Europe must ask whether its banking rules are delivering the right outcomes
Opinion piece by Brian Hayes, Chief Executive, Banking & Payments Federation Ireland.
Featured in the print edition of The Sunday Times, 26th July 2026
The publication last week of the European Commission’s Communication on the competitiveness of the EU banking sector should mark a step change in Europe’s economic debate.
For too long, bank regulation has been viewed mainly through the lens of financial stability. That remains essential. But a broader question now confronts Europe about whether we generate the investment, productivity and growth needed to remain competitive in an increasingly uncertain world. The debate about bank competitiveness is therefore also a debate about Europe’s capacity to finance its own future. If the answer is yes, profitable and resilient banks must be part of the solution. As Ireland holds the Presidency of the Council of the European Union, we have an opportunity, and a responsibility, to help shape that debate.
As Mario Draghi identified, Europe’s competitiveness problem is fundamentally a productivity problem. Deeper capital markets will be part of the answer, but they will take time. For now, banks remain the primary source of finance for Irish and European businesses and households.
It is also why the debate about regulation must be framed appropriately. Andrew Bailey, Governor of the Bank of England, recently made an important point that the issue is not whether there is too much or too little regulation; it’s whether regulations are delivering the outcome they were designed to achieve.
That is the right test for Europe.
The post-crisis reforms of the past fifteen years have made European banks more resilient. But that success should not prevent Europe from asking whether today’s rules will help deliver tomorrow’s outcomes.
This is particularly important when it comes to bank capital. It protects depositors, absorbs losses and supports confidence. But it also has a cost. If requirements are set too high, or calculated in ways that do not reflect risk, that can affect banks’ ability to lend as well as the price of credit. It is therefore legitimate to ask whether, in some cases, the marginal benefit of additional capital is outweighed by the cost it imposes on lending, investment and consumers.
The Commission is right to look at this practically. Certain rules do not always work well for European businesses or consumers, whether in relation to mortgages, infrastructure lending, SME finance, or banks’ ability to invest in digital software. These are not abstract issues. They influence whether credit is available, infrastructure is financed and businesses can grow.
Ireland also has specific challenges that must not be overlooked. Rule changes cannot simply benefit larger Member States with different market structures. Irish banks operate with strict loan-to-value and loan-to-income mortgage limits, yet the capital framework does not always recognise the risk-reducing impact of those rules. Nor do Irish lenders always benefit from the lower capital treatment available elsewhere in Europe for social and affordable housing or SME lending. If policymakers are serious about housing delivery and business investment, the prudential framework must work for all markets, including Ireland.
The same practical test should apply to how EU rules are implemented.
Europe often speaks about the benefits of a single market in financial services. But for banking, especially retail banking, that single market remains far from complete. EU rules are too often supplemented by additional national requirements. These layers create complexity, raise costs and make cross-border activity harder.
Ireland is not immune to this. A bank considering whether to provide services here must navigate domestic requirements that do not necessarily exist in the same form in other EU markets. While these rules have important objectives, the wider question is whether divergent national approaches are compatible with a genuine European banking market. For example, Ireland remains an outlier within the EU when it comes to remuneration restrictions imposed on Irish retail banks. The historical reasons are well understood, but rules designed for a different period should still be open to review.
Banks today compete for talent with technology firms, asset managers, fintechs and international financial services companies that do not face the same constraints. A more sensible debate on pay and conditions is overdue. This is not about returning to the excesses of the past but recognising that banks need the skills and leadership to manage risk, invest in technology, support customers and compete in a wider market.
Divergent national requirements, in areas like remuneration, do not result in a stronger single market. It is fragmentation and an unlevel playing field. A genuine European banking market requires greater convergence across the board and also in areas such as consumer protection, enforcement of security and bank capital.
Finally, another important recommendation which should not be overlooked is the proposal to consider whether competitiveness should form part of the European Banking Authority’s mandate. This should not be controversial, in fact, a number of comparable jurisdictions already recognise that competitiveness can sit alongside, rather than in opposition to, financial stability. The UK provides a useful example, with both the Prudential Regulation Authority and the Financial Conduct Authority operating under secondary competitiveness objectives. Australia has moved in a similar direction, while consideration of broader economic and competitive impacts is common across many US regulatory bodies.
This is not about putting competitiveness ahead of financial stability. It is about ensuring both objectives are properly considered.
Ultimately, this is the real significance of the Commission’s Communication, as it opens the door to a necessary debate about whether Europe’s banking framework is delivering the outcomes Europe now needs.
If Ireland wants to make its Presidency count, helping to turn that debate into practical reform would be a very good place to start.
