It outlines the main challenges that hinder the sector’s contribution to the EU economy, while laying out measures to address them. The Communication itself is not a legislative proposal, however it does mark the beginning of what is expected to be one of the most significant banking regulatory reform packages in recent times, with formal legislative proposals due in Q1 2027.

Key challenges identified

The Commission has identified three interconnected challenges limiting the sector’s competitiveness.

• Fragmentation along national lines: Cross-border integration of EU banking markets remains limited. The Commission identifies prudential requirements imposed at both group and subsidiary level as a key structural barrier. National gold-plating, divergent transposition of EU rules, and unjustified national interventions in bank mergers compound the problem. Non-prudential barriers, including differences in insolvency law, AML controls, taxation, and consumer protection rules, also limit cross-border activity.
• International standards not fully reflecting EU specificities: The EU applies Basel III standards to all banks, not just large internationally active ones, creating disproportionate burdens. Deviations and delays in implementing these standards in other major jurisdictions have also increased concerns about the competitive position of EU banks globally.
• Regulatory complexity: The multi-layered EU regulatory framework, spanning Level 1 legislation, Level 2 technical measures, and Level 3 supervisory guidance, has become unduly complex. Overlaps between microprudential, macroprudential, and resolution rules create duplications and limit buffer usability (the so-called capital stack issue). Reporting and disclosure requirements have become burdensome and, in many cases, duplicative.

Commission proposals

The Communication sets out a package of legislative and non-legislative measures for consideration by stakeholders.

Fostering integration with appropriate safeguards

To address prudential barriers to integration, the Commission will propose measures to allow cross-border banking groups to allocate capital and liquidity more efficiently across the EU, and empower group-wide supervisors to ensure that requirements are met at parent level and that sufficient resources are allocated to subsidiaries in a timely and enforceable manner. The Commission will also propose measures to harmonise the regulatory treatment of intragroup exposures at domestic and EU levels, and will address sovereign exposure concentration risk. The Commission will also use its enforcement toolkit against unjustified national interventions in bank mergers.

On national safeguards, the Commission will replace the 2015 legislative proposal to establish a European Deposit Insurance Scheme with a new proposal on the deposit insurance framework. The proposal will simplify the structure of the framework, align resolution and deposit insurance measures, address any remaining vulnerabilities of national deposit guarantee schemes to liquidity shortfalls, and ensure a cross-border banking failure does not unduly impact individual Member States. The Commission will also propose new measures to improve the predictability of group resolution strategies.

On non-prudential barriers, the Commission will work with the Anti-Money Laundering Authority to implement the EU’s single AML rulebook. It will also monitor the national application of consumer protection rules and assess whether gold-plating or inconsistent application is unnecessarily fragmenting the market.

Implementing international standards with greater proportionality

The Commission will make clear proposals on the output floor and its transitional arrangements on unrated corporate lending and residential mortgage lending, with a view to ensuring these are appropriately calibrated for EU market conditions. It will implement a long-term strategic approach to market-risk capital requirements (the Fundamental Review of the Trading Book / FRTB), monitoring international implementation efforts. The Commission will evaluate the regulatory treatment of trade finance, software assets and strategic investments funded via specialised lending. It will also explore what steps can be taken to ensure access to lending for the immaterial economy in general.

The Commission will propose a more clearly defined regulatory regime for small and less complex banks. It will also assess possible adjustments to the remuneration framework for material-risk takers to support the competitiveness of EU banks in attracting talent globally.

The Communication also addresses investment firms. Recognising the important role of investment firms in contributing to the depth and diversity of EU capital markets, including through the provision of liquidity, support for equity and debt issuances, and capital allocation, the Commission commits to proposing targeted changes to the prudential framework for investment firms. These will include amendments to the threshold structure, governance and remuneration requirements, building on the joint EBA and ESMA opinion on the functioning of the current investment firms’ prudential framework (PDF, 1.7 MB).

Simplifying the regulatory framework

The Communication sets out a range of simplification measures:

• Microprudential: More targeted application of Pillar 2 guidance; removal of Pillar 2 capital requirements related to the leverage ratio.
• Resolution: Revision of the MREL framework to align more closely with international standards and the introduction of a simpler, more automatic calibration; a streamlined permissions process for share buybacks and liability management; and more proportionate resolution planning requirements.
• Macroprudential: A revised framework to reduce the number of capital buffers and improve their design, alongside greater harmonisation of the Other Systemically Important Institutions (O-SII) framework.
• Reporting: Support for integrated prudential, statistical, and resolution reporting; targeted legislative changes to mandate the European Banking Authority (EBA) to deliver further proportionality, simplification, and automation of reporting; a review of existing EBA guidance to improve usability, and a rationalisation of existing EBA Q&As; support for review of, and reduction of, national and EU duplicative or unnecessary reporting burdens. Notably, the EBA has already implemented measures that, together with additional steps proposed in 2026, are expected to reduce the total number of data points in EU reporting frameworks by 50%.

The Commission also proposes action points to deal with the overlapping microprudential, resolution and macroprudential rules, including stronger coordination mechanisms between authorities, enhancing control mechanisms on how mandates are granted and applied, and considering the possibility of moving certain rules into directly applicable regulations.

Competitiveness as a shared responsibility

Significantly, the Commission frames competitiveness as a shared responsibility requiring a cultural shift. Regulators are called upon to focus on the risks that matter most for overall financial stability and to move away from a zero-tolerance risk culture. Banks are encouraged to take greater responsibility for applying regulatory requirements on the basis of materiality and to reduce excessive reliance on supervisory guidance. In this vein, the Commission intends to work with the EBA to draw a clearer distinction between binding and non-binding guidance. Overall, the intention is to encourage a move away from a banking environment that is hyper-prescriptive, overly complex and dominated by risk aversion.

The Commission also commits to reinforce its role in regularly reviewing the functioning of the European banking system and its impact on the internal market, to ensure that supervisory and resolution activities remain effective, proportionate and supportive of EU competitiveness.

Next steps

Stakeholders are invited to provide feedback on the Communication through the European Commission’s Have Your Say platform. The Commission intends to publish a formal legislative package in Q1 2027, in line with the ‘One Europe, One Market’ roadmap (PDF, 213 KB). It remains to be seen whether the package will be presented as an “omnibus” dealing with all proposals, which is the Commission’s preference, or whether it will be split to facilitate a faster legislative process in respect of the less controversial elements.

If you require further information, please contact a member of the Financial Regulation Group  or your usual Arthur Cox contact.