Currently, the market capitalization of JPMorgan Chase, the largest U.S. bank, exceeds the combined market capitalization of the five largest banks in the EU. (The European Union does not disclose specific names, but it can be assumed that these banks include France’s BNP Paribas, Germany’s Deutsche Bank, and Spain’s Santander.)
This striking fact about market capitalization is cited in the European Commission’s report on banking regulation, published in late July. The European Commission is not known for praising the achievements of the U.S. financial sector, so the aim was likely to send a warning signal to those EU member states that continue to resist the reforms as recommended in the European competitiveness reports prepared in recent years by former European Central Bank President Mario Draghi and former Italian Prime Minister Enrico Letta.
There are many and varied reasons for this sharp shift in the ratio of economic indicators. One obvious factor is that the U.S. economy recovered from the 2008 financial crisis much more quickly than the EU economy, outperforming Europe by nearly 20 percentage points since 2009.
Another factor is that U.S. capital markets are more developed and flexible, which provides companies with more sources of capital and allows banks to manage their balance sheets more actively.
Furthermore, the cost-to-income ratio at EU banks remains consistently high, and many local regulations hinder the formation of a true single market. The convoluted “merger dance” involving Unicredit and Commerzbank may well end happily, but the time it has taken clearly demonstrates just how difficult it has been to achieve consolidation in the banking sector. We still do not have a single pan-European bank worthy of the name, with the possible exception of Revolut.
Traditional EU banks also blame the ECB’s overly conservative prudential regulation. There are signs that the European Commission itself, which is subject to greater political pressure than the ECB, is beginning to share this view.
“Cemetery Stability”
The Commission is becoming more receptive to the argument that the need to stimulate bank lending—especially to small and medium-sized enterprises, which in Europe rely more heavily on bank loans than in the U.S.—should be taken into account when setting capital requirements. Perhaps, as the saying goes, the ECB is achieving “cemetery stability,” where nothing moves.
The difficulty lies in the fact that the evidence on the relationship between bank capital and economic growth is mixed.
A recent study by the consulting firm Oliver Wyman and the financial research firm Autonomous points to a decline in return on equity of approximately 1%—a significant but not drastic — driven by the ECB’s more conservative approach compared to that of the U.S. Federal Reserve. The ECB, unsurprisingly, disputes this conclusion and points to the long-term benefits of a highly resilient banking sector.
However, this is a static approach, and from the perspective of EU banks, there are worrying signs of a growing transatlantic divergence.
The Fed has clearly moved away from the “Basel Endgame” proposals that sparked such hostility a couple of years ago. The Fed’s current proposals, outlined by Vice Chair for Supervision Michelle Bowman, include lowering the supplementary leverage ratio, reducing the surcharge for global systemically important banks (G-SIBs), and other changes that, taken together, will reduce capital requirements for large U.S. banks by approximately 5%. This will satisfy the administration of President Donald Trump.
The Bank of England is cautiously moving in the same direction and announced earlier this year a reduction in its core Tier 1 capital requirement from 14% to 13% (corresponding to a CET1 ratio of about 11%). This can hardly be called a radical move, and British banks want more, but it is a step toward the more competitive approach that the government itself has been calling for.
“The Equilibrium of Low Growth”
However, the ECB is maintaining a hard line for now. The head of its supervisory authority, Claudia Buch, argues that strict capital regulation has not, in practice, held back lending growth. She agrees with the need for simplification (raise your hand if you’re against simplification), but disagrees with arguments in favor of any general reduction in capital requirements.
Instead, the ECB continues to argue that banks could do more for their own well-being by controlling costs more effectively. And although the price-to-book ratios of major EU banks remain lower than those of their U.S. competitors, they have finally begun to rise.
To be fair, it’s worth noting that the ECB is not alone. While Canada has slightly eased its capital requirements, other major economies have not. Australia and Japan continue to take a conservative approach and resist change. It is difficult to compare China’s system, but it appears that policymakers are sticking to their traditional line—“Basel plus one” percentage point—regarding capital requirements.
In each case, the political and economic context is different. Europe is stuck in a state of low growth, and its leaders are desperately seeking a way out of this situation. However weak this argument may be, lowering capital requirements seems to offer the prospect of some relief. This, evidently, is shaping the current thinking at the European Commission.
This could set the stage for an interesting showdown between the Commission and the ECB this fall, with the “doves” in Brussels pitted against the “hawks” in Frankfurt. Usually, the outcome of this battle is easy to predict: the ECB holds most of the cards.
But other considerations must also be taken into account. This issue could play a role in discussions about who will succeed Christine Lagarde as ECB president in 2027. If the German economy remains stagnant, Chancellor Friedrich Merz may be more favorably disposed toward a candidate who is not as ardent an advocate for ever-increasing capital reserves as his compatriot, Ms. Buch.
Howard Davies,
a former deputy governor of the Bank of England, is a professor at Sciences Po.
© Project Syndicate, 2026.
www.project-syndicate.org
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