One Market, One Vision: How Interstate Consolidation Can Transform Europe’s Banking Landscape

Abstract

As the European Union advances financial integration, eliminating regulatory and institutional barriers to interstate banking consolidation must become a priority. This is particularly relevant for large, systemically important financial institutions within the euro area, whose performance has ripple effects worldwide. Interstate consolidation offers numerous advantages: greater financial stability through diversification, improved market efficiency, and enhanced global competitiveness of European financial markets. It also supports internal EU goals, such as completing the Banking Union and advancing the Capital Markets Union, as emphasized by reports by Mario Draghi and Enrico Letta. However, regulatory fragmentation, political resistance, and prudential barriers remain significant obstacles. Achieving greater interstate consolidation requires a multi-faceted legislative strategy. Key actions include facilitating the formation and growth of cross-border financial groups by simplifying transaction mechanisms, ensuring an unfettered market for corporate control, and addressing prudential barriers; enhancing group-wide capital and liquidity management through revisions to the Capital Requirements Regulation to allow capital and liquidity waivers for EU subsidiaries; and establishing legal certainty in resolution frameworks by specifying enforceable conditions for intra-group asset transfers and loss-sharing arrangements during resolution. Without these reforms, EU financial fragmentation will persist, weakening Europe’s international competitiveness and leaving its markets vulnerable in an increasingly competitive global environment.