Europe wants banking champions but still protects national banks 

Europe wants larger and more competitive banking groups. The Draghi report warned that the largest US bank has greater market capitalisation than the ten largest EU banks combined, and policymakers have stressed the need for scale to support investment, innovation and strategic autonomy. Yet genuine cross-border consolidation remains the missing piece of the European Banking Union. An ECB analysis shows that cross-border deals remain a minority of mergers and acquisitions (M&A), and they tend to follow pre-existing financial linkages rather than opening new markets [1]. 

Government interventions to shield domestic banks from foreign bidders are a recurring pattern across Europe, and they frequently culminate in the deal collapsing. Recent M&A activity illustrates this paradox. UniCredit’s bid for Commerzbank, the most ambitious cross-border deal on the table, remains blocked by Berlin’s view of the lender as a national champion that cannot be sold abroad. This bottleneck is not financial. Europe’s largest banks are estimated to hold around $600 billion in excess capital [2], while their valuations trade at a substantial discount to US peers, a gap attributed to the limited growth potential of a fragmented framework [3]. 

Even where capital is available, much of it cannot be deployed across borders. Over €475 billion in capital and liquidity remain trapped in subsidiaries of large EU banking groups due to the absence of cross-border waivers, with €225 billion in capital and €250 billion in high-quality liquid assets unable to move freely across borders [4]. Around 75% of EU bank lending portfolios remain invested in their home markets. This figure has barely shifted since the Banking Union was created [5]. By contrast, ‘Brexit banks,’ US-headquartered groups that relocated euro area operations after 2016, have grown from €200 billion in assets to almost €1.3 trillion, and they operate with more integrated cross-border structures than most Banking Union banks themselves [6]. 

Within the Banking Union, supervision was centralised with the Single Supervisory Mechanism, but crisis management and deposit insurance remain, by and large, national. Without a European deposit insurance scheme (EDIS), host authorities still perceive subsidiaries as the last line of defence for local depositors, and they resist moving capital and liquidity across borders. For host countries, a foreign-owned subsidiary can be systemically critical for the local economy and yet remain a marginal concern for the parent group or the home supervisor in a crisis. This asymmetry incentivises ring-fencing by national authorities, even where the rulebook would allow deeper integration [7]. Member states continue to treat large banks as strategic national assets, vehicles to finance domestic priorities and preserve leverage over credit allocation. Each new attempt at cross-border consolidation reopens the same question. Whose banks are they meant to be? 

In practice, the Banking Union has progressed unevenly across its three pillars. The missing piece is precisely one that would force the member states to share the political cost of bank failure, thus perpetuating the sovereign-bank loop the Union was meant to break [7]. The result is a framework that looks European on paper, but the operational reality remains shaped by national preferences and political reflexes. 

Recently, the ECB has called for progress on the Banking Union’s missing pillars, particularly a binding timetable for an EDIS [8]. Other proposals go further, suggesting a separate country-blind jurisdiction for banks with significant cross-border operations designed to prevent national governments from ring-fencing capital and liquidity [9]. The diagnosis is correct, but it has been correct for over a decade. Europe has built a single supervisor without building a single banking market, and the gap will not close until the member states accept that European banks must be, by definition, less national.  

Bibliography 

[1] Figueiras, I., Gardó, S., Grodzicki, M., Klaus, B., Lebastard, L., Meller, B. & Wakker, W. (2021, November). Bank mergers and acquisitions in the euro area: Drivers and implications for bank performance. Financial Stability Review. European Central Bank. (ECB) 

[2] Jumabhoy, H. (2025, September). Big Bank Bearhug Bonanza: UK & European Financial Services M&A – Sector Trends H2 2024 | H1 2025. White & Case LLP. (White & Case) 

[3] Draghi, M. (2024). The future of European competitiveness: A competitiveness strategy for Europe. European Commission. (European Commission) 

[4] Association for Financial Markets in Europe. (2025, September). Banking Union: Measuring progress and identifying implementation gaps. (AFME) 

[5] Buch, C. (2025, April 10). European banking integration: Harnessing the benefits, containing the risks. Warsaw School of Economics, Warsaw. European Central Bank. (European Central Bank) 

[6] Gotti, G., McCaffrey, C. & Véron, N. (2024). Banking union and the long wait for cross-border integration. Economic Governance and EMU Scrutiny Unit (EGOV), Directorate-General for Internal Policies. (European Parliament)  

[7] Beck, T., Bruno, B. & Carletti, E. (2024). Can the Banking Union foster market integration, and what lessons does this hold for Capital Markets Union? Briefing paper for the ECON Committee. (European Parliament) 

[8] European Central Bank. (2026, April). Eurosystem response to the EU Commission’s targeted consultation on the competitiveness of the EU banking sector. (European Central Bank) 

[9] European Parliament: Directorate-General for Internal Policies of the Union. (2024). The next goal: euro area banking integration: a single jurisdiction for cross-border banks. European Parliament. (European Parliament)