Europe must overcome banking fragmentation, says Eurogroup president

Europe’s fragmented banking market has become a strategic vulnerability that could undermine the continent’s ability to finance its own future, according to Eurogroup President Kyriakos Pierrakakis. “Fragmentation is no longer only a financial inefficiency; it is a strategic vulnerability,” Pierrakakis said in an interview with the European Central Bank’s (ECB) Supervision Newsletter. His comments come as European policymakers seek to strengthen the banking union and savings and investments union while also improving the competitiveness of European banks in the face of rising investment needs, global competition and geopolitical pressures. Pierrakakis said Europe had succeeded in building a banking system that was “strong, stable and resilient”, but argued that the challenge had now shifted towards making finance a driver of competitiveness and long-term growth. Europe needs to invest more heavily in innovation, the green and digital transitions, defence, infrastructure and the companies expected to shape its future, he said. The savings and investments union and a competitive banking sector should therefore be viewed as closely connected, with banks continuing to provide the backbone of financing for the European economy. “If we want the savings and investments union to succeed, we need banks that can operate on a truly European scale, support businesses wherever they are in the Single Market and channel capital efficiently towards Europe’s strategic priorities,” Pierrakakis said. He identified greater cross-border banking, appropriate regulation and simplification as three priorities for creating a more integrated market. Capital and liquidity should be allowed to move more freely within the banking union, supported by stronger common safeguards and greater trust between supervisors. An integrated banking market, he said, would allow capital to reach more productive investment opportunities, provide businesses with more financing options and make better use of European savings. At the same time, Pierrakakis rejected the idea that improving competitiveness should mean weakening regulation. “Adapting regulation is not about lowering standards; it is about making our framework more predictable and better able to support investment, innovation and sustainable growth,” he said. He also called for unnecessary administrative burdens to be removed and prudential and resolution frameworks to become more coherent, arguing that banks should spend less time dealing with avoidable complexity and more time financing households and businesses. The same approach, he said, should apply to the long-running debate over a European deposit insurance scheme, or EDIS. Pierrakakis argued that common depositor protection and market integration must move forward together, building on the sequence agreed by the Eurogroup in 2022. The first stage involved strengthening the common framework for bank crisis management and national deposit guarantee schemes, followed by an assessment by consensus of the remaining elements of banking union. The recently adopted reform of the crisis management and deposit insurance framework completes that first stage by improving the handling of bank failures, strengthening depositor protection and limiting the potential burden on taxpayers. The next priority should be effective implementation, while Pierrakakis also welcomed the European Commission’s intention to replace its 2015 EDIS proposal with a simpler framework covering responsibilities and financing at national and central levels, potential liquidity shortages and equal protection for covered deposits across the banking union. The Eurogroup’s July work programme provides a route towards assessing progress since 2022 and identifying further measures to remove barriers to completing banking union ahead of Commission legislative proposals expected in 2027. Pierrakakis said banking union and the savings and investments union would be among his key priorities as Eurogroup president, describing them as central to Europe’s competitiveness and ability to finance its strategic ambitions. “The stronger Europe wants to be, the more important economic coordination becomes,” he said, pointing to weaker productivity, intensifying global competition, geopolitical fragmentation, higher investment needs and a changing security environment. He said the Eurogroup’s value lay partly in bringing finance ministers together for frank strategic discussions and helping them develop a common understanding of economic challenges. “I often say that the Eurogroup’s greatest contribution is helping Europe develop a shared vocabulary,” Pierrakakis said. As president, he wants the forum to become more dynamic and forward-looking, with greater attention to artificial intelligence, demographic change, Europe’s investment gap, geopolitical fragmentation and economic sovereignty. He also backed the Eurogroup’s quality of public finances exercise, saying that examining the effectiveness, efficiency and governance of public spending could help governments learn from one another and make better use of increasingly limited fiscal resources. On banking competitiveness, Pierrakakis said resilience remained the foundation of the sector but was no longer sufficient. Europe also needed banks capable of financing a new growth model, particularly as innovators often struggle to find the financial depth and scale required to become globally competitive businesses. Banks still provide around 70 per cent of financing to the European economy, he said, and would remain particularly important for small and medium-sized enterprises. He identified completion of the financial integration architecture, greater cross-border banking and consolidation, and regulatory simplification as priorities. On supervision, Pierrakakis argued that strong regulation should not be confused with excessive complexity. “Strong regulation does not have to mean unnecessary complexity,” he said, calling for rules that are rigorous but coherent, proportionate and predictable. He also called for greater supervisory coordination, clearer expectations and more consistent application of the Single Rulebook, while better data sharing and harmonised reporting could reduce the administrative burden on banks. Pierrakakis drew on his previous experience leading Greece’s digital transformation in government, arguing that digitalisation should involve rethinking institutional processes rather than simply putting existing procedures online. “Digitalisation is not about putting existing processes online; it is about rethinking how institutions work,” he said. He advocated collecting information once, using common standards and securely reusing it where necessary, allowing supervisors to spend more time analysing risks rather than reconciling duplicated data. He also sees artificial intelligence and advanced analytics as tools that could help supervisors identify emerging risks earlier and focus attention where it is most needed. “The value of AI is not that it replaces human judgement; it is that it enables supervisors to ask better questions sooner and make more informed decisions,” Pierrakakis said. The rapid development of powerful AI tools also creates operational and cyber risks, making strong governance, human oversight, cyber security, timely security updates and continuous resilience testing essential. Pierrakakis linked resilience to banking scale, arguing that European banks remain relatively small compared with major international competitors. The five largest euro area banks are broadly comparable in size with those in the United Kingdom and Japan, despite serving a much larger market, while remaining considerably smaller than the biggest banks in the United States and China. Limited cross-border consolidation is one reason for this gap, he said, adding that investment in technology by Europe’s largest banks as a share of assets has been significantly lower than among US peers. “A more integrated banking sector would give European banks greater capacity to invest in innovation and strengthen their operational resilience in order to remain globally competitive,” Pierrakakis said. He also pointed to Greece’s experience in dealing with non-performing loans as an example of the importance of prevention. “The best way to deal with bad loans is to prevent them from accumulating in the first place,” Pierrakakis said, arguing that prudent lending and strong underwriting standards were the first line of defence against future asset-quality problems. The Greek banking sector, he said, had substantially repaired its balance sheets and improved asset quality over the past decade, demonstrating that determined reforms and cooperation between banks, supervisors and public authorities could deliver lasting results. “Resilience begins with prudent lending,” Pierrakakis said, stressing that credit discipline was particularly important during periods of strong growth, when lending standards could come under pressure. His broader message was that resilience should serve as a foundation rather than an end in itself, allowing Europe’s banks to finance growth and entrepreneurship while protecting financial stability throughout the credit cycle.