By Ryan Borg - Deputy Counsel, EU & International Affairs, MFSA 

Recently the Commission has published its report to improve banking competitiveness in the EU. It presents a unique opportunity ahead of us to strengthen Europe’s capacity to finance growth and to advance Europe’s competitiveness agenda and push forward the simplification programme. The Communication is a key pillar of the Commission's savings and investments union (SIU) strategy.

European banks play a large role in closing the investment gap and to channel savings towards productive investment. Banks remain the dominant source of financing for the real economy and are uniquely positioned to connect savings with productive investment. However, successive layers of regulation, increasing supervisory burden, and persistent market fragmentation have reduced banks’ capacity and incentives to support the investments most critical to Europe’s growth. A strong banking sector is the foundation for deeper capital markets and Europe cannot afford to stand still while its international peers move forward.

At a moment of geopolitical fragmentation, global competition, digital transformation, energy infrastructure, security and defence needs, Europe’s ability to mobilise investment at scale will be decisive for its economic future, strategic autonomy, and resilience. The scale of the challenge is massive. The demand for the adoption of Artificial Intelligence (AI), data centres, and the energy infrastructure required to support them is growing rapidly, while Europe’s financing gap continues to widen.

Following the global financial crisis, regulators introduced major reforms that successfully strengthened the resilience of the banking sector. These reforms were necessary and successful in restoring stability and confidence in the financial system. However, the cumulative effect of these measures has also constrained banks’ balance-sheet capacity and altered incentives, encouraging a shift towards lower-risk and shorter-duration assets. As a result, banks are less able to provide the long-term financing needed to support Europe’s growth, innovation, and economic transformation.

The challenges Europe is facing are not attributed due to a shortage of capital, but rather it stems from the inefficient allocation of capital, combined with fragmentation, complexity, and insufficient integration, creating barriers that prevent capital from flowing effectively towards Europe’s strategic priorities. Therefore, we need to enable banks to play a greater role and become a stronger engine for growth, innovation, and competitiveness.

The question which needs to be addressed is not the nature of investment, but the different forms of capital to be deployed effectively across the full risk and maturity spectrum of that investment. It is very clear that today the mechanism is not functioning effectively as the transmission between capital supply and investment demand remain too weak and inefficient to support Europe’s strategic objectives.

Solutions need to work in the real world. Whilst regulation and supervision are important in safeguarding the financial system, determining the right level is essential. This does not mean compromising resilience. It means ensuring requirements are proportionate to risk and removing unnecessary complexity. We require political ambition, credible implementation, especially in addressing proportionality, simplification, and fragmentation which is discouraging cross-border investment and increases the cost of capital relative to other major economies. The objective is not deregulation, but rather a more efficient and coherent framework aligned with Europe’s overall strategic priorities.

Looking at the banking sector as a subset of the financial sector may induce us to think that resolving the lack of competitiveness by addressing the banking ecosystem will in itself create the required competition.  It is wildly evident that banks are slow to innovate and have been challenged over the years in customer facing retail activities by fintech companies, who have been the drivers of growth and innovation.  Therefore, it is pertinent to consider how fintech companies can be facilitated to participate retail credit markets which can address lending to individuals and SME’s.

Another challenge for banks is dealing with different legal systems and the various laws that govern financial activities across countries. Many institutions find the legal risks of operating in multiple jurisdictions to be complex, costly, and difficult to predict. This is particularly true for lending and capital markets, where institutions must comply with a wide range of national laws and regulations. These challenges are further compounded by differences in local market practices, business cultures, and stakeholder expectations.

Policymakers should embrace the opportunity to modernise the legislative framework and address the cumulative impact of regulation and supervision on EU banks which has increased materially over time. The EU framework comprises a significantly greater number of regulatory instruments than the US framework, increasing both cost and complexity for banks operating in Europe. A more rationalised approach to rulemaking could help ensure that new requirements and supervisory expectations remain proportionate, evidence-based, and aligned with their intended objectives.

Europe’s investment needs are not theoretical projections. Failure to mobilise sufficient capital to meet these needs risks constraining growth, weakening competitiveness and widening Europe’s gap with other major economies in strategically important sectors. The consequence of inaction extends beyond the financial sector. Without a fully functioning financing continuum, Europe will struggle to finance innovation, renew infrastructure and boost productivity.

This impacts businesses, workers, and households across Europe. Banks remain central to closing the investment gap and solving these challenges. What it lacks is a system to effectively recalibrate the post-crisis reforms and address unintended constraints on financing capacity while preserving resilience. Europe has an opportunity ahead of us to modernise its regulatory framework in line with the needs of a more digital, capital-intensive economy, while ensuring its financial institutions remain resilient, globally relevant and capable of supporting long-term growth.