Fireside chat

Conversation between Frank Elderson, Vice-Chair of the Supervisory Board of the ECB and Member of the Executive Board of the ECB, and Marlene Schörner, Policy Fellow for EU Financial Markets at the Jacques Delors Centre at the “Fewer Rules or Fewer Borders? What Our Banks Need to Finance Europe’s Future’’ event organised by the Hertie School of Governance, Berlin

8 September 2026

European banks are doing much better than they used to. Their profitability has caught up with that of US banks since the pandemic, and cost-to-income ratios in the EU are now better than in the United States. Asset quality is also improving: the NPL ratio has fallen from 6% in 2015 to 2%, and mergers seem to be accelerating. Why are we still talking about a competitiveness problem?

European banks are indeed in a strong position: not only do they now have more capital, more liquidity and better risk management frameworks, their profitability has also improved remarkably. For example, banks’ return on equity has recovered significantly and stabilised at around 10%, reaching some of the highest levels observed since the establishment of the Single Supervisory Mechanism (SSM). Our latest supervisory statistics, to be published next week, will confirm this positive trend.

Investors are increasingly recognising this progress. The valuation gap with US banks has narrowed significantly, with the average price-to-book ratio of European banks now standing close to 1.5. This demonstrates an important point: resilience, competitiveness and profitability are not conflicting objectives for banks. On the contrary, they reinforce one another.

Importantly, banks that are both resilient and competitive deliver a double dividend: they are better able to withstand shocks, but also better able to continue financing households and businesses when the economy needs them most – just as they did during the pandemic or during the energy shock following Russia’s war against Ukraine.

The more interesting question, however, is not whether European banks are competitive today. It is whether they will remain competitive tomorrow and in years to come.

Competitiveness cannot be captured by a single metric such as current profitability. It depends on whether banks are resilient, efficient and innovative, whether they can deploy new technologies timely and effectively and whether the regulatory and market environment enables them to invest, adapt and compete over time.

So important questions that we have been asking are: do banks have sustainable business models that remain profitable across the economic cycle? Are banks well placed to defend their central role in an increasingly digital financial system with new innovative players entering? Do banks cater for more demanding customers, providing easy access to capital markets and attractive saving products? Are banks able and willing to make the necessary investments in cutting-edge technologies such as artificial intelligence (AI) to improve their product offering and internal risk management?

On these questions, the ECB – alongside many other stakeholders in the debate – has reached a clear diagnosis: the main constraint to the long-term competitiveness of European banks is persisting fragmentation along national lines.^[1]

The truth is that today, Europe still lacks a truly integrated banking market. Consider that banks grant around 80% of their loans to households and firms in their own country, less than 2% of bank deposits are held in another country, and cross-border merger activity has fallen sharply since the pre-crisis years. Put simply, the Single Market in banking remains far from single.

This matters because fragmentation limits the ability of euro area banks to build pan-European business models and scale up their activity. And limited scale puts European banks at a disadvantage compared with global competitors when it comes to mobilising the large investments needed for digitalisation, deploying AI, strengthening cyber resilience and developing innovative services.

Fragmentation also reduces banks’ ability to channel savings efficiently across Europe and support the investment needed for the digital and green transitions, defence spending and Europe’s broader strategic priorities. And finally, the lack of well executed cross-border mergers means that banks are not reaching the scale needed to generate significant cost-savings and diversification in their revenue streams.

As you just mentioned, the EU is facing huge investment needs, from the green and digital transition to strengthening its defence capabilities in a new and much more hostile geopolitical environment. Some of these financing needs will be covered through public investment, but most of this capital will need to come from the private sector. Are Europe’s banks currently equipped to finance this investment challenge – and if not, what needs to change?

As Europeans, we have come to realise that we are living through a true Zeitenwende, as this transformative period has been aptly described here in Germany. In an increasingly hostile geopolitical environment – with headwinds coming from the east but increasingly also from the west – we need to take our future into our own hands. And to make sure that our fate is not determined elsewhere, we must strengthen our strategic autonomy. This is true not only for Europe’s energy independence and payment infrastructure, but also for our defence capabilities and digital infrastructure, including AI.

Boosting our autonomy requires investment on an unprecedented scale: consider that based on an analysis by the ECB, the EU requires around €1.2 trillion to meet its green, digital and defence goals. Not just in total, ‒ every single year until 2030. Financing investment at this magnitude requires banks that can operate seamlessly across borders, diversify risks across the Union and allocate capital wherever it is most productive.

This is why any serious conversation about competitiveness must begin with a time‑bound roadmap towards completing the Single Market. In banking this means that the euro area needs to function much more as a single jurisdiction for the purpose of financial regulation, with capital and liquidity able to flow freely within cross‑border banking groups. To break the current deadlock, we need synchronised progress on the core elements of the banking union – most importantly, concrete steps towards establishing a European deposit insurance scheme, with a clear timetable for implementation.

At the same time, we should be clear about what banks can and cannot do. Banks are indispensable providers of credit, especially for households and small and medium-sized enterprises (SMEs). But many of the investments needed to modernise Europe’s economy also require risk-bearing capital. New technologies, innovative start-up firms and high-growth sectors often need equity financing rather than debt financing.

That is why deepening the integration of capital markets by advancing this dimension of the savings and investments union is equally important. And banks themselves would benefit from deeper and more integrated capital markets through greater opportunities to develop market-based sources of financing and diversify to more fee based business. This is why advancing capital market and banking market integration in parallel as part of the savings and investments union is so important.

Do we really have a financing issue here? We have little evidence of a credit crunch, and, for instance, some reports on financing the green transition identify that the problem lies on the real economy side, where uncertain demand, a lack of policy certainty and cumbersome permitting procedures lead to a lack of investable projects. So would it even help to lower banks’ capital requirements to boost financing?

We have looked carefully at whether capital requirements in Europe are having an impact on banks’ competitiveness and lending to the real economy. European capital requirements are generally aligned with the Basel framework and are broadly comparable to those applied in other major jurisdictions. We do not see any evidence that current capital requirements have constrained lending.^[2] The higher capital requirements applied since the financial crisis have not impaired banks’ ability to lend to the economy. On the contrary, strong capital positions are essential for banks to withstand shocks while continuing to provide financing to households and firms.^[3]

The more fundamental challenge is that access to credit is only one side of the equation.

The bigger challenge to credit comes more from the demand side of the economy, as banks crucially depend on a dynamic real economy to do business. Banks can provide loans, but firms ultimately need to have reasons to invest. When firms are pessimistic about the future, lowering the cost of credit by a few basis points is unlikely, on its own, to create a wave of investment. Lowering prudential requirements would not therefore automatically deliver gains in competitiveness or unlock lending volumes as some expect and could also be used by banks to increase shareholder payouts. Instead, revitalising growth in the real economy would increase credit demand and thus lead to higher lending volumes.

Ultimately strengthening Europe’s competitiveness requires progress in both the real economy and the financial system. Europe needs to become better at turning savings into investment, investment into innovation and innovation into productivity growth. That requires a broad agenda: deeper and more integrated capital markets, a completed banking union, a stronger Single Market, faster diffusion of digital and AI technologies and a business environment in which firms can scale up across borders. Strong banks have a vital role to play in financing that transformation, but for productivity challenges in the real economy, technology deployment, investment in infrastructure, skills and structural reforms all play an important role.

For the German context specifically, the Bundesbank does not find evidence that higher capital requirements hamper German banks’ lending to enterprises and households. On the contrary, banks with a CET1 ratio of above 14% increased lending to the real economy by up to 3.6% during the pandemic and the subsequent energy price shock, compared with 2.6% for banks with a CET1 ratio of below 12%. Capital therefore appears to be an important foundation for lending, not a barrier to it.

Moreover, the Bundesbank recently conducted a survey covering institutions representing around half of German banking assets, which found that capital is rarely the reason banks lose lending mandates with clients. Instead, this is typically determined by factors such as efficiency, risk appetite and customer proximity.

On 17 July the European Commission published its long-awaited report on the competitiveness of the European banking sector. Which reforms do you consider most important to strengthen Europe’s banking system, and how important is completing the banking union?

I welcome the report because its diagnosis of the competitiveness challenge European banks face is spot on: European banks are not held back by resilience, they are held back by fragmentation, unwarranted complexity and the fact that Europe’s financial market is still not fully integrated.

The Commission report rightly recognises that advancing the savings and investments union, fostering market integration and reducing unnecessary complexity should all be priorities. The largest and most durable gains are likely to come from reducing fragmentation and making the Single Market in banking work more effectively. A more integrated market would allow banks to operate more efficiently, allocate capital more effectively and better support households and businesses across Europe, including in years to come.

To bring us closer to that goal we need synchronised progress on two sides of the same coin: market integration and simplification. They are not alternative pathways. They are mutually reinforcing. Simplifying regulation, supervision and reporting or removing unnecessary complexity and duplication is key to enabling banks to focus on managing risks, investing and serving customers. It is important to keep in mind, though, that while simplification can make the framework more efficient, its impact will be far greater if it goes hand in hand with reforms that tackle the structural barriers that are still causing fragmentation in Europe’s banking market. This is why any serious competitiveness agenda needs to make sure integration and simplification move in parallel.

More specifically, on your question regarding the banking union: taking concrete steps towards finalising a European deposit insurance scheme (EDIS) with a clear implementation timeline remains paramount. This would ensure that deposit safety is perceived in the same way across the Union, improve risk diversification, allow capital and liquidity to flow freely within cross-border groups and remove obstacles for banks operating across borders – thereby helping them to scale up. Without losing sight of the goal of a fully-fledged EDIS, interim steps deserve consideration – for instance, allowing the largest and most internationally active banks, including their subsidiaries, to first join a single deposit guarantee scheme. Such a step could already significantly ease home-host concerns, foster financial stability, and thereby advance the overarching aim of cross-border integration.

For banks that compete in certain segments, like market-based and investment banking services, scale, technological investment, global reach and economies of scale and scope are particularly relevant. One promising path for euro area banks to improve their operating efficiency and reap the benefits of economies of scale is through consolidation. From a supervisory perspective, we have repeatedly stressed that we see the benefits of well executed cross-border mergers and have been crystal clear that we will not obstruct consolidation efforts, provided that the limitative set of regulatory criteria are met. These criteria essentially ensure that a merger results in the formation of a safe and sound bank.

Completing the banking union has been on the EU’s political agenda for well over a decade. But decisive steps have repeatedly been blocked by disagreements among Member States, including Germany. What has changed that could make another push successful this time?

In today’s far more fragmented geopolitical environment, I think that as Europeans we have come to recognise both the urgency of deeper integration and the costs of continued inaction.

Of course, Europe cannot solve all the challenges it faces on its own. But we can remove the barriers that we impose on ourselves – barriers that lead to significant welfare losses every single day.

According to the International Monetary Fund, internal barriers within the Single Market are estimated to be equivalent, on average, to a tariff of around 110% for services.^[4] Estimates by the OECD and the ECB paint a similar picture: costs associated with providing services across EU borders are still equivalent to a tariff of more than 90%, with the tariff equivalent for financial services standing above 60%.^[5]

That is a powerful reminder that significant obstacles to growth and prosperity are still of our own making.

And for tackling those barriers there is no excuse for delay, no justification for paralysis and no reason for inaction.

Europe has no shortage of strengths. We have abundant savings, world-class talent, innovative firms, strong institutions and the rule of law. What we still lack is a truly integrated financial system capable of mobilising these strengths at scale. That is why this moment represents a unique opportunity. We should use this window to make tangible, time-bound progress on the savings and investments union, complete the banking union and deepen capital markets.

This would act as a catalyst, making Europe once again a place where innovators, creators and doers seek opportunity in the world’s second largest market. In other words, the importance of completing the banking union and advancing capital market integration is also about strengthening Europe’s capacity to shape its own future in a more fragmented world.

Alongside integration, simplification is another key component of the debate on banking sector competitiveness. Where do you draw the line between useful simplification and deregulation that could ultimately undermine financial stability?

Simplification is about making the framework more efficient while preserving each authority’s effectiveness in delivering prudential objectives. In practice, this means reducing unnecessary complexity and overlaps, improving clarity and consistency, and streamlining processes where possible. Crucially, simplification is not about lowering resilience. It is about achieving the same prudential outcomes with a framework that is easier and more efficient.

When simplifying, we should therefore focus on the areas that offer the clearest gains: in European banking regulation this may come from more harmonisation through directly applicable regulations. Today, significant parts of the single rulebook are not yet truly single. The rulebook consists of a plethora of directives that must be transposed into national law, leading to divergence, and sometimes gold-plating. Shifting from directives to directly applicable regulations would support a genuinely single market and help prevent national gold‑plating. This is just another example of where simplification and integration can work very well together.

Simplification is also not a mechanism for raising – or lowering – capital requirements. The objective is a clearer, more proportionate, more risk-based and more coherent framework. For example, the risk-based capital stack in the EU is admittedly complex. With up to nine different layers of requirements and buffers, the system can be difficult to navigate. That’s why we think that while maintaining resilience, there is also room for simplification; for example, by merging the five existing macroprudential buffers into two. In short, we want simpler requirements, not lower requirements.

We also recognise that banks experience capital requirements as a whole. Overall capital demand reflects Pillar 1, Pillar 2 and the macroprudential buffers set by national authorities. Differences in national buffer frameworks can therefore contribute to variations across the banking union. With this in mind taking a holistic view of the overall level of capital demand at system level, abstracting from individual bank-level decisions, may merit some consideration going forward.

However, the holistic view must not obstruct the main goal of the capital and other prudential requirements to cover idiosyncratic risks of each individual bank.

As the prudential framework is simplified and coordination between authorities is improved, it will be important to preserve a central feature of effective supervision: the ability to identify and address the risks of individual banks. Common rules provide an essential, risk-based foundation, while banks can differ materially in terms of their business models, governance, controls and exposure to emerging risks. Supervisors therefore need sufficient scope to use bank-specific qualitative and quantitative measures where this is justified by the risk assessment.

Independent of the current discussion on legislative changes to the regulatory framework, already some time ago European banking supervision has already undergone significant reforms aimed at becoming more efficient, less complex and more focused on the risks that matter most. What prompted these reforms in the first place? What has changed in practice and do you still see scope for further simplification?

Indeed, the SSM is deeply invested in the simplification agenda. We are driving forward an ambitious agenda that reduces unwarranted complexities and increases the efficiency of the supervisory process. Concretely, the reform entails a review of several supervisory processes: shorter timelines, faster decisions, fewer requests for non-essential information and more focused assessments on what matters most. However, this is not just about processes: it’s about changing the culture of our supervisors and of banks. We don’t want supervisors and banks to discuss long lists of issues, without clear prioritisation. We want supervisors to identify the major risk drivers for each bank. And, once a severe weakness is identified, we expect banks to remediate it in a timely manner.

So in a nutshell: our simplification work does not mean light touch supervision; it means reducing procedural complexity and making supervision smarter, focusing more on the risks that matter most for each individual bank.

Over recent months we have moved from designing and planning to implementation.^[6] A good example is our ‘’Next-level supervision’’, where we have looked closely at all our supervisory processes to see whether we can speed them up, asking only for strictly necessary information and responding to banks quicker.

For example, in the second quarter of this year we reduced the processing times for capital-related decisions from several months to an average of less than six days.

Or take the approval of simple securitisation transactions as another example. As part of our simplification work we have reduced processing days for standardised and less risky securitisations from three months to an average of around seven days.

We are making on-site inspections shorter and more clearly aligned with the risks that matter most, without compromising on rigour or quality. On-site inspections are now being completed around 10% faster than before 2026. At the same time, in line with our risk-based approach, there will continue to be cases where inspections need to remain comprehensive.

For stress testing, we have reduced the number of data points that banks need to report by around 55% and are streamlining the stress test quality assurance process. This reduced unnecessary work for banks, while keeping the stress test robust, meaningful and focused on the relevant risks.

A key supervisory reporting package, the short-term exercise, has already been streamlined, reducing the number of data points by around 20%, and further reductions are planned.

Technology is another important enabler. For example, in fit and proper assessments, we are increasingly using digital tools and AI to process applications more efficiently. This allows us to shorten timelines significantly while fully preserving our objective of ensuring that only suitable individuals serve on banks’ management bodies.

Another example is our review of supervisory guidance: we looked carefully, one by one, at over a hundred publications containing supervisory expectations and good practices, to make them more concise and user-friendly. Around 40 publications have been discontinued, others have been revised in a targeted manner and several are undergoing a more in-depth review.

Or take our risk-based approach to the timely remediation of supervisory findings: thanks to a tiered follow-up process that is calibrated to the materiality and urgency of issues, supervisors and banks can focus on the most significant weaknesses, while addressing less material issues more proportionately. The overall aim is clearer prioritisation and faster risk reduction, while keeping key risks fully covered.

An additional example is our assessments of acquisitions of qualifying holdings and extensions of banking licences. These now also follow a more risk-based framework, with fewer interactions in straightforward cases and faster processing times as a result. This approach already covers around 50% of ECB decisions on authorisations and qualifying holding procedures, enabling supervisors to process lower-risk cases more quickly and focus their attention on higher-risk cases.

In sum, our simplification activities have already started to produce tangible benefits, and we will continue rolling out these initiatives throughout the year.

The German banking sector has a specific structure with the three pillars of public-sector banks, cooperative banks and commercial banks. What role does embedding further proportionality in the framework play?

The European banking landscape – and the German one even more so – is characterised by a diverse spectrum of banks, serving different financing needs. Alongside large internationally active banks, Germany has a dense network of savings banks and cooperative banks that play a vital role in financing households, SMEs and local communities. We very much welcome this diversity and believe that it’s a source of strength.

But it also means that a small regional bank should not have to deal with exactly the same reporting burden or supervisory processes as a large internationally active banking group with complex trading activities. This is precisely where proportionality comes into play. Proportionality is already deeply embedded within the European regulatory and supervisory approach. Consider, for example, that small and non-complex institutions (SNCIs) – banks that meet clear criteria for size, simplicity and limited trading activity – are only required to report up to 30% of the data that large banks must report. Around 75% of all less significant institutions (LSIs) in the euro area are currently classed as SNCIs.

At the same time we see room for embracing proportionality further. To do so, rather than creating a completely distinct small bank regime, the SNCI regime is the natural starting point. This would ensure that the risk-based nature of the prudential framework is retained for all banks. One option is for example to increasing the scope of eligible small banks. European supervisors have suggested that national authorities be allowed to raise the total assets threshold in the SNCI definition – from the current €5 billion to as high as €10 billion – if they see fit based on the size and structure of their domestic LSI sector.

Another option could be to reduce the frequency and granularity of certain supervisory activities, such as the Supervisory Review and Evaluation Process (SREP). As far as supervisory stress tests are concerned, exempting SNCIs from the regular bottom-up exercises (in which banks run and submit their own stress projections), relying instead on top-down approaches (in which the projections are run centrally by supervisors), could substantially ease the workload of almost 1,000 SNCIs.

As for reporting, various initiatives are already under way, with implementation planned for the near future. These include the addition of the SNCI category in the ECB FINREP Regulation, ensuring that all SNCIs benefit from a significant reduction in the volume of FINREP reporting compared with the full version (approximately 700 data points, versus around 13,500). Meanwhile, the planned revisions to the EBA ITS on supervisory reporting will result in the discontinuation of numerous templates, the elimination of overlaps and the exemption of SNCIs from certain templates.

Importantly, any simpler regime for smaller banks must also be accompanied by a credible, flexible and efficient crisis management framework for these institutions.

Proportionality should not be mistaken for simply reducing prudential standards for all smaller banks, irrespective of the risks this would generate. After all, depositors in smaller banks should be just as confident as those in larger institutions that their bank is subject to robust risk management standards. To preserve that confidence, our focus should be on proportionality measures that reduce unnecessary complexity, excessive prescriptiveness and undue compliance costs, without making banks less safe or causing them to lose track of the underlying risks.

Why is the integration agenda also particularly relevant for the German banking sector?

Let me return to the longer-term challenges to banks’ competitiveness that I outlined at the start. These challenges are not unique to Germany; they are shared across Europe.

The key questions are really: how can banks ensure that they remain resilient, strong and competitive not only today, but also in 2030 and beyond? How can they harness digitalisation to compete successfully with new market entrants? How can they leverage the technological revolution in AI and quantum computing to improve customer services, strengthen risk management and enhance efficiency?

The answer lies partly in some sort of scaling up, consolidation and integration. The investments required to remain competitive are substantial, whether in technology, cyber resilience or innovation. National markets alone – even the big ones – will not provide the scale and diversification needed. This is where integration becomes particularly relevant for Germany. German banks are deeply embedded in local communities and have a long standing tradition of relationship banking. That is a genuine strength which should be preserved. But local presence and European integration are not mutually exclusive. They can reinforce one another.

By operating more seamlessly across borders, banks can spread fixed investment costs across a larger customer base, diversify risks, unlock efficiencies and strengthen their ability to compete. Greater integration also creates opportunities for consolidation, allowing institutions to achieve the scale needed to thrive in an increasingly technology-driven financial sector.

Take cyber resilience as a concrete example. As cyber threats become more sophisticated, including through the use of AI models such as Mythos, banks must invest heavily to ensure that critical services remain available even when disruptions occur. Maintaining customers’ trust through secure and resilient services is not only a resilience objective, it is also a competitive necessity. Such investments are costly, and scale can make them easier to achieve.

Integration and Europeanisation should not be seen as moving towards a one-size-fits-all banking system. Europe’s banking diversity is an asset, and Germany’s three-pillar banking system is a case in point. The objective is not to replace local banking models, but to complement them with a more integrated approach that allows banks to invest, innovate and compete more effectively.

Hence, combining local presence with further Europeanisation are not mutually exclusive goals. Instead, they can go hand in hand, as the cooperative and savings banks systems across different European countries have shown.