The European Union is accelerating the reform of its banking system to raise its economic competitiveness

BRUSSELS, July 21, 2017 (WAM) – The European Union is moving to accelerate broad reforms in the banking system, in a move aimed at enhancing the financial sector’s ability to finance economic growth, improving the efficiency of capital allocation, and raising the competitiveness of the European economy in the face of global challenges, especially in the areas of technology, green transformation, and defense.

These reforms come at a time when the Union’s needs for huge investments to support strategic sectors are increasing. The European Commission estimates that the Union needs about 1.2 trillion euros annually to finance the areas of clean technology, artificial intelligence, defense industries, and economic modernization programs.

Brussels believes that meeting these needs requires mobilizing private capital more efficiently, and not relying on government funding alone.

Despite the successes achieved by the banking union project over the past decade, the European Commission confirms that the European banking market still suffers from regulatory fragmentation resulting from national barriers, which limits the movement of capital between member states, restricts the ability of banks to direct financing to the regions and sectors most in need, and also affects the opportunities for companies and families to obtain credit.

The European Commission, within the framework of a reform project published in Brussels, proposed a package of measures aimed at revitalizing cross-border banking operations, simplifying supervision and control mechanisms, and enhancing integration between the banking system and capital markets through the “Savings and Investment Union” initiative. The plan is scheduled to be presented in its official form during the first quarter of 2027.

One of the most prominent aspects of the reform is to ease restrictions imposed on the management of capital and liquidity within banking groups operating in more than one European country. Currently, regulatory rules require banks to maintain separate levels of capital and liquidity within each country in which they operate, which enhances local stability, but reduces the flexibility of using financial resources at the union level.

To address this problem, the Commission proposes to strengthen supervision at the level of the entire banking group, so that the European Central Bank, in coordination with national supervisory authorities, will supervise major banks with cross-border activity, allowing for more efficient management of capital and liquidity within the group.

Experts believe that these amendments could lead to reducing regulatory compliance costs, improving the efficiency of allocating financial resources, and increasing the ability of banks to expand lending operations within the European single market, in a way that supports investment and economic growth.

The European Commission stresses that deepening banking integration will not come at the expense of financial stability. Parent banks will remain obligated to ensure that their subsidiaries have sufficient levels of capital and liquidity to face normal conditions and potential crises.

The proposed reforms also include enhancing depositor protection, reducing the risks associated with the concentration of bank investments in government bonds, in addition to unifying the rules regulating anti-money laundering, enhancing consumer protection, and developing digital banking services, which contributes to establishing a more integrated and efficient European banking market.

Observers believe that these reforms reflect a shift in the European outlook on the banking sector. The goal is no longer limited to ensuring financial stability, but rather the banking system has become a major tool for mobilizing private capital and directing it towards sectors that represent engines of future growth. The continued fragmentation of financial markets may weaken Europe’s ability to compete in the race to attract global investments, especially in light of the intense competition with the United States and China in the areas of technology, innovation, and strategic industries.

It is expected that, if these reforms are approved and implemented successfully, they will contribute to enhancing the freedom of movement of capital within the European Union, providing a stronger financing base to support the green transition and technological progress, and enhancing the competitiveness of the European economy, while the main challenge remains to achieve a balance between increasing the flexibility of the movement of funds and maintaining the strength and stability of the European financial system.

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