Why Europe Is Rethinking Bank Rules as the U.S. Deregulates

Christian Sewing, president of the Association of German Banks, welcomed the Commission’s plan but called for faster action on issues including the output floor, trade-finance treatment and software investments. Slawomir Krupa, Société Générale’s chief executive and president of the European Banking Federation, described the package as a significant step toward addressing capital and liquidity trapped by national ring-fencing.

What “ring-fencing” means

Ring-fencing occurs when national authorities require a bank subsidiary to hold capital or liquid assets locally instead of allowing the wider banking group to deploy them where they are most productive. The Commission says easing these constraints could make roughly €230 billion of liquid assets available for more efficient use within the EU, while still protecting local economies and financial stability.

What the Commission’s July package proposes

The Communication sets the policy direction for legislative proposals expected in the first quarter of 2027. It does not itself deliver all of the proposed changes immediately.

Its main elements include:

Simpler capital requirements

The Commission wants to rationalise the capital framework and remove overlapping requirements. One specific proposal is to remove Pillar 2 leverage-ratio requirements where they duplicate the existing leverage framework.

It also plans to examine parts of the EU’s implementation of Basel III, including the output floor. That rule limits how far internal risk models can reduce a bank’s risk-weighted assets—and therefore its capital requirement—relative to the standardised approach. The Commission has signalled a review or reform, not necessarily complete abolition.

Less reporting and supervisory duplication

The package targets overlapping reporting obligations and calls for more proportional, standardised and digital processes. The annual burden cited in the debate is estimated at €11.2 billion.

Reducing paperwork could lower operating costs, but the value of the reform will depend on whether reporting is genuinely simplified or merely moved into a new set of overlapping systems.

Curbing national “gold-plating”

“Gold-plating” refers to national authorities adding requirements or restrictions beyond the common EU baseline. The Commission wants to reduce these national differences so that the single rulebook functions more like one regime rather than 27 variations.

Freer movement of capital and liquidity

The Commission proposes to make it easier for cross-border banking groups to use excess capital and liquidity across the bloc. The objective is to move resources toward lending, investment and other productive uses without removing safeguards for host-country depositors or resolution systems.

Delaying market-risk implementation

The package also proposes postponing implementation of the Fundamental Review of the Trading Book, the Basel market-risk framework, so Europe does not move ahead of other major jurisdictions while their own rules are being reconsidered.

Taken together, the measures are designed to remove EU-specific duplication and internal barriers. They do not amount to a blanket suspension of prudential regulation.

How the EU plan compares with the U.S. overhaul

U.S. regulators—the Federal Reserve, Federal Deposit Insurance Corporation and Office of the Comptroller of the Currency—have proposed a broader modernisation of bank capital rules. The proposals would revise risk weights, streamline parts of the Basel framework, adjust leverage requirements and recalibrate the surcharge applied to globally systemically important banks. The agencies say the changes would align capital more closely with risk while preserving safety and soundness.

Industry estimates attached to the U.S. proposals include $87.7 billion in system-wide Common Equity Tier 1 relief and approximately $2.5 trillion in additional asset capacity. These are model-based estimates, not cash payments to banks or guaranteed new lending; the outcome would depend on the final rules and how banks choose to use any released capacity.

The OCC separately estimated a 6.9% aggregate reduction in binding minimum capital requirements under its proposed standardised approach for the banks it supervises, and a 3.4% reduction for the largest banks under the expanded risk-based approach.

That comparison is politically powerful for European executives. U.S. banks already benefit from a more integrated domestic market and greater scale. If their capital constraints ease while European banks remain divided by national barriers and heavier processes, European lenders fear losing ground in lending, investment banking and the financing of strategic industries.

But the figures do not prove that lower capital requirements are automatically safe or that every released euro or dollar will become productive lending. They describe potential capacity, not a guaranteed economic result.

Why regulators remain concerned

The main objection is not to every form of simplification. The ECB itself supports a more integrated banking union and has argued that capital and liquidity should move more freely within cross-border groups. It has also called for the euro area to function more like a single jurisdiction.

The concern is that freer movement requires stronger common institutions. National authorities need confidence that supervision, resolution and depositor protection will work across borders if a bank fails. Without that confidence, countries may respond to reform by retaining or increasing local safeguards rather than dismantling them.

The output-floor dispute

The output floor is the most visible flashpoint. The Eurosystem says the output floor and leverage-based requirements are complementary and essential parts of the prudential framework. Its purpose is to limit the risk that internal models understate a bank’s exposures and produce capital requirements that are too low.

The United States has moved away from implementing the output floor in the form European regulators are reviewing, increasing pressure on Brussels to reconsider its approach.

Neil Esho, the former secretary general of the Basel Committee on Banking Supervision, warned that abandoning the rule would be a “disaster” and “a big step too far.” His concern is that selective retreat from internationally agreed safeguards could trigger competition based on weaker standards rather than better risk measurement.

The risk of regulatory fragmentation

If the United States, the EU and other major jurisdictions apply Basel standards differently, headline capital ratios become harder to compare. That can make it more difficult for investors and supervisors to judge whether banks are genuinely resilient or simply operating under looser assumptions.

The European Banking Authority has also argued that the existing EU framework has strengthened resilience, depositor protection and a consistent prudential baseline across member states. This is why the debate is not simply between “regulation” and “deregulation”: it is about whether removing duplication produces real efficiency, or whether it removes protections that markets and depositors still need.

The likely compromise

The most plausible path is targeted reform rather than a wholesale copy of the U.S. approach. Brussels can reduce duplicative reporting, limit national gold-plating, remove unnecessary leverage add-ons and free trapped group liquidity while maintaining credible capital, leverage and liquidity backstops.

The harder part is institutional. Cross-border banking works best when capital can move freely, but that requires trust in common supervision, resolution and deposit protection. If those foundations remain incomplete, national ring-fencing may prove difficult to eliminate.

Europe’s competitiveness challenge is therefore real, but matching the United States does not necessarily mean reproducing every U.S. rollback. The durable test for the July package will be whether it helps European banks build scale and finance growth without turning the transatlantic regulatory race into a race to the bottom.