] These are arguments in favour of supervision that engages with banks, challenges them and intervenes when needed.

The second lesson is that fragmented rules and supervision are dangerous. The global financial crisis did not respect national borders, and neither did the transmission of its costs. When supervision is fragmented, different jurisdictions apply different standards, supervisory cultures diverge and the rules governing a banking group depend on where its subsidiaries are incorporated. The result is weaker oversight of the risks that matter most, for example concentrations and interconnections.

These two lessons are why the Basel Committee exists and why, in Europe, we responded to the global financial crisis by building a common regulatory and supervisory framework, rather than leaving each Member State to draw its own conclusions. This framework is not perfect, and it can certainly be improved. However, it was not a knee-jerk reaction but rather a considered response to very costly failures, designed to preserve financial stability and to support fair competition and the functioning of the Single Market.

The European response to these challenges has worked

The framework built since 2008 has, by any reasonable measure, worked.

Since the crisis, capital positions (both Common Equity Tier 1 and leverage ratios) have strengthened and non-performing loan ratios have fallen from 7.5% in 2015 to 1.9% today.^[4] European banks withstood the pandemic, the 2022 energy shock and the market tensions of 2023 without systemic disruption.

Profitability has also recovered. Euro area banks’ return on equity reached 9.5% in the fourth quarter of 2025. Price-to-book ratios are now close to 1.5 and the profitability gap with US peers has narrowed to around 2 percentage points.

What does this mean? In short, a resilient banking system can also be a profitable one. The stronger capital and governance standards that followed the global financial crisis did not prevent European banks from improving their returns as economic conditions evolved.

The financial regulations introduced since the global financial crisis must be preserved, even as the memory of the crisis fades and risks giving way to excessive optimism. One might ask whether momentum similar to that of the early 2000s is building. The financial sector is calling for less regulation and less supervision, and unregulated activities have grown dramatically, with increasingly strong links to the regulated sector. What we should favour, however, is the stability of the banking system, achieved by carefully adapting regulation and supervision to continuously evolving market practices and by tackling inconsistencies and unnecessary burdens, but without dismantling the current regulatory framework. It is worth recalling that, as some historians have shown, the deregulation of the 1980s was not shaped by financial stability and depositor protection but by other objectives. Fiscal pressures, monetary policy changes, international competition and low economic growth all contributed to the deregulation agenda.^[5] That reminder matters, because prudential frameworks should not be adjusted top address problems that originate elsewhere in the economy or in public finances.

Capital requirements and competitiveness: what the evidence shows

This brings me to capital requirements, which have been one of the core elements of banking regulation since the first Basel accord. In discussions about the competitiveness of European banks, the conversation often moves quickly to capital requirements. That instinct is understandable: capital requirements are quantifiable, ostensibly comparable and politically salient. But the evidence does not support the conclusion that EU banks are structurally disadvantaged by systematically stricter capital requirements than those of their international peers.

Recent ECB analysis^[6], which draws on a detailed comparison of the requirements in place in 2025 for large, internationally active banks on both sides of the Atlantic, reaches a carefully qualified but important conclusion. Although comparing banking systems with very different features is always complex, the notion that European banks are uniformly burdened with disproportionately high requirements relative to their US peers is not supported by the data until now.

This conclusion is in line with a growing body of recent work. One study^[7] finds that EU banks do not face disproportionately high supervisory requirements when rigorous comparisons are made. Another study^[8] reaches a similar conclusion for large banks under European banking supervision. A third study^[9] finds no statistically significant link between higher capital requirements and lower profit efficiency for euro area banks.

None of this means that calibration questions are irrelevant and that we should not give them more thought. Some prudential requirements or supervisory expectations related to specific activities or portfolios may well merit closer attention, especially when banks compete directly across jurisdictions. Within its supervisory remit, the ECB is committed to contributing towards this work as part of the broader simplification effort. But it means that Europe’s competitiveness challenge in banking cannot be diagnosed primarily as a capital stringency problem. If capital requirements are not the main explanation, we need to look elsewhere.

The solution for European banks: deepening single market integration

The Eurosystem’s response to the European Commission’s targeted consultation on EU banking sector competitiveness published last month contains an argument – which in my view is the most important in the current debate^[10] – that I have repeated constantly since I joined the ECB two years ago: the banking union still needs to be completed and strengthened.

We must remember that since the single market for banking was created, EU Member States have worked to remove any unnecessary barriers. We will only achieve the right balance between market efficiency and the public interest in safeguarding financial stability if we manage to remove all the protectionist obstacles that exist within the EU. A more integrated banking market would allow banks to operate within a genuinely single jurisdiction where a diverse mix of larger and smaller institutions would be able to serve different clients and different local economies. It would enable some banks to realise economies of scale and scope, and offer seamless services across borders. It would also reduce unnecessary complexity for smaller and medium-sized institutions, both of which find it harder than large banks to absorb the cost of complying with multiple national systems, legal frameworks and reporting requirements. Taking steps to achieve these conditions would have more of an impact in promoting European banks’ competitiveness than calibrating a particular capital requirement.

Let me explain why.

A European banking group operating across Member States is still unable to optimise the allocation of its resources. In practice, it cannot allocate capital and liquidity across the banking union as freely and efficiently as a banking group operating within a single national jurisdiction is able to.

Cross-border consolidation is also hampered by a patchwork of regulatory, governance and legal barriers. Mergers and acquisitions within the euro area tend to cluster around neighbouring countries or remain within national borders. The eight biggest US banks hold 55.2% of total US banking assets between them. In contrast, the eight biggest euro area banks hold 41.3% of euro area assets, i.e. a lower degree of concentration in a more fragmented market.^[11] This matters, because fragmentation prevents an efficient scale from being reached, which could improve service capacity, investment capability and resilience.

The third pillar of the banking union, the European deposit insurance scheme (EDIS), is still missing. The logic underlying the three-pillar architecture is that common supervision, common resolution and common deposit insurance will all reinforce each other. Common supervision ensures consistent standards, common resolution provides a framework for managing failing banks, while common deposit insurance would create the conditions for depositors to trust cross-border institutions in the same way they trust domestic ones. Without EDIS, national deposit guarantee schemes continue to play a central role, and national authorities retain strong incentives to ringfence resources within their borders, meaning that there is still no genuine integrated European banking market.

Completing the banking union is still a work in progress. The Eurosystem’s view is that its non-completion represents a real cost to European banks, the firms and households they serve, and Europe’s broader economic objectives. The answer is not to accept fragmentation as a permanent condition.

The practical policy agenda is clear. Capital and liquidity should be allowed to flow freely within cross-border banking groups in the banking union, subject to the same safeguards that apply when banking groups operate through different legal entities in a single Member State. Likewise, we should abolish the rule that requires banks to treat intragroup transactions with entities in other Member States differently from intragroup transactions with entities in the same Member State. The regulatory framework should be further harmonised by converting prudential directives into regulations, which would substantially reduce the differences that currently exist in incorporating directives into national legislation. As a result of these differences, there are effectively 27 different national legal environments, even in areas intended to be governed by common rules. That’s why we need to take concrete steps towards introducing the European deposit insurance scheme and establishing a clear and credible implementation timetable.

These reforms would make a structural difference to European banks’ competitiveness.

Simplifying supervision

I would also like to directly address the question of modernising and simplifying banking supervision, because it is central to the current debate and because the ECB’s position is sometimes misrepresented.

The ECB is not opposed to simplification. In fact, we are actively pursuing it. In December 2025 the ECB Governing Council endorsed 17 recommendations prepared by its High-Level Task Force on Simplification. These recommendations form the basis of a comprehensive programme covering the capital stack, macroprudential buffers, the stress test methodology, reporting requirements, the proportionality regime for smaller banks and the supervisory framework more broadly. ECB Banking Supervision has simultaneously embarked on major internal reforms, including to the Supervisory Review and Evaluation Process (SREP), the next-level supervision project that extends the SREP reform to areas such as decision-making, capital-related decisions and on-site inspections, and an initiative to promote a more unified supervisory culture. This is a genuine and substantial reform agenda, and it reflects a serious commitment to make supervision more focused, efficient and proportionate.

However, there is a version of simplification that we should make sure we separate from our own. That version proposes tackling complexity primarily by narrowing the scope of what supervision looks at and by confining supervisory attention to a defined set of quantifiable financial metrics, treating everything else as outside the supervisory mandate. According to this point of view, governance, risk management culture, operational resilience, business model sustainability and early remediation of identified weaknesses are all matters for management, not supervisors.

Our Vice-Chair addressed this question directly in a speech given in Washington DC last year.^[12] He argued that the drivers of bank fragility do not respect that perceived boundary. A supervisory model that limits itself to monitoring lagging financial indicators will not address problems like governance failures, weak risk management frameworks or high concentrations sufficiently early. It will identify them after they have already materialised as financial losses, i.e. when it is too late.

The research presented at this conference makes the same point from an academic angle.^[13] It shows that increased supervisory attention can prevent banks from taking excessive risks, even when formal rules are relaxed. Taking the ECB’s 2024 cyber resilience stress test as a reference, it also demonstrates that supervisory scrutiny measurably increased cybersecurity investment among laggard institutions. These effects are invisible in a supervisory model that restricts itself to checking financial ratios.

From the ECB’s perspective, simplification means removing complexity that does not serve prudential objectives. It means having clearer priorities and more predictable processes. It means greater proportionality, which is why we suggest expanding the small and non-complex institutions regime in a prudent and evidence-based way. It means reducing the number of macroprudential buffers, streamlining reporting and making the SREP more focused on the risks that matter most. We will continue to pay attention to all of these things.

Conclusion

Let me conclude by going back to the start.

Since the global financial crisis, Europe has built a stronger banking system that is better capitalised, more liquid and supported by a common supervisory framework that has raised consistency across a very diverse sector. Europe can be proud of its record in this area.

The challenge now is to complete this framework. Europe’s competitiveness problem is fundamentally a story of fragmentation. Banks are still not operating in a genuinely single European market, and the banking union remains incomplete in practice.

That is why the next steps are clear: complete the banking union, remove unnecessary obstacles to integration, and continue modernising supervision to make it simpler, more predictable and more effective, while continuing to pay close attention to the drivers of future fragility.

Thank you.