EU Banking Reform 2025: Simplified Rules, Stronger Banks & Shifted Timelines

The European Union is implementing a coordinated regulatory reform programme aiming to strike a balance between preserving financial stability and enhancing competitiveness of its banking sector. Core pillars include: simplification of rules, revision of capital quality, reinforcement of resolvability, and streamlining supervisory procedures.

First, simplification is now at the centre. The ECB Governing Council’s High-Level Task Force on Simplification has recommended compressing the multitude of capital buffers into two broad categories—non-releasable and releasable—while reducing leverage ratio elements from four to two for most banks. Smaller banks would be allowed materially simpler prudential rules under a widened proportionality regime, which reflects recognition that one-size-fits-all rules can hinder smaller or less complex institutions. [2]

Second, the EU has implemented most of the Basel III reforms effective January 1, 2025, improving capital adequacy, risk management, and governance. However, the market risk component (Fundamental Review of the Trading Book, FRTB) remains postponed until January 1, 2027, due to concerns over asymmetric global implementation, particularly given delays in the U.S. and UK. This delay underscores a broader issue of competitive pressures from jurisdictions with lighter regulatory regimes. [3][4]

Third, the crisis management and deposit insurance (CMDI) framework is being strengthened. The June 2025 political deal grants failing small and medium-sized banks access to industry-funded instruments like national resolution funds and the Single Resolution Fund to “bridge the gap” where their own loss-absorbing capacity is insufficient. Yet, strict safeguards including maintaining MREL as first line of defense and preserving depositor protection remain central. [5]

Fourth, supervision and reporting are being overhauled to improve efficiency and risk orientation. The ECB’s reform of the Supervisory Review and Evaluation Process (SREP), efforts to streamline internal model approvals, governance assessments, and fit-and-proper assessments are intended to reduce delays and redundancies. Stress test data templates are being aligned with regular supervisory reporting to avoid duplicative work. [6][2]

Strategic implications for market players include:

• Large banks will face rising demands on capital quality and resilience; existing AT1 instruments may be under review. [2]
• Smaller institutions and cross-border banking operations stand to benefit from proportionality reforms, reduced compliance costs, and harmonized rules, but will need to prepare for regulatory transitions. [2][5]
• Competitive dynamics may shift: EU banks may be better protected from being outcompeted by peers in other jurisdictions with looser or delayed regulation. Conversely, delays in Basel market risk rules may sustain uncertainty for global investment banking operations. [3][4]
• Regulatory relief will be constrained by insistence on maintaining safety and depositor protections; moral hazard risk is acknowledged and addressed via safeguards. SMEs, in particular, will remain a priority in resolution frameworks. [5]

Open questions for investors and regulators include:

• How will changes to Additional Tier 1 (AT1) instruments evolve? Will some be reclassified or replaced by Common Equity Tier 1 (CET1), and what will that mean for cost of capital? [2]
• What is the final shape of the regulatory standard for small and non-complex banks under proportionality reforms? Calibration will be critical to avoid under-regulation. [2]
• How will global peers react? If major jurisdictions maintain lighter regimes, will the EU face pressure to delay more or adjust standards to remain competitive? [3][4]
• How swiftly will legislation follow the ECB’s task force recommendations, and how will transitional friction be managed? [2][5]