Competitiveness and simplification – a common agenda for European banks

Speech by Pedro Machado, Member of the Supervisory Board of the ECB, at the Expansión XVII Financial Forum

Madrid, 28 September 2026

It is a pleasure to be with you today to speak about two forces that will define the future of European banking: competitiveness and simplification.^[1] These are not two separate agendas running in parallel – they are deeply intertwined and go to the heart of how your institutions will operate, compete and serve the real economy in the years ahead. This is not a new argument. Writing as the Delors Report was being turned into the Maastricht Treaty, Tommaso Padoa-Schioppa observed that competition and integration in money and finance advance together: markets cannot produce the institutional framework they need when left to their own devices, and public action alone cannot conjure up the practices and habits that make a market work.^[2]

Let me start with a commonly asked question: are European banks competitive? A few years ago, this would have prompted a defensive answer. But today, the facts tell a different story. Their profitability has caught up with that of their US peers. Cost-to-income ratios now compare favourably. Asset quality has improved markedly. And returns on equity have stabilised near the highest levels since European banking supervision began. So why are we still talking about a competitiveness problem?

The answer lies in a common misconception: that there is a tension between resilience and competitiveness – that stronger capital and supervision come at the cost of banks’ ability to compete. I want to dispel that idea from the outset. Evidence shows that a well-capitalised, well-managed banking system is best placed to keep lending when the economy needs it most, to absorb shocks without pulling back from clients, and to invest with confidence rather than caution.^[3]

This is the framework for my remarks today. I will first discuss why fragmentation is a constraint on European banks’ competitiveness. I will then show how simplification is already delivering concrete results in day-to-day supervision – results I hope you will recognise from your own interactions, not least with your Joint Supervisory Teams (JSTs).

Competitiveness and fragmentation

Competitiveness cannot be judged by a single quarter’s profitability figures. It hinges on whether banks are resilient, efficient and innovative, whether they can put technologies like artificial intelligence to work quickly and effectively, and whether the wider regulatory and market environment lets them invest, adapt and compete over time.^[4]

It is not a lack of resilience that is holding Europe’s banks back, but persistent fragmentation along national lines. The Draghi report identified the EU banking sector as a critical bottleneck for competitiveness precisely because of fragmentation, regulatory complexity and a lack of scale compared with US rivals.^[5] The figures speak for themselves. The overwhelming majority of bank lending stays within national borders, cross-border deposit-holding is virtually negligible, and cross-border bank mergers have become rarer than they were before the financial crisis.

The European Commission has since thrown its weight behind this diagnosis. On 17 July it adopted a Communication on the Competitiveness of the Banking Sector and the Single Market in Banking.^[6] The Communication draws on a targeted stakeholder consultation held earlier this year, to which the Eurosystem contributed.^[7] Tellingly, it converges on the same three interconnected challenges we have identified: fragmentation of the banking market along national lines, international standards that do not fully reflect EU specificities, and undue complexity in the regulatory framework. The Communication is not itself a legislative proposal – a comprehensive legislative package is expected in the first quarter of 2027 – but it signals that the direction we have been advocating for is now shared at the highest political level.

Why does this matter in practice? Fragmentation carries real costs; costs that you may recognise from your own strategic planning, for instance on digital transformation and service innovation. And with cross-border mergers remaining the exception rather than the rule, banks are missing out on the cost efficiencies and revenue diversification that come with greater scale. It is worth being precise, though, about where the gap with US peers actually lies. In terms of the traditional business of lending and taking deposits, European banks serve households, firms and governments well, and at lower interest margins than their US counterparts. The comparison is far less favourable when it comes to trading and post-trading activities, however – and this is precisely where scale, and a deep capital market in which to deploy this scale, really matters.^[8]

Clearly, national markets alone, even large ones, simply cannot provide the scale and diversification banks need to remain competitive.^[9] Fragmentation also shows up in the persistence of divergent national rules, notably governing insolvency, consumer protection and mortgage markets, that sit outside the harmonised Single Rulebook but still act as real barriers to integration.^[10] In trading-related activities alone, banks and other market participants have to navigate 27 different withholding tax regimes. This is a telling illustration of how fragmentation makes cross-border business both more expensive and less efficient.^[11] Taken together, these barriers mean Europe’s banks are less able to channel savings efficiently towards strategic priorities.

The scale of what is at stake is considerable. As the ECB has noted, any serious conversation about competitiveness must begin with a time-bound roadmap towards completing the Single Market. Internal barriers within the Single Market still act, in effect, like a substantial tariff on services, and the equivalent burden on financial services specifically remains stubbornly high. This is a powerful reminder that significant obstacles to growth and prosperity are still of our own making, and there is no excuse for not tackling them.^[12]

None of this reflects a shortage of underlying strengths. What is missing is a genuinely integrated financial system able to put those strengths to work at scale. That is precisely why completing the banking union matters so much, and why concrete progress towards a European deposit insurance scheme, on a clear implementation timetable, should remain a priority.

The ECB’s position here is clear: with cross-border deposit-holding still virtually negligible and deposit insurance still organised along national lines, failing to reach political consensus on this front would be a missed opportunity. It would leave fragmentation as an unresolved structural weakness precisely when Europe’s banks most need strengthening.^[13] An integrated framework would give savers the same sense of security wherever they hold their deposits, improve risk diversification and let capital and liquidity move freely within cross-border banking groups.

This is not purely a question of efficiency; it is also a question of resilience. The parallel is instructive: just as an electricity grid is more reliable when it is better connected across regions, a more integrated European banking system copes better with shocks because risks can be spread across a wider area and resources redeployed more efficiently.^[14]

Simplification in practice

If fragmentation is the structural constraint, simplification is something we can act on now. And the ECB has moved from designing measures to implementing them. Let me be clear about something we have said consistently: this is not deregulation. Simplification means achieving the same prudential outcomes with a clearer, more proportionate framework. It does not mean lowering the bar. Good supervision is judged not by the volume of letters or procedures it generates, but by how effectively it identifies the risks that matter. I know that, from where you sit, supervision is often experienced through its processes: timelines, documentation and resubmissions. That is exactly where we have focused our efforts.

Let me give you a few examples of what this means in practice:^[15]

• Faster capital decisions. Capital-related decisions that used to take several months, such as own funds reductions and standardised securitisations, can now be approved in around a week in eligible cases. Roughly 80% of applications for own funds reductions qualify for the fast track.
• Streamlined decision-making. We have moved more decisions down the organisation’s hierarchy, enabling senior managers to approve straightforward cases directly. This includes a growing share of decisions on qualifying holdings and licence extensions, in line with a more risk-based approach.
• A lighter reporting burden. We have cut the number of data points banks need to provide for EU-wide stress tests by roughly half. A key supervisory reporting package - the short-term exercise - has been streamlined. And a risk-based materiality threshold should significantly reduce the need for resubmissions of reports.
• More efficient on-site work. On-site inspections will be conducted more quickly, with shorter, more focused reports, without sacrificing accuracy.
• Updating the rulebook. We have reviewed more than 100 supervisory guides and are discontinuing many that are outdated.

But simplification has to go beyond processes. We also need to look at the regulatory architecture itself. Complexity in the rulebook carries costs, not only for supervisors, but also for banks as they plan their capital and communicate with boards and investors. The risk-based capital stack in the EU today comprises up to nine separate layers of requirements and buffers. That level of complexity serves neither banks nor supervisors well. And many of you have told us that it makes capital planning and market communication unnecessarily difficult. Consolidating the macroprudential buffers into a simpler two-tier structure, with a distinction between releasable and non-releasable buffers^[16], would preserve the same overall resilience while making the framework considerably easier to navigate and communicate.^[17]

Internal models are another area where we are putting greater emphasis on proportionality. For instance, a more risk-based approach to materiality will free up supervisory resources. This will allow us to concentrate on the cases that genuinely warrant closer scrutiny, such as outliers and idiosyncratic risks, rather than devoting the same level of supervisory attention to every case, regardless of risk.

Taken together, these are not marginal tweaks. They mark a genuine shift in the way we supervise: smarter, sharper and better calibrated to the risks that actually matter. And they prove that simplification need not come at the expense of rigour.

But let me also be candid about the road ahead. Simplification is not a one-off exercise that ends with a press release. It is a way of working that needs to evolve as markets, technology and risks change. The initiatives I have described are real and measurable, but they are a starting point, not an end point. So I encourage you to keep telling us, through your JSTs and in forums like this one, where you see further scope to simplify. This is a two-way process, and your operational experience is an important part of it.

Conclusion

There is no shortage of debate about simplification and competitiveness, whether at the ECB, at the Commission or among market participants such as yourselves. The priority now is to deliver. And delivery will require action from all of us. The Commission’s legislative package, expected in the first quarter of 2027, will be an important test of whether that shared diagnosis – fragmentation along national lines – translates into shared action.

Let me close with three points.

First, resilience and competitiveness are not in tension. A bank that is safe and sound is better placed to seize opportunities. The strongest contribution supervision can make to sustainable growth is to keep banks resilient, so they can continue to finance the economy through good times and bad.

Second, the fragmentation that has held Europe’s banks back for too long is not a law of nature. It reflects policy choices, and policy options can change. The barriers I have described today, including differences in insolvency regimes, national deposit insurance schemes and an overly complex capital stack, are not immutable. They can be addressed if there is sufficient political will. The convergence we are now seeing, from the Draghi report to the Commission’s July Communication, suggests that the willingness to act is there.

Third, simplification only works if it is grounded in a genuine dialogue. The reforms I have outlined were not developed in isolation. They reflect what we have learnt from the first decade of European banking supervision, informed by an independent external review^[18] and by the feedback we receive from banks through the supervisory dialogue and in forums like this one. That dialogue does not end today. On the contrary, it will become even more important as the Commission’s 2027 package takes shape and the ECB’s own simplification agenda moves into its next phase.

Integration and simplification are therefore not competing agendas but two sides of the same coin – each reinforces the other. Both are essential if Europe comes to rely on a banking sector capable of financing its energy and digital transitions and supporting its pursuit of strategic autonomy.

In the spirit of simplification, let me leave you with one message. We will not make Europe’s banks more competitive by lowering the bar, but rather by overcoming the fragmentation that could limit scale and by making supervision and regulation simpler and more proportionate while preserving resilience.

I will finish where the architects of monetary union began. Padoa-Schioppa compared the project to a jigsaw puzzle whose remaining pieces might seem incompatible, impossible to place or even as though they belonged to a different puzzle altogether. His warning was not to discard any piece before the overall design was complete.

Banking union is still a puzzle we are assembling and our task is to put the remaining pieces in place.