EU plans measures to help EU banks build scale and compete with US rivals

By Philip Blenkinsop and Jan Strupczewski

BRUSSELS, July 17 (Reuters) - The European Commission aims to limit political interference in European Union banking mergers and remove obstacles to cross-border banking within the bloc to allow EU banks to compete more effectively against larger U.S. rivals.

An EU executive report released on Friday says internal barriers are preventing EU banks from expanding, leaving them at a disadvantage to U.S. lenders that have benefited from economies of scale in a more integrated U.S. market. EU mergers remain largely within national borders.

"This leads to an outcome where many banking groups in the EU are large relative to the size of their home economy, but not relative to the size of the EU or the banking union economy or international competitors," the report said.

Unjustified national interventions in cross-border bank mergers were preventing banks from acquiring scale at the EU level to reach a critical size, it said.

The criticism comes after Germany rejected in June an offer from Italy's UniCredit to take over Commerzbank. UniCredit began its pursuit of Commerzbank back in September 2024, but has faced strong opposition - highlighting how hard it is to pull off cross-border banking deals in Europe. 

While Germany officially cited the price offered by the Italian bank as the reason for its rejection, the government has also made clear that Commerzbank is a key lender to German companies and should remain under German ownership.

"It is a mistake from our point of view. If it's okay by the supervisor and the competition authority, cross-border mergers are good things," a senior EU official said, adding that U.S. banks were outcompeting European peers across many business lines in Europe.

"The main driver of competitiveness is not the rulebook ... it's the absence of scale," the official said.

The EU executive, the report said, will propose a range of measures in the first quarter of 2027.

These include plans to crack down on EU members that breach EU rules limiting the circumstances under which they can intervene in proposed mergers.

Other proposals would allow cross-border banking groups to meet capital and liquidity requirements more at the parent level, rather than the current system with additional requirements for subsidiaries. Removing such constraints could release €230 billion ($263.1 billion) of liquid assets, the report said.

It will also replace its proposal from a decade ago to create a European deposit insurance scheme with a new plan to simply deposit insurance measures in the bloc.

The banking industry gave the report a mixed reception. French banking lobby FBF described the report as containing "several positive orientations" but said concrete measures on key issues were required, including better regulatory coordination and limits on country-specific rules.

Christian Sewing, Deutsche Bank CEO and president of the Association of German Banks, urged swift action, calling for adjustments to the lower limit on capital requirements known as the output floor, relief for trade finance and improvements on software investments, as well as urging a review of financial stability buffers. ($1 = 0.8742 euros)

(Reporting by jan Strupczewski and Philip Blenkinsop; additional reporting by Tom Sims in Frankfurt, Mathieu Rosemain in Paris and Tommy Reggiori Wilkes in London. Editing by Louise Heavens)