Reforming EU banking regulations
Jesper Berg and Hans Geeroms are Non-Resident Fellows at Bruegel
Strong financial regulation provides benefits that often outweigh its costs. The financial sector requires close supervision because it channels private savings into the economy in a situation in which financial service providers understand finance much better than those they provide services to. Banks can also be so large (‘systemic’) that they pose a threat to financial stability, as seen nearly 20 years ago during the global financial crisis.
Nevertheless, the financial industry typically argues for less-strict regulation. Some European Union bank supervisors have joined the chorus, including the European Central Bank (ECB 2025, 2026), Germany’s Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, Bafin) and central bank (Bundesbank 2025), authorities in Nordic countries1 and the National Bank of Belgium (NBB 2026). Mario Draghi in his report on competitiveness for the European Commission said financial regulation had become too complex (Draghi 2024). The Dutch, German, French, Italian, Polish and Spanish finance ministers in March 2026 also called jointly for a simplification push2.
In mid-July, the European Commission is due to publish a report on the competitiveness of the EU banking sector, which may take up these ideas3. To better understand the current debate on bank regulation, it is worth looking at the most interesting elements of three sets of proposals:
1. An ECB report published in December 2025 on possible simplification (ECB 2025a);
2. Bafin/Bundesbank (2025) on a simpler regime for small and non-complex banks;
3. October 2025 proposals from the European Banking Authority on the efficiency of the regulatory and supervisory framework (EBA 2025).
These proposals can be measured against a metric of whether they provide for simplification while not lowering regulatory standards. A secondary test is whether they would reduce complexity. The most promising proposal among those we review is a simpler regulatory regime, with safeguards, for smaller and non-complex banks.
Simplification proposals
The European Central Bank
A report written by an ECB High Level Task Force on Simplification (ECB 2025a) made numerous recommendations, most of which are not especially new and are unlikely to lower standards or have a substantial impact on simplification4. Many recommendations concentrate on regulatory and reporting simplification.
However, three recommendations that touch on capital buffers that banks must hold as a safeguard are potentially concerning.
1. A proposal to reduce the number of capital elements in the prudential framework;
2. A recommendation that adjustments should be made to the design or roles of capital intended to absorb losses while a bank remains a going concern (known as Additional Tier 1 (AT1) capital) and capital to absorb losses once a bank fails (Tier 2);
3. Closer alignment of the EU Minimum Requirement for Own Funds and Eligible Liabilities (MREL) and the international Total Loss-Absorbing Capacity (TLAC) frameworks (standards for bank safety nets in case of financial crisis or bankruptcy), while reviewing how these interact with the going-concern framework. The EU introduced the stricter MREL standard in reforms in the mid-2010s, in advance of the entry into effect of TLAC in 2019.
These changes could lead to banks being required to hold less capital, potentially increasing the risk of bank failures. The capital requirements are admittedly complex. However, if elements are removed, the sum of capital requirements should not be reduced. Lowering capital requirements by removing certain elements would be simplification that lowers standards. Maintaining capital requirements while removing elements would be simplification without reducing standards.
AT1 mostly serves to generate profits for the investment banks that sell the assets that underpin it. AT1 has value for banks because it is uncertain, if a problem arises, whether authorities will impose losses on AT1 or resort to bail-in. This reduces the cost of AT1 to the banks but at a cost to taxpayers. AT1 should be abolished to create greater certainty in resolution. It should be replaced by Common Equity Tier 1 (CET1) – the highest standard of capital. However, that would likely create an industry outcry.
The changes to align the MREL and TLAC requirements would be in line with some calls to reduce complexity by defaulting to TLAC, improve the efficient use of capital in Europe and reduce reliance on costly third-party markets5. This alignment is referred to as TLAC+. It is important that TLAC+ is not defined in a way that reduces capital requirements.
The Bafin/Bundesbank proposals
Bafin and the Bundesbank in a joint paper (Bafin/Bundesbank 2025) proposed a special regulatory regime for smaller and non-complex banks6. They have in mind the Sparkassen (savings banks) and Genossenschaftsbanken (cooperative banks), which dominate the German financial landscape, together with the two German globally systemic banks, Deutsche Bank and Commerzbank.
Smaller EU banks with total assets below €10 billion and simple business models, are subject to a disproportionate regulatory burden compared to their systemic risk, according to Bafin/Bundesbank (2025). These banks should be able to opt out of EU requirements7 that are based on the Basel standards for large international banks, including increasingly complex capital and liquidity requirements. They should be subject instead to a simpler, more proportional supervisory regime. This would replace risk-based capital standards with a leverage ratio, while streamlining reporting and stress-testing procedures.
A more proportionate regulatory framework for smaller EU banks (in the jargon: Less Significant Institutions, LSIs) can offer advantages. Nevertheless, history shows that multiple LSIs encountering difficulties simultaneously – especially because of comparable underlying factors – may collectively exert a systemic effect on the financial sector. For example, about 25 smaller UK banks failed between 1991 and 1994 because of a crash in the domestic property market (Hindmoor and McConnell 2014).
Simpler standards for smaller banks should therefore be calibrated conservatively. Replacing risk-based capital requirements with a leverage ratio could otherwise encourage banks to increase their exposures to higher-risk assets.
Accordingly, the leverage ratio should be set above risk-weighted capital requirements and complemented by restrictions on activities such as securitisation and private-equity financing. Supervisors should also have powers to prevent regulatory arbitrage or inappropriate risk-taking, and to require banks to return to the full regulatory regime where necessary.
To preserve a level playing field, the largest small banks could opt into the larger-bank regime. If few do so, standards under the small-bank regime should be tightened.
With these safeguards, there is a strong case for not applying the strictest capital-buffer requirements to smaller banks.
The financial sector requires close supervision because it channels private savings into the economy in a situation in which financial service providers understand finance much better than those they provide services to
European Banking Authority proposals
The EBA’s recommendations cover, among other things, the production of technical standards and guidelines addressed to financial institutions – the EBA’s core task8. In this area, the EBA proposes a new review methodology, a review of the existing rulebook and steps to make it more accessible (see Table 2 in the appendix).
The production of such technical standards and guidance suffers from at least three problems. First, such standards and guidance are produced when needed for the implementation of EU financial laws via secondary legislation. Issues that cannot be agreed in the top-level lawmaking process are pushed into secondary lawmaking (technical and implementing measures), recourse to which has exploded9. Many secondary laws go well beyond their initially more technical aim10.
Second, secondary acts are drafted by groups of specialists from all national authorities. They all have their own ways of doing things and the result is the sum of all approaches. Third, drafts then move through subcommittees and are finally approved by the EBA Board of Supervisors (BoS), the members of which are briefed by their specialists. Therefore, the BoS is rarely able to take a holistic view and make substantial changes.
To break this pattern, a change of culture is needed at all stages of the process. In this respect, the EBA has made the right proposals – but they must be delivered on. Peer reviews can strengthen mutual understanding of best practice, but legislative changes have made the process more adversarial between the EBA and the National Competent Authorities that work with the EBA11.
Simplification should not spill over into lower standards
There is some justification for the view that EU financial regulation has become too complex. In this context, the ECB, Bundesbank/Bafin and EBA proposals – primarily on restructuring capital buffers and introducing a lighter-touch regime for smaller banks – deserve closer analysis. Proposals should be assessed according to two criteria: whether they make a difference, and whether they would lower standards.
A more proportionate framework for smaller, non-complex banks would be the most obvious win from a simplification push, provided it is calibrated conservatively and accompanied by robust safeguards against systemic risk and regulatory arbitrage. Other simplification proposals are more questionable. The main danger is that the simplification debate will spill over into lower standards, particularly if a strong bank lobby uses simplification to push for lower capital standards.
Current capital and liquidity standards ensure well-capitalised banks and support long-term investment in Europe (Berg et al 2025). The global financial crisis cost the euro area about 9 percent of GDP (Chen et al 2019); that disaster should not be repeated.
Endnotes
1. See Swedish National Debt Office news of 9 May 2025, ‘Debt Office in joint letter to EBA on rulebook for banking crisis management’.
2. The so-called E6. See ‘E6 Letter – Advancing the Savings and Investments Union: An Imperative for European Competitiveness’, 11 March 2026.
3. European Commission, ‘Targeted consultation on the competitiveness of the EU banking sector’, 11 February 2026.
4. Along with the High Level Task Force on Simplification report, the ECB published a report on banking supervision and simplifying macroprudential policy (ECB 2025b). See Table 1 in the appendix for further details of ECB recommendations.
5. See French Banking Federation, ‘Improving the financing of the European economy: proposals of the FBF’, 15 December 2025, and Villeroy de Galhau (2025).
6. See also Michael Theurer and Mark Branson, ‘Europe’s small banks need simplified rules’, Frankfurter Allgemeine Zeitung, 12 September 2025.
7. The Capital Requirements Directive (CRD, Directive 2013/36/EU) and the Capital Requirements Regulation (CRR, Regulation (EU) No 575/2013).
8. In technical languages, guidance is provided in response to Level 2 and Level 3 mandates; see European Commission, ‘Regulatory process in financial services’, undated.
9. The most recent CRD/CRR update (see footnote 5) required more than 50 delegated acts. Anti-money laundering rules finalised in 2024 required close to 20 delegated acts.
10. A prominent example was the technical standards issued in 2014 laying out the definition of liquid assets for the purposes liquidity requirements, as required by Art. 460 CRR; see EBA press release of 28 March 2014, ‘EBA publishes final draft Technical Standards on liquidity requirements’
11. Including by reducing the role of the BoS and giving more power to EBA staff (as done in Regulation (EU) 2019/2175 of 18 December 2019.
References
Bafin/Bundesbank (2025) ‘A Simple Regulatory Regime for Small and Non-Complex EU Banks’, unpublished non-paper, August
Berg, J, N Boivin and H Geeroms (2025) ‘The quickly fading memory of why and when bank capital is important’, Working Paper 04/2025, Bruegel.
Chen, W, M Mrkaic and M Nabar (2019) ‘The Global Economic Recovery 10 Years after the 2008 Financial Crisis’, IMF Working Paper 2019/083, International Monetary Fund.
Draghi, M (2024) The future of European competitiveness, Publications Office of the European Union.
EBA (2025) Report on the Efficiency of the Regulatory and Supervisory Framework, European Banking Authority.
ECB (2025a) Simplification of the European prudential regulatory, supervisory and reporting framework, European Central Bank.
ECB (2025b) Streamlining supervision, safeguarding resilience: the ECB’s agenda for more effective, efficient and risk-based European banking supervision, European Central Bank.
ECB (2026) Eurosystem response to the EU Commission’s targeted consultation on the competitiveness of the EU banking sector, European Central Bank.
Hindmoor, A and A McConnell (2014) ‘Who saw it coming? The UK’s great financial crisis’, Journal of Public Policy 35(1): 63-96.
NBB (2026) Annual Report 2025, National Bank of Belgium.
Villeroy de Galhau, F (2025) ‘Une approche européenne de la simplification : éviter trois idées fausses et proposer quelques jalons concrets’, Speech at Eurofi, Warsaw, 11 April.
This article is based on a Bruegel Analysis.
Appendix
Table 1. Proposals by the ECB high-level task force
Source: Bruegel based on ECB (2025a).
Table 2. Selected proposals by the EBA for a more efficient regulatory and supervisory framework in the EU
Source: Bruegel based on EBA (2025).
