The European Commission is poised to propose a significant overhaul of banking regulations, particularly regarding how capital and liquidity are managed across banking groups. The draft report, initially reported by the Financial Times, suggests moving compliance focus from individual subsidiary levels to the parent entity. This change aims to reduce regulatory fragmentation that has hindered EU banks' competitiveness. The European Central Bank has been a proponent of this shift, arguing that national ring-fencing traps approximately $225 billion in capital and $250 billion in liquidity within subsidiaries, preventing these resources from being deployed more broadly across the group.
This proposed deregulation could unlock substantial lending capacity. According to industry estimates, simplifying these rules while maintaining financial resilience could boost lending by over $2 trillion. Spain's AEB banking association head, Alejandra Kindelan, supported this figure, highlighting that the current framework constrains lending. The European Banking Federation estimates that the EU faces a widening $1.4 trillion annual investment gap, which impacts its economic growth objectives.
Beyond capital requirements, the draft report also suggests reforms to bank deposit insurance schemes and capital requirements for investment firms. To mitigate the risk of undercapitalized subsidiaries under a group-level compliance model, the proposal includes a potential new legal power. This power would enable supervisors to mandate that a parent entity transfer assets to a subsidiary if necessary, serving as a safeguard. The Commission's final report is expected next month, with legislative proposals anticipated in 2027.
