Europe increasingly wants its banks to think globally. They are expected to finance European companies abroad, support trade and investment, connect European firms to the world’s major markets, and contribute to the European Union’s broader ambitions for economic resilience and strategic autonomy. Yet there is a basic contradiction in this agenda: more than three decades after the creation of the single market, European banks still struggle to operate across the EU as if it were genuinely their home market.
The problem is not that Europe lacks the institutional building blocks. The EU already has a single banking licence and passporting rights. Banking Union has moved supervision of significant banks to the European level and substantially Europeanised resolution. However, the economics and organisation of banking remain strikingly national. Cross-border groups continue to face different national requirements, supervisory expectations and market infrastructures. Capital and liquidity can remain effectively constrained within national entities and deposit insurance is still predominantly national. Cross-border expansion can take place through separately incorporated subsidiaries as well as branches, even though the single market framework was designed to facilitate cross-border provision through the single passport. Yet cross-border entry through branches or subsidiaries remains rare.
Before designing yet another set of mechanisms to make cross-border banking work, has Europe fully utilised the single market freedoms it has already created?
Rewriting the rules
One obvious way forward is the branch model. By operating through branches rather than separately capitalised subsidiaries, a bank can manage capital and liquidity more efficiently at group level and run more like a truly integrated European institution. This is precisely what the single licence was designed to enable.
That said, converting subsidiaries into branches is not necessarily the answer in every case. There are good reasons why banks might prefer the subsidiary model. Acquired entities often have a strong local identity, client base and political importance. A purchaser may seek to signal a continuing commitment to the local market, rather than immediately branching the acquired bank. Different business models may also require different organisational forms. Even in a formally branched bank, national supervisory and macroprudential requirements may still apply.
The argument is not that Europe should impose a common corporate structure on all cross-border banks, but that the single market as it exists now fails to allow banks to choose the most efficient structure because of unnecessary national barriers.
Home-host trust
The home-host debate is usually framed as one between banks wanting greater freedom of movement of capital and liquidity, and host authorities aiming at protecting local subsidiaries. Both are understandable, but if Banking Union is to go beyond common supervision, it should steadily diminish the relevance of the distinction between ‘home’ and ‘host’: a properly integrated system should generate sufficient trust in common supervision, resolution mechanisms and safeguards to make the location of a bank’s headquarters less relevant for the treatment of its activities elsewhere in the EU.
The Nordic experience is relevant in this context, where cross-border banking is relatively mature in a number of Nordic markets and groups already have structures blurring the home-host divide. However, even there, supervisory expectations and national set-ups differ. The lesson is not to be found in the need to replicate a regional model in Europe, but rather in the fact that integration is easier when authorities trust each other and apply common rules consistently.
Europe’s global aspirations make this unfinished item on the EU’s internal agenda even more important. European banks operating outside the EU help European companies to extend their reach abroad, finance trade and investment and link the European economy to world financial markets. They also take advantage of diversification. If Europe wants to create banks that can compete effectively in the US, Asia and other key markets, those banks should not have to start from the disadvantage of a fragmented home market.
The same principle should inform how the EU treats banks’ activities outside Europe. Prudential safeguards are essential, particularly where operations are located in jurisdictions with weaker regulatory or supervisory frameworks. However, the EU should also distinguish between genuine prudential risks and international diversification into well-regulated markets. European rules should be capable of recognising credible local supervision and avoiding unnecessary duplication, while preserving effective consolidated supervision. Strategic autonomy cannot mean encouraging European firms to internationalise while making it unnecessarily difficult for European banks to accompany them.
Utilising single market
There is also a responsibility on the banking sector itself. The single market cannot be completed entirely through legislation. One question raised in the current debate is whether banks themselves make full use of the possibilities already available to them. The existence of legal rights to operate across borders has not, by itself, produced widespread pan-European banking. Cross-border lending remains subdued and cross-border entry limited. Legal access is therefore not sufficient: banks themselves also need to make greater use of the opportunities offered by an integrated market.
The next stage of integration requires movement on both sides. Policy-makers should examine whether national rules, supervisory practices and infrastructures unnecessarily frustrate the single licence. Enforcement of existing single market rights deserves as much attention as the creation of new legislative frameworks. Home-host arrangements should be redesigned so that credible safeguards permit more efficient group structures rather than simply preserving national ring-fencing. And banks should demonstrate that, when barriers are removed, they will actually use the resulting freedom to compete across borders.
Europe has spent the post-crisis period building a safer banking system, which should now provide the foundation for a more integrated one. The goal should not be to dismantle prudential safeguards or to force all banking groups into the same organisational model. It is to ensure that European banks can genuinely treat the EU as their home market.
The strategic question, therefore, is not only whether Europe should have bigger banks or lower capital requirements. It is whether it can legitimately require its banks to compete internationally when they are still struggling to trade freely within Europe itself. Before trying to concentrate on the size of Europe’s banking footprint in the world, the EU should ensure that its banks finally have a home market worthy of the name.
Apostolos Thomadakis is Senior Research Fellow and Head of the Financial Markets and Institutions Unit at the Centre for European Policy Studies, and Head of Research at the European Capital Markets Institute.
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