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Just as it was five and ten years ago ¹ See Véron (2019) and Véron (2014). , the dominant challenge for the European Union’s new financial services commissioner – or to give the full title, commissioner for financial services and the savings and investments union – will be to advance the ongoing transition from 27 national financial systems towards a single European financial system (Merler and Véron, 2024). That is desirable on grounds of economic efficiency, investment capability and, as the euro-area crisis demonstrated, financial stability in the euro area and by implication in the EU as a whole. 

Recent EU parlance refers to this ambition as the Savings and Investments Union ² See Mission Letter from Ursula von der Leyen to Maria Luís Albuquerque, Commissioner-designate for Financial Services and the Savings and Investments Union, 17 September 2024, . , encompassing both the completion of the banking union – defined as breaking the bank-sovereign vicious circle, initiated a decade ago, already transformative but still unfinished (Véron, 2024a) – and the establishment of a capital markets union (CMU), a loosely defined expression coined by then Commission president Jean-Claude Juncker in 2014. 

Capital markets supervisory integration

CMU is arguably the most immediate issue on the commissioner’s agenda. The associated legislative projects so far have been either of limited impact or overly ambitious, such as attempts to harmonise policies that member states have not yet opted to pool at European level, including taxation, insolvency law, pension finance and housing finance, not to mention steps towards fiscal union.

As suggested a year ago by European Central Bank President Christine Lagarde, capital markets supervision is the one area of CMU in which transformative reform is achievable and should be prioritised (Lagarde, 2023). A reform of the European Securities and Markets Authority (ESMA) was unsuccessfully attempted by the Juncker Commission, but a renewed effort now would be more promising (Véron, 2024b). It should be focused on ESMA and not its sister agencies for banking and insurance, to prevent a coalition of opponents driven by concerns not directly related to CMU. Lagarde summarised that vision as a “European SEC” with reference to the US Securities and Exchange Commission, a broadly effective supervisor that has shaped American capital markets since its establishment in the 1930s.

Implementing that vision of capital markets supervisory integration should combine the broadening of ESMA’s scope of authority with root-and-branch reform to transform ESMA into an independent, effective and market-conscious supervisor, which it currently is not to a sufficient extent. This should include governance and financing arrangements broadly aligned with those adopted for the new EU Anti-Money Laundering Authority (AMLA) ³ See .  , currently in build-up phase. It should also include a new supervisory concept which, given the wholesale nature of most areas of capital markets supervision, must be less dependent on national authorities than those adopted for AMLA or for European banking supervision.

In line with the new Commission’s aim of reducing complexity and better serving the day-to-day needs of business, the best design would be one in which the reformed ESMA is the only supervisor of the areas of capital markets for which it is empowered, avoiding the pitfalls of over-centralisation by operating through a network of offices in the relevant member states. Given the multiplicity of supervisory mandates that ESMA would gradually assume, some of these offices could take an EU-wide lead for a given mandate.

This unitary but decentralised design has been recommended in July in a joint report by the French Council of Economic Analysis and German Council of Economic Experts (Landais, Schnitzer et al, 2024). It would combine the best of both worlds: consistency and predictability of practice, in contrast to the present divergence of national approaches that perpetuates market fragmentation; and appropriate familiarity and proximity with local market realities, legacies and practices. 

Because supervision shapes markets, its streamlining and integration into a single organisation could have a catalytic impact on the dynamics of market integration at a European scale, in line with the EU agenda of open strategic autonomy. It would also represent major simplification compared to the current jumble of competing centres of decision-making, once the inevitably complex transition from the current regime is completed. 

Completing the banking union

Given the dominant role of banks in the EU’s financial system, completing the banking union may be viewed as even more important than capital markets supervisory integration, but progress towards its completion also appears more difficult to achieve rapidly. The legislative proposal known as Crisis Management and Deposit Insurance (CMDI), an attempt at incremental improvement, has been bogged down in crippling compromises among member states. 

The Council position on CMDI, adopted in June, appears worse than the status quo ⁴ See Spitzer and Magnus (2024) and McGuinness (2024). . It would reverse the Commission’s proposed streamlining of deposit seniority, introduce further incentives to handle bank failures under national rather than EU law and undermine the governance of the EU Single Resolution Board (SRB). CMDI did not address many of the banking-union incompleteness challenges to start with and may now be beyond repair. If so, the new commissioner should withdraw it. 

Instead, the Commission should reframe the agenda for banking union completion by explicitly acknowledging the twin challenges of concentrated domestic sovereign exposures and of an ill-designed crisis intervention framework, both of which perpetuate the bank-sovereign nexus within the monetary union ⁵ Joachim Nagel and Nicolas Véron, ‘Opinion: Breaking the vicious circle between banks and sovereigns for good’, Politico, 22 October 2024, . . 

Concretely, this means promoting regulatory treatment of sovereign exposures such as concentration charges (Véron, 2017) on banks’ capital (set at zero if the exposures are sufficiently diversified), together with a fully integrated framework for crisis intervention to replace the present halfway house (including mandatory deposit insurance that would be managed by a single European organisation, presumably a reconfigured SRB). The shift from an exclusive focus on the crisis intervention theme towards acknowledging the necessity of also tackling concentrated sovereign exposures is politically challenging for the Commission, but indispensable to unlock this crucial reform. 

The revealed preference of member states in past negotiating rounds is that they are unwilling to concede key items – such as European deposit insurance for Germany, or regulatory treatment of sovereign exposures for Italy – if they only obtain a halfway house in return. This observation suggests that the banking union will be completed via a grand bargain that addresses the key issues together, rather than by a succession of incremental steps. 

Unless events intrude, a key milestone could be the Commission’s forthcoming report on the framework for bank prudential requirements, which the capital requirements legislation adopted earlier this year (Regulation (EU) 2024/1623) requires before end-2028. The Commission could opt to deliver that report earlier, say in late 2026, to leave time for subsequent consultations and negotiations to bear fruit before the end of the current term. 

Other issues

Following the successful adoption earlier this year of a comprehensive legislative package that enabled the ongoing establishment of AMLA in Frankfurt, the Commission should devote sufficient resources to its successful implementation, which will require significant technical work on relevant technical standards. The existential challenges associated with the war in Ukraine and the related need to improve the enforcement of EU financial sanctions add urgency to these tasks. 

The EU has been a generally constructive champion of global financial standards, a vision that is made even more pertinent by the degradation of the global geopolitical environment and also by the realities of Brexit. It should work, in particular, on better alignment of its sustainability reporting standards with those set at global level and, on a medium-term basis, on full alignment with the Basel Committee’s framework for banking regulation, including the so-called Basel III accord. 

In particular, the painful experience of the euro-area crisis, together with the observation of developments in the US and other jurisdictions, should enable the EU to resist misguided pleas from the banking industry for relaxation of bank capital standards. The competitiveness of the banking sector is positively associated with demanding capital requirements, whereas watering these down generates fragility that is detrimental to the banking sector as a whole. In line with both its commitment to global standards and its need for a sound and dynamic banking sector, the EU should thus act to remediate its current areas of lingering non-compliance with Basel III. 

Sustainable finance was a major area of activity for the 2019-2024 Commission. Effort should be made to maintain momentum on the more impactful aspects of the agenda, while acknowledging that the initial legislative phase may not have got everything right. In particular, the EU should not shy away from an honest assessment of relevance of the EU taxonomy for sustainable activities and refinement of critical definitions, such as those of sustainable investment and of transition finance. In other words, the objectives of optimising the compliance burden and of aligning the EU’s financial sector policy with its climate policy, should and can be pursued simultaneously.

References

Lagarde, C. (2023) ‘A Kantian shift for the capital markets union’, speech at the European Banking Congress, Frankfurt am Main, 17 November, available at

Landais, C., D. Sraer, M. Schnitzer, V. Grimm, U. Malmendier, A. Truger and M. Werding (2024) ‘Enhancing EU capital markets’, joint statement of the French Council of Economic Analysis and the German Council of Economic Experts, July, available at

McGuinness, M. (2024) ‘Speech by Commissioner McGuinness at Bruegel event, “Europe's banking union at 10: unfinished yet transformative”’, 25 June, available at

Merler, S. and N. Véron (2024) ‘Memo to the commissioner responsible for financial services’, in M. Demertzis, A. Sapir and J. Zettelmeyer (eds) Unite, defend, grow: Memos to the European Union leadership 2024-2029, Bruegel, available at /book/unite-defend-grow-memos-european-union-leadership-2024-2029

Spitzer, K.G. and M. Magnus (2024) ‘Council position on the CMDI reform: An initial analysis regarding key aspects of the proposed bank crisis management framework’, Briefing, Economic Governance and EMU Scrutiny Unit, European Parliament, available at

Véron, N. (2014) ‘Flash Cards for European Commissioner-designate Jonathan Hill’, Bruegel Blog, 3 October, available at /blog-post/flash-cards-european-commissioner-designate-jonathan-hill

Véron, N. (2017) Sovereign Concentration Charges: A New Regime for Banks’ Sovereign Exposures, Study for the European Parliament, available at

Véron, N. (2019) ‘Questions on financial services policy for Valdis Dombrovskis, Executive Vice-President-designate of the European Commission’, Bruegel Blog, 30 September, available at /blog-post/questions-financial-services-policy-valdis-dombrovskis-executive-vice-president-designate

Véron, N. (2024a) Europe’s Banking union at ten: unfinished yet transformative, Bruegel, available at /book/europes-banking-union-ten-unfinished-yet-transformative

Véron, N. (2024b) ‘Capital Markets Union: Ten Years Later’, In-Depth Analysis requested by the ECON Committee, European Parliament, available at