The European Commission is weighing reforms to subsidiary-level capital and liquidity requirements that could free up significant resources across EU banking groups.
The European Commission is considering reforms to capital and liquidity rules that currently require banks to hold resources at the level of individual subsidiaries rather than at the group level. A draft report, first reported by the Financial Times, proposes shifting compliance to the parent entity in a banking group, a change the Commission frames as necessary to address regulatory fragmentation holding back EU banks' long-term competitiveness.
The final report is due next month, with legislative proposals expected to follow in 2027.
Scale of trapped capital and lending implications
Industry estimates suggest approximately EUR 225 billion in capital and EUR 250 billion in liquidity are currently ring-fenced within subsidiaries across EU banking groups, unable to be deployed at group level. The European Banking Federation estimates the EU faces a widening EUR 1.4 trillion annual investment gap that risks constraining its economic growth objectives.
If regulators were to simplify the current framework while maintaining financial resilience, Europe's banking sector could increase lending by more than EUR 2 trillion, according to the head of Spain's AEB banking association.
The European Central Bank has previously advocated for group-level capital and liquidity management, arguing that national ring-fencing traps resources in subsidiaries that could otherwise support broader lending activity.
Proposed safeguards and broader scope
The Commission's draft acknowledges the risk that parent-level compliance could leave individual subsidiaries undercapitalised in stress scenarios. To address this, the proposal includes a potential new legal power enabling supervisors to require a parent entity to transfer assets to a subsidiary if needed, providing a backstop mechanism alongside the flexibility afforded by group-level management.
The draft report also proposes changes to the structure of bank deposit insurance schemes and capital requirements for investment firms, indicating a broader package of financial regulatory adjustments rather than a standalone capital rule change.
Global competitive context
The review takes place against a backdrop of diverging regulatory approaches globally. The US has moved more aggressively than other jurisdictions in proposing rollbacks of post-financial crisis capital requirements, creating pressure on European regulators to respond in order to maintain the competitiveness of EU-based institutions. The Commission's draft frames the current framework as a structural constraint on EU banks relative to international peers.
The proposals remain at draft stage and are subject to revision before the final report is published.
