By Gloria Hervás (Global Head of Public Policy, Banco Santander) | I have been working in banking for nearly 25 years, and I have experienced the debate over European financial integration firsthand—even before the complicated months leading up to the 2008 financial crisis. I still remember how doubts regarding the solvency of one part of the financial sector dragged down the industry as a whole, and how this fed into doubts about the country’s own solvency. At that time, the goal was to prevent the banking system from collapsing. Spain knew how to do its homework and is today a reference model. Today, the challenge is different: building a Europe capable of growing together—competitive and sovereign in an uncertain world.
During this time, I have seen remarkable progress. The creation of the Single Supervisory Mechanism (SSM) and the Single Resolution Mechanism (SRM) was a massive institutional leap. Europe reacted quickly and with a sense of purpose. However, I have also seen, time and again, how political processes, regulatory differences, and national interests slow down the integration we all recognize as necessary. Cross-border banking mergers are a gauge of that progress. They are not happening as they should, and that is no coincidence. But I don’t want to see it as a failure; it is a task yet to be completed.
What we have built: A solid but incomplete foundation
Europe has changed radically since the crisis. Today, we have common banking supervision, a single resolution system, and what is known as the “Single Rulebook”—common rules that apply to all banks equally, regardless of the country. However, the European Banking Union remains incomplete. European banks, even the most international ones, still operate largely as groups of national banks.
Herein lies the paradox: we have a single currency, a single central bank, and a single supervisor… but not a single banking market. This is not a technical issue, but a political one. The decisive step is missing: a European Deposit Insurance Scheme (EDIS) to help us decouple a bank’s situation from a country’s fiscal situation. Furthermore, it would provide citizens with the same protection, wherever they are. This, in turn, means that liquidity could move beyond national borders—which is key for cross-border mergers. Completing the Banking Union is not a matter of bureaucracy; it is a matter of trust between countries. If we have the same supervision and the same rules, trust must follow. It is time to take that step decisively. But there are other reasons as well.
“A bank operating in five countries must maintain five regulatory compliance systems, five technological systems, and five versions of the same product adapted to each national legislation.”
Why mergers aren’t happening as they should
For years, the debate has repeated itself in the same way. If we want to compete with other banks and other jurisdictions, scale matters. It is essential for undertaking digitalization projects—projects that require significant investment and allow for improved efficiency. But despite the consensus on the need to consolidate, pan-European mergers are not arriving. Why? For three fundamental reasons:
- a) Regulatory and Supervisory Fragmentation: A bank operating in five countries must maintain five compliance systems, five tech stacks, and, in some cases, five versions of the same product. In any merger announcement, analysts and investors focus on cost synergies. Revenue synergies matter too, but their achievement is subject to greater uncertainty. Cost synergies are less questioned because we are talking about duplicating staff, offices, and especially savings from technological processes. These have always been the greatest synergies. And that is where the market doubts. In practice, potential synergies are diluted. If every country has different rules for consumer protection, taxation, AML (Anti-Money Laundering), or mortgages, it means I have to manage the acquired bank in another country as a distinct entity from the acquirer. This makes a cross-border merger more expensive, slower, and more uncertain than a domestic one. This is already a factor for neobanks and fintechs; if it’s a hurdle for them, imagine the impact on large acquisitions.
- b) Lack of a Common Resolution and Public Support Framework: The Bank Recovery and Resolution Directive (BRRD) was a great step forward, but it still coexists with different insolvency laws and varying roles for national deposit guarantee funds. The state aid framework has become obsolete, and there is still room for national discretion. This creates asymmetries: a bank in a country with more “fiscal space” is perceived as safer than one with less margin, even if both are equally well-managed. This difference in perception distorts the market. We need to complete the “backstop” to the Single Resolution Fund, launch a liquidity instrument in resolution, and ideally move toward a single European safe asset.
- c) The Weight of Psychological and Political Borders: Beyond rules, there is a less visible but equally powerful factor: the resistance to losing national control over financial systems. Governments tend to protect “their” banks. We all want “European champions,” but only as long as a “leg,” an “arm,” or the “torso” of that champion belongs to our country. It’s understandable: banks are essential for credit, employment, and stability. However, this national logic prevents us from seizing the scale and efficiency of an integrated market. Subordinating national interests to European ones is not an act of naivety; it is an investment in shared stability and sovereignty.
What is at stake: Scale, competitiveness, and credibility
While Europe debates, the rest of the world moves forward. As ECB President Christine Lagarde recently noted: “Financial fragmentation is not an inevitable fate; it is a political choice.” The good news is that Europe has already shown it can advance when there is political determination. The united response to the pandemic—with the NextGenerationEU funds—is proof of this. If we were able to issue common debt to finance recovery, we can also take the step toward a truly common banking market.
“We must update the resolution and State Aid framework and move toward directly applicable regulations regarding insolvency, consumer protection, AML, and taxation. Only then will the invisible barriers hindering mergers be eliminated.”
What we must do: trust, consistency, and a long-term vision. Financial integration will not be achieved through technicalities, but through trust and a shared vision.
a) Completing EDIS and releasing trapped capital. European banking groups hold hundreds of billions of euros in capital and liquidity “trapped” in national subsidiaries. If we manage to implement the European Deposit Insurance Scheme (EDIS) and cross-border waiver mechanisms, we could release immense resources for investment, innovation, and credit.
b) Harmonizing the rules that still divide us. We must move toward directly applicable regulations—not mere directives—regarding insolvency, consumer protection, anti-money laundering (AML), and taxation, among others. This even includes areas such as Know Your Customer (KYC) and customer authentication mechanisms, market product investment information, or the authorization of third-party service providers. Only then will the invisible barriers hindering mergers be eliminated.
c) Updating the resolution and State Aid framework. The public aid regime must be modernized to prevent divergent interpretations between countries. Furthermore, banks acquiring entities in resolution must do so with legal certainty, without assuming past liabilities.
d) Incentivizing value-creating consolidation. It is not about merging for the sake of merging, but about creating stronger, digitized entities capable of competing globally. Larger entities are not necessarily better. No, that is not the case. The purpose of a merger is to achieve better, more diversified, more solvent, and more profitable entities. Regulators can support this process with prudential incentives, capital relief, and clear frameworks that recognize the synergies of a well-planned integration. For example, the current framework requires incorporating capital requirements. If a Global Systemically Important Bank (G-SIB) decides to acquire another entity, it will have to factor into the acquisition cost the expense of increasing its systemic importance, which involves increasing the G-SIB buffer.
Looking ahead: Europe as a project of trust
Those of us who work in regulatory debates have learned that integration cannot be imposed: it is built with patience and a compelling narrative. I have seen what Europe is capable of when facing a crisis. There is nothing better in this life than having an “enemy”—in this case, a common goal. I saw it during the [financial] crisis, when the ECB was established as the single supervisor; I saw it during the pandemic, with the joint recovery plan; and I see it now, in the willingness of many leaders to take a step further.
But I also know that time is of the essence. We cannot afford another decade of half-hearted progress. The challenges we face—energy, defense, competitiveness, demography—require an integrated, strong, and European financial system. We need to demonstrate to our citizens that Europe works, that Europe protects, and that Europe multiplies opportunities. As the EU motto says, “in varietate concordia.”
